The Movie Industry Analysis Essay, Research Paper Introduction 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.
The Movie Industry Analysis Essay, Research Paper
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.
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.
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.
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.
Significant socio/economic trends
*** (Entertainment Industry and the Environment – Internet) Many studios and production facilities have developed comprehensive environmental policies. Many studios have organized task forces made up of various department heads to oversee the implementation of these policies. They began recycling programs and then closed the loop by purchasing recycled products, including office paper, tissue products, towels and toner cartridges.
The movie industry has proven they are in tune with consumer preferences when between 1991 and 1993, movie companies cleaned up their films by increasing the number of G rated movies.
ANALYSIS OF STRATEGIC ISSUES
Strengths – Reputation, high standards set by Disney. Diversity & experience in animation
Weaknesses – Dependence on animation. Disney’s need to continually attract artistic talent for its animation portfolio. Reliance on visibility and name recognition for marketing advantages.
Opportunities – Old movies; new release directly to video. Development of the international sell-through market could allow disney to double or triple its foreign video revenues by the year 2000.
Threats – Damaged reputation due to expansion into mix of movie themes in the industry. R-rated thrillers (Pulp Fiction)(The Crying Game).
Strengths – consistent track record and ability to avoid costly bombs. Notable success worldwide. Fulfilled moviegoers’ desire for westerns when other studios did not.
Ability to put together production deals with independent production companies.
Their film library dates back to 1949 and consists of over 1800 films.
Weaknesses – Inability to keep up with competition (Disney).
Opportunities – Warehousing and distributing advantages with its music division. Video release of certain blockbuster hits on a direct sell-through basis.
Warner Brothers Network (The WB) and the Full Services Network (FSN). Warner Brothers would be a direct competitor with Paramount to obtain broadcast stations as network affiliates and the FSN would offer pay per view, home shopping and video games.
Threats – Disney and Universal are major competitors at the box office.
Strengths – Vertically integrated, owns a variety of ancillary markets. Relatively small firm library as compared to others in the industry, but the value per each title is significant. Reputation of being “blockbuster kings”.
Weaknesses – Loss of identity due to the merger with Viacom. Paramount is so diversified and each of its subsidiaries has maintained its own name causing a diminished recognition of the Paramount name.
Opportunities – Viacom-Paramount so large and successful, it should be able to benefit from the development of multimedia services worldwide.
Threats – So diversified this company could be in danger of losing the Paramount name. Dreamworks and other up and coming independents’ may pose a threat.
Twentieth Century – Fox
Strengths – Consolidation of Twentieth Century Film Corporation, Fox Television stations and Fox Broadcasting has benefited the company with the release of motion pictures to television via the videos, pay per views and the exclusive licensing agreement with HBO.
Weaknesses – Reliance on a small number of “blockbusters” and a limited number of films being produced. Diversification appears to be limited to cable and network TV.
Opportunities – Creative alliances that aid the company in reducing financial risks through the development of diversified production and distribution cost mixes.
Twentieth Century Fox will continue to benefit from their international market. For example, Fox has licensed motion pictures to British Sky Broadcasting and to Star Television (Asian TV). They have also launched a cable programming service in Latin America.
Threats – Fox has limited their growth of many ancillary markets and therefore has failed to keep pace with the competition.
Strengths – Universal Pictures has subsidiaries that produce and distribute non-theatrical films, motion pictures and television.
Universal Pictures and their subsidiaries have amassed a film library of over 6000 titles that include such films as Jurassic Park whose total revenues exceeded 8 billion.
Weaknesses – Now Japanese owned, Universal is limited in their ability to diversify due to management decisions caused by the Japanese recession.
Opportunities – Ability to expand into different markets such as the toys, games, etc. (Will they take advantage of this)?
Threats – Much of Universal’s success can be attributed to the long time relationship between the company’s CEO & their leading director Steven Spielberg. Mr. Spielberg has started his own film studio, Dreamworks which is expected to be yet another major studio.
The creation of Dreamworks caused internal discord between the Japanese parent company and U.S. subsidiaries.
Sony Pictures Entertainment (Columbia-Tristar)
Strengths – Sony purchased columbia – Tristar in 1989 and has doubled its price to sales ratio value as of 1994. Concentration strategy (they make movies).
Weaknesses – Depressed earnings, high production costs and excessive spending. Lack of diversity.
Opportunities – Availability of technology from other areas of the firm (Sony). This affords them the advantage of remaining on the cutting edge for new technological developments in the movie industry (DVD’s, computer enhanced films).
Threats – Lack of ancillary markets due to previous debt position which made the company potentially attractive for takeover.
Where is this industry currently headed?
The movie and entertainment industries are taking the use of information technology to an extreme. They have embraced the technology and are using it for everything from online publications to games to special effects for our favorite movies. Video releases continue to provide a great deal of profits for many of these studios.
The entertainment industry has always been a leader in the use of new industry technologies. Since the arrival of the digital age, firms that once focused on a film production are now producing interactive CD ROMS, Digital VideoDiscs and production studios are even offering WEB services. The channels of delivery have broadened significantly.
Where should each of these major studios be headed?
Disney has benefited from great leaders, visionaries over the years. The focus has always been quality and innovation. The Disney Brand is well known all over the world and as the organization continues to expand both with products and geographically, care must be taken to ensure the Disney name and reputation.
Warner Brothers is doing a fine job of revving up of their ancillary markets. They are currently well diversified. I recommend that Warner should continue on the same path however, this rapid growth could mean trouble. They should install contingency plans throughout their organization to mitigate the risk of rapid expansion into different ancillary markets.
Paramount Pictures, touted as the “blockbuster king”, should remember that picking hits is still largely guesswork. In order to improve their position and guard against a time when they may not be the “blockbuster king”; Paramount must develop a plan to aggressively increase its film library.
Twentieth Century Fox relies heavily on blockbuster films and produces only a small number of films each year. They have limited themselves to cable and network television in the ancillary markets. Fox is heavily involved in many other areas, News Corp., Fox News Channel, Fox TV & Fox Family Channel.
I believe they are “missing the boat” with regard to the video market. The video market is one that continues to generate profits long after the movies are actually made.
Universal Pictures can attribute much of its success to Steven Spielberg. When he left to form Dreamworks, Universal began to experience some in-fighting. Although Spielberg initially used Universal for foreign distribution, I do not expect this to continue as Dreamworks’ continues to have such successes as this summer’s “Saving Private Ryan”.
Since there was so much reliance on Spielbergs’ name and films, I feel that Universal will not be able to maintain their ability to compete with the other majors. The previously mentioned in-fighting only magnifies this problem.
My first recommendation is that Matsushita look for a buyer for MCA and Universal. Preferable a company with experience in this industry, one that would take advantage of the opportunities with the ancillary markets as well as new opportunities with the amusement park operations.
If this is not possible, my second recommendation is that Universal should aggressively work towards a formal review of their current business strategies and make the first order of business to resolve the in-fighting. All of management both the parent company and the U.S. executives should be “on the same page”.
If this is accomplished, a plan should be developed to align themselves with some other successful directors and/or recognizable and respected industry leaders.
If none of this is possible, I do not believe this company will survive.
If Sony (Columbia-Tristar) is going to continue with this “concentration strategy” of theater exhibition only, they must make a concentrated effort to improve their revenues, reduce spending, and cut costs. This could be accomplished through “talent buying”. The company could utilize professionals to help in acquiring either actors or directors with “star power” that would improve the odds of movie’s success.
I also feel that Sony should place more emphasis in their technology division and should focus in that arena. They remain on the technological edge and could possibly gain the leading position within that market. With emphasis in the Research and development division the possibility of new market share is endless.
Works Cited :
1. Gunther, Marc. “The Rules According to Rupert.” Fortune October 26, 1998 issue
2. Family Motion Pictures – Industry Statistics
3. Jaeger, James. “The Movie Industry.”
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