Subject Module - Elective CIAKL II - Class 03

EUROPEAN COURSE IN ENTREPRENEURSHIP FOR THE CREATIVE INDUSTRIES

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DIGITAL
CONVERGENCE


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Digital Convergence
Sources:
 Peter Bloore, “Re‐defining the Independent Film Value Chain”, 2009
 OECD, “Remaking the Movies, digital content and the evolution of the film
and video industries”, 2008
 Christina Kukenshoner et. Al, “Bollywood – Maharashtra and India’s Film
Cluster”, 2008
 Financial Times, “Bollywood: To the next level”,  October 28 2011
 Financial Times, “Entertainment: Growing cultural clout mirrors country’s
rising economic status”, January 28 2010

A new independent film value chain model

Value chain and value system An industry value chain or system is a connected series
of activities, that combine to create and deliver a product (or value) to customers.
These activities could include research and development, manufacturing, packaging,
marketing, and distribution. A value chain represents those activities as carried out
within a single company, and a value system represents those activities being carried
out by a series of different businesses or freelancers, acting together to create and
deliver the product.

Delivering value “When a company competes in any industry, it performs a number of
discrete but interconnected value‐creating activities, such as operating a sales force,
fabricating a component, or delivering products, and these activities have points of
connection with the activities of suppliers, channels, and customers. The value chain is
a framework for identifying all these activities and analyzing how they affect both a
company's costs and the value delivered to buyers.”

Processes are merging “SCM (supply chain management) and CRM (customer
relationship management) are starting to merge, as end‐to‐end applications involving
customers, channels, and suppliers link orders to, for example, manufacturing,
procurement, and service delivery. Soon to be integrated is product development,
which has been largely separate.”

Studio and independent value chains In the US studio system a film is often
developed, produced, distributed and exploited without leaving a single integrated
company or consortium: a simple corporate value chain. This is also the case with a


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small number of international studio‐style companies.

However the independent
feature film production and distribution sector (the prevalent model outside America)
is a value system business, in that a feature film is not made and delivered to its final
audience by a single company. Instead there is a chain of companies, businesses, and
freelancers, all working on different elements of the production and exploitation
process, and adding value in different ways along the chain. Furthermore, once the
film is exploited, the money handed over by the consumer (whether it be in return for
a cinema ticket, DVD purchase or online download) is subject to various revenue
shares or commissions as it passes back through the chain, which then complicates the
revenue flow.

Film “value chain” This terminology has been selected as the title, whereas the term
“value system” would be more accurate to Porter’s original usage, since separate
companies and freelancers are involved. However, as we have seen, the choice of
“value chain” reflects current usage amongst academics and consultants in the media
sector.
Design Since Porter (1985) it has been conventional to show the value chain or value
system as a series of arrows or lines going from left to right, with the customer or end‐
user on the right. This is in keeping with the Western European approach to reading
and representations of the passage of time. Each segment of the chain as illustrated
shows a point where a value is added, usually where an investment is made in the film
or its exploitation.

The order of the listing of “players” in each segment Film finance and production is a
highly complex and collaborative process. The term “players” has been selected to be
able to include the range of private and public organisations and freelance individuals
involved. The players have been approximately listed in order of creative power and
influence, with the most powerful at the top. It enables the value chain to be read in
terms of creative value and influence, as well as financial value and investment. This
order of listing does not reflect their financial input, or their entitlement to levels of
income.

Development Development is the process of creating or acquiring (through an option)
the idea for a film, creating the screenplay (through many drafts), securing
development funding for the writer, and initiating the production financing process.
Development financing often comes from a different source to production financing
(and in Europe often involves public subsidy funds). The chain as a whole shows very
clearly the distance between the development process and the end consumer of the
film. As a result marketing departments and distributors very rarely influence the


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creation of the films they will eventually exploit. This separation can sometimes be said
to be one of the weaknesses of independent film‐making.

Financing and pre‐sales This is the stage where the film is financed, in the case of
independent film often involving a huge range of collaborating businesses, advisors
and investors. This is the most complex stage of the process, where the leadership and
negotiation qualities of the producer are most vital in ensuring that multiple
stakeholders have to be made to say “yes” simultaneously. In investment terms film is
perhaps the most expensive of all art forms (with the possible exception of
architecture), and each of the investors may bring with them business needs and
creative views that can massively affect the completed film. Pre‐sales refers to the
process where a film is sold, in advance of being made, to some territories in the
world, on the strength of the perceived value attached director and cast.
Production, shoot and post The segment where the film is shot and edited. Post
production includes the whole editing process, including the addition of computer
generated visual effects and music. The shoot is usually the point at which the director
is most powerful; however this can reduce during the edit and post production
process, since the financiers are concerned to protect their investments and get
involved in creative decisions. Often the director, financiers and producers are all
involved in approving the final edit (who has final sign off is often a closely fought
contractual issue).

International sales and licensing The point at which the completed film is then
licensed internationally to distributors in each country or group of countries (known as
territories). Those distributors pay to receive the film and have the rights to exploit it
over a specified period of time. Usually the distributors also agree to return a share of
the profits of the distribution of the film back to the original financiers of the film.
Therefore  in the independent sector it is the distributor and not the producer of the
film that pays to market it to the final paying audience. In the studio system many
international sales are handled through automatic output deals or foreign distribution
is handled by a subsidiary of the studio.

International Distribution / Exhibition and Exploitation The process where the
distributor prepares for and delivers the segment of Exhibition and Exploitation in each
territory, sometimes selling on portions of the rights. The “windows” (or time‐sensitive
opportunities of different types of exploitation) could be listed as follows, in order of
value to the distributor (rather than the timing of exploitation, which is discussed later
in this paper): DVD and VHS sales / rental; Pay TV (satellite and cable); Cinema (a.k.a.
the Exhibitor); Free TV (PSB or Advertising); Video On Demand (VOD); and finally
Online download (rent or own). Due to changing business models, this order of value


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will probably soon change, especially as DVD sales decline to be replaced by online
download or VOD. Again the American studio system tries to keep as much control as
possible of this stage of the process.

Consumption / the consumer The consumer is the last segment, which is not always
usual practice in value chain diagrams. This is because the consumer is fulfilling two
key value‐related functions. The first is purchasing the product and allowing financial
value to return down the chain (customer consumption). The second, in a way no less
important, is that the long term “library” value and reputation of the film is highly
influenced by the response of both the general audience (box office figures and word
of mouth) and critical voices (including both formal “approved” media critics and
informal “unapproved” critics, for example on internet websites or bulletin boards.

Library Rights The film can be re‐exploited in two ways. Firstly, for the duration of the
distribution license, it can be re‐exploited by the distributor (for example a second
release of the DVD, perhaps in a collector’s edition). Secondly, once the distribution
license expires and the rights revert, the producer may then be able to sell (usually via
a sales agent) a further distribution license (to the same distributor or another one) for
another period. This is more often as a part of a package of films, rather than as an
individual property. A repeat theatrical release is rare, until a significant anniversary of
a classic is reached (say 10 or 20 years), however a re‐release onto a newly developed
technological format has become quite normal.

Risk Generally speaking the earlier (further to the left) you are in the chain (towards
development and production) the higher the potential risk for the capital investor, due
to the distance in the recoupment chain from the money paid by the consumer.
However in keeping with Porter’s original theory, the value chain diagram does not
attempt to actually show the flow of income and the recoupment corridor.


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Digital content and the evolution of the film and video
industries

Product characteristics and markets
 The OECD area is the source of most of the value produced by the film and video
industry. Although film and video markets in countries such as India and China are
very large, their investments and revenues are still a very small fraction of the
world total. Most of the total value (up to 80%) is produced in only a few OECD
countries, led by English language productions.

 During the past ten years, the number of cinema films produced per year in most
major OECD markets has shown no substantial prolonged increase although there
have been significant fluctuations in US production from year to year. In contrast,
there has been a marked increase in the number of cinema screens and in the
amount of postrelease activity, mainly DVDs and television‐based distribution. In


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particular, the number of titles available on DVD has surpassed the number of titles
that were available on video cassettes by a considerable margin.

 Relative to all other media products, cinema and television entertainment requires
by far the highest amount of initial investment per unit, most of which is high risk.
Investors often adopt a venture capital model, financing a portfolio of productions,
of which only a few are expected to be successful. In the feature film segment,
average costs have soared over the past 20 years, driven largely by the
‘blockbuster’ phenomenon, where a large share of capital is invested in a small
number of productions. Average costs have risen across the board, but much of the
increase is in advertising and distribution, which now account for 30‐ 40% of total
costs for major studios.

 The economic viability of the industry depends upon average rates of return from a
constantly diversifying portfolio of media and associated enterprises. This average
can be maintained only where there is sufficient variety and volume of output, but
also where the rate of production matches demand.

 The market success of film and video products is closely tied to consumer
perceptions of quality, which is reflected in constantly escalating production
values. Products are not price‐sensitive, and price discounts tend not to encourage
greater consumption of items with lower production values.

 Technology and market distinctions between cinema and television markets are
breaking down. Most film and video products now depend on a wide spectrum of
interrelated distribution channels, all of which are digitised or are increasingly
becoming digitised into a set of relatedmarkets: Cinema box office markets.
Television markets (incorporating cable, satellite and
broadcastsegments).Consumer markets (including home video sales and
rentals).Online markets (including video services, interactive television, and
wireless digital content).

 Consumption of audio‐visual media and content tends to be cumulative rather
than substitutive. New media such as DVDs and home entertainment centres tend
to supplement and reinforce cinema and television consumption. Consumers who
attend the most cinema performances also tend to buy more DVDs and watch
more television. DVD and television release (mostly pay‐TV and VoD) have become
major profit sources, DVDs often earning 50% or more of total income.


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 To this point in time, the online video download market has not developed as
quickly or as comprehensively as many had expected. Compared to DVDs and
television, downloading is not yet a substantial revenue stream for most film and
video products. Television (including broadcast, pay‐TV and VoD) is now
overwhelmingly the most competitive distribution media for all types of film and
video products, followed by DVD rentals and sales.

 Much digital film and video content is distributed by e‐commerce, selling or renting
DVDs online.

 Although existing legal download sites appear to be slow in achieving a substantial
market share, ‘social networks’ show many signs of developing the consumer
communities necessary to stimulate the online download market. Furthermore,
these social networks also promise to change the paradigm of online distribution
from basically a linear distribution process to a highly interactive environment.

Industry structure
 The markets for media products in the OECD countries overall is characterised by
large, vertically integrated multinational conglomerates that own or have
substantial interests in a wide range of audio, visual and print media as well as in
communication networks of various kinds. A substantial portion of the Hollywood
production cluster is now owned by conglomerates and investors that are not
based in the US.

 For most of the largest of these groups, film and video entertainment products
make up only about 25% of the product portfolio, and these businesses have
invested particularly heavily in networking activities ranging from cable television
networks to ISPs, portals and telecommunication undertakings, and increasingly in
Internet‐based businesses.

 The film and video investment and production structure is now distributed
internationally. International contract and co‐production initiatives have increased
the value of domestic film and video output dramatically in several countries, most
notably the UK, Canada and New Zealand.

The value chain
 The film and video value chain is already heavily digitised and dependent on high‐
speed Internet facilities. Most of the major production and postproduction
functions are computer‐dependent. The production of music, sound and special


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effects is almost entirely digital as is most of the animation process. Remaining
areas for digitisation are image capture in the cinema film segment and in parts of
the television feature segment along with distribution in the cinema segment.

 The film and video value chain is highly complex because film and video
entertainment products are intermediate goods. Once a film or video has been
produced, various stakeholders invest and add value to it in various secondary and
tertiary markets. Some of this is related to exhibition and distribution, but others
exploit various spin‐offs ranging from merchandising and advertising to the
commercialisation of new technology.

 The technology of film and video production and distribution has changed
substantively in the past 50 years but the basic value‐added structure of the
industry has remained intact. Although many digitized segments are now very
mature, they have not caused major alteration in the basic value‐added structure.
However, significant challenges to this structure are likely from the elimination of
remaining analogue bottlenecks, mostly concerning new digital image capture and
digital distribution, with digital cinema technologies likely to be extremely
significant.

 Full digitisation of production and post‐production may have major effects on the
value chain: Greater integration of the production and post‐production segments.
Redefinition and possible relocation of the duplication function. Redefinition of the
distribution function. Closer integration of the cinema and television
environments. Creation of a new ‘communication’ value‐added segment geared to
exploiting new methods of interactive market research encompassing social
networks.

 The cinema exhibition segment will eventually be converted to fully digitised
production and distribution. The added flexibility of digital cinema may expand the
range of products that are shown and enable market development that goes well
beyond the exhibition of conventional feature films.

 Although digitisation of production and distribution has many cost advantages, the
digital environment will not necessarily lower overall costs. In particular, film and
video production will remain a human resource‐intensive enterprise, and
increasing skill and productivity levels may result in overall higher labour costs.

 Digitisation provides opportunities for more undertakings in more countries to add
value to the film and video industries, i.e. by exploiting emerging specialist

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Subject Module - Elective CIAKL II - Class 03

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