The Movie Industry Analysis Essay

The Movie Industry is one of the most exciting and informative business in the world, a business where the revenue of a single feature film can approach or exceed $1 billion. In 1994, U.S. consumers spent over $6 billion on movie tickets and another $34 billion on cable TV and video purchases and rentals. In 1996, worldwide gross revenues generated by motion pictures in all territories and media (including music and ancillaries) amounted to over $40 billion.

These figures were only a fraction of total entertainment outlays worldwide, spent mostly on American-made movies. Over 70% of the population rents or goes to movies regularly, this accounts for over 1.5 billion movie attendance’s each year in the United States.

Strategic Issues:

1) “Blockbuster-ability”, or the ability to consistently produce a wide variety of popular films at a profit;

2) Expanding distribution channels into the ancillary markets where

profit margins are higher; and

3) The value and depth of film libraries, which extend a film’s life cycle and gererate revenues far into the future.

Key Problems

Cost-

Film profits are rare and difficult to measure. There are high promotional and marketing costs which include fees paid to exhibitors, distributions fees, overheads, interset and expenses ( paid usually to studios distributors). These combined costs greatly reduce the revenue sream flowing to the producer and net profit participants. In addition, certain management decisions made in the beginning, whether or not to hire “star” talent as opposed to an unknown can be quite costly, although this sort of decision may guarentee box office success of the movie.

Diversification & Integration-

The ability to exploit a movie in many markets diminishes investment risk and increases earning potential. Diversification and integration into ancillary markets can turn a movie that has lost money theatrically into a video market winner. Unfortunately, if the studio is a small independent it may cost prohibitive to diversify. If the studio is a “major” that is not already diversified, the competition and cost to do so would be significant factor.

Barriers to entry for independents-

The most obvious barrier to entry is the high cost of acquisition. Larger studios owe their survival to ample resources, which afford them the ability to weather box office disasters. Small studios would not necessarily be able to survive box office failures.

Major studios also have an advantage in their ability to maintain distribution networks across the country and in foreign markets. This ensures that their films get to theaters and television screens.

Competition-

Thousands of screenplays are in developement at any given time but only 450 to 500 actually become motion pictures. Of those, approximately 173 are actually released to the theaters. Even then, the success at the box office is not guaranteed because that success is always subject to public preference.

Historical trends in the industry-

Feature motion pictures have historically had one major source of revenue in the United States and abroad,”The movie theater.” Industry statistics reveal that in the past ten years there has been an overall increase of at least 30% in many ancillary markets and over 200% in the case of home video. Today much of the world is undergoing a mass communications revolution; hence, new movie markets such as home video, cable and pay-per-view have been growing so rapidly that they are no longer just ancillary markets to the basic theatrical market but have become basic markets in themselves.

The latest technological frontier for motion picture companies was in direct-access TV through telephone lines.

With the advent of the new computer-based technologies, “cable” markets and direct digital-delivery of motion pictures via satellite and the Internet are expected to increase dramatically over the next five years, creating an accelerated demand for original and re-run motion pictures.

What is the competitive environment?

There are thousands of screenplays in development at any given time, however each year only 450 to 500 of these are produced into motion pictures. Although the majority undergo principal photography in the United States, approximately 60 to 80 are shot offshore (including Mexico and Canada). Of these approximately one-third come from the majors (Disney, Sony, (Columbia-Tristar), Warner Brothers, Universal, Paramount and Twentieth Century Fox) and approximately two-thirds from the “independents”.

“Independents” are those companies engaged in the production and/or distribution worldwide in all media of all motion picture and television programs that are not generated by the recognized major studios. It includes those independent productions, even those distributed by a major studio, in which the producer retains a significant ownership interest and is at risk for a significant portion of the production cost.

Of the 450 to 500 feature films produced each year, only 155 were given a theatrical release in 1994, 169 in 1995 and 195 in 1996. Thus a significant number of features do not get a theatrical release but are released directly to home video and other media.

Producing and/or financing these movies are approximately 6 major studios, 50 to 80 major independent production companies and over 1,200 smaller independent production companies. The domestic market share is evenly distributed.

Any major changes in the market?

*** (The Movie Industry by James Jaeger). Increased foreign demand for U.S movies is reflected in the fact that recent export sales to foreign markets hit an all time high in 1997. The European foreign market accounts for 56% of global revenues generated by English language.

One of the most attractive markets is centered around the Far East, Japan being the largest. Focus on Asian themes has produced many movies that clearly reflect this trend.

Generally speaking, if an English-language film made for U.S. release does well domestically, it becomes popular in foreign markets, particularly in Europe.

All of this popularity and success internationally has not come without a price. Some countries began to complain about the spread of American culture due to the movie industry. In order to soothe these complaints, Disney and Miramax announced in October 1994 the creation of a company to promote the distribution of French films in the United States and increased funding to French filmmakers.

Relaxed enforcement of the 1948 antitrust decree under Reagan administration which allowed Universal, Paramount, and Columbia to acquire interests in various theater chains.

Rapidly changing demographics. Shrinking population of 13 to 25 year olds who would traditionally see as many as 12 films per year. Real growth audiences were becoming both younger and older. The older group (40-49) appreciated mature themes; those with children were also attracted to family oriented movies.

Distribution media is dynamic. Beginning in the late 1980’s, ancillary markets (videos, TV, cable, or pay per view) began to emerge as the high-growth segment in the industry. This growth had a negative impact on box office sales as ticket growth was limited by the relatively inexpensive availability of movies outside the traditional theater.

Key Industry Financial Statistics:

* Admission Revenues

* Average Cost per Film

* Profitability (by Operating Margin Percentage)

Results of past marketing strategies and current marketing strategies-

Control and expansion of distribution channels has always been a primary objective of major studios. In 1950, many theaters were owned by major movie studios. This represented a trend toward vertical integration into theaters. This risk-reduciton strategy combines the production, distribution, and exhibition functions under the studio’s control.

The distribution pattern seen in theaters was reproduced in ancillary markets. As with theater exhibition, films in the motion picture industry began to vertically integrate into these media, owning cable stations, TV networks, and video chains.

Even more recently, technology has improved to include such state of the art viewing options as Pay-Per-View, Digital Video Disc (DVD’s), satellite television, and Home Theater (surround sound). Interactive Video and computer games are another huge new market that is rapidly expanding.

Ancillary markets have proven to be invaluable sources of revenue as in the case of Star Wars and Jurassic Park. There were such spin-offs as toys, games, T-shirts and novelty items. These spin-off sales may eventually be as significant as revenues the picture has already earned in various other markets.

Leave a Reply

Your email address will not be published. Required fields are marked *