Movies are big business and a large part of a film’s exploitation is concerned with extracting maximum value from every film produced over as long a period of time across as many media and in as many different territories as possible.  Each new film goes through an earnings cycle based on distribution to various media, including television, which has become an increasingly important source of revenue.

Twenty or thirty years ago producers made their films and hoped for big enough revenues from the box office to recover their costs.  They received some extra income from television, but in each country there were only a couple of television channels which were limited in the number of movies they could broadcast in schedules that covered news, soaps and general entertainment as well as the occasional film.  Any revenue in addition to box office was icing on the cake.

Today it is very different.  New revenue streams from video and pay-TV have been introduced and the box office often no longer accounts for even a majority of a film’s revenues.  Not any more is television the icing on the cake – it provides a vital portion of overall income.

Box office revenues in the United States have grown steadily by around 8% per annum.  For a particular film the box office can still dwarf other income if it becomes very big, but theatrical success has a knock-on effect on other revenue streams as the price television pays for films rises with the box office.  The better known a film becomes the better it will usually do on Pay-Per-View (PPV) where the rights owners or producers will normally share 50% of the income generated.

Pay-TV, including Pay-Per-View (PPV), is growing faster than any other source of revenue – increasing by 23% per annum for the past five years.  It represents at least 20% of total movie revenues and as digital multi-channel television increases penetration across the world it will continue to grow at the expense of the traditional free TV channels funded by advertising and government licence fees.

The most important recent moves in the cable and satellite world have been towards thematic television, with channels devoted to specific genres.  Old style general entertainment channels are competing against children’s channels, music channels, documentary channels and film channels.  As more bandwidth becomes available and digital compression technology allows more channels to come on stream, the trend is towards more targeted channels.

Cable and satellite delivery has led to many more channels and for the film industry this has meant film channels, both premium ones with the first showing on television some 12 to 18 months after theatrical release, and classic movie channels with old films that had already been through the first pay-TV and free TV windows.  The digital world means new and cheaper delivery methods.  Broadband telephone networks, for example, can now provide new services such as Video-on-Demand (VOD) and more targeted channels such as ones devoted to Westerns or to foreign language films.

For those that provide the content, the market is expanding, not just in terms of new ways to deliver more of their product, but also geographically.  Multichannel pay-television first developed in the richer countries of the world.  But the technology has now made pay-TV cheaper and more accessible, and it has expanded into other newly industrialised parts of the world like Latin America and South East Asia.

Movies have always driven the ratings for free television, but in pay-TV they are even more important.  Rupert Murdoch once described movies and sports as the battering ram with which to build pay-TV penetration.  These two genres, more than any other, drive subscription – but to do so they must have the best product as soon as possible, otherwise people will not pay for it.  For sports that means live action from the most popular sports.  For movies it means blockbuster movies on TV for the first time as soon as possible after theatrical release.

Movie producers have seen demand increasing for their product, from new markets and from new services.  At the same time, the number of films released theatrically every year has hardly risen, certainly not at the same pace as increased demand.  It is hardly surprising, therefore, that prices have been rising for the best movies and that Hollywood studio output deals are now worth millions of dollars.  One of the great advantages of television, compared with theatrical or even video, is that the costs involved for the producers are relatively small.  Distribution costs are relatively low and the broadcaster bears most of the marketing costs.

But costs of production as well as marketing budgets have risen rapidly.  In 1999 the average production cost of a film from the Hollywood studios was $51.5 million, while the marketing budget came to $24.5 million.  For every film that succeeds at the box office there are many that do not, and making films continues to be a very risky business.
Producers need that extra revenue from television to recover their costs.  Indeed one of the trends has been an increasing tendency to share the risks and offset some of the initial investment by bringing in third parties across the world and splitting the rights.

This report is about films and pay-television, or more specifically about film channels.  It also covers PPV as this form of exploitation can be loosely described as a film ‘channel’.  PPV provides a relatively small share of overall revenues right now, but it growing very quickly.  VOD will eventually take over from video rental as it is the natural successor to this window (period of exploitation) and it will also eat into film channel revenues as some subscribers choose to watch films on demand rather than wait longer to watch them on a premium movie channel.

KEY MARKETS

The United States dominates the world, not just in terms of movie production, but also at the box office and all other sources of revenues.  In box office terms the US accounts for 40% of the global market and in overall revenues it takes around half of the total.  At the box office, Japan is the next biggest market with around 9% of the total, followed by France (6%), the UK (5.5%), Germany (5.4%), Italy (3.9%) and Spain (2.5%).  Taking total revenues, including television, the order changes slightly, with Germany coming on top after the United States, followed by Japan, France, Italy, Spain and Britain.  Together these markets – the US, Western Europe and Japan – account for over 80% of all revenues from all media.

It is hardly surprising that the best markets for pay-TV are the most developed economies.  But there are other important factors at work.  Aside from economic prosperity, they include the competitive environment for pay-TV operators.  Where there are several operators there is more competition for rights and therefore prices tend to be pushed up.

In addition to these established markets, the expansion of multi-channel pay-TV has moved into the newly industrialised countries of Latin America and South East Asia as well as strong potential markets of Central Europe and Russia.  These are the growth regions for pay-television and many of the countries there still have some catching up to do before they begin to near the maturity of the US, Japan and Western Europe.

THE PLAYERS

Apart from the film channels and PPV services across the world, there are a number of other vital players to this business.  The first stage in the value chain is production and this is dominated by the seven major Hollywood studios that produce nearly half of all the films on theatrical release in the United States.  In addition to the majors there is a large group of producers represented by AFMA and a large proportion of the other 230 or so films released each year come from its members.

The next stage in the value chain is distribution, again dominated by the US studios, although to a lesser extent outside the US.  Effective distribution across territories and media is the key to commercial success.  There are several big producer/ distributors that also own major libraries.  These include Canal+ in France, the Kirch Group in Germany, and Mediaset in Italy.

The distributors sell the rights to film channels, free TV and PPV services.  The film channels are either premium channels with first run movies, in which case they tend to be sold wholesale to the pay-TV platforms, or they are classic movie channels which show library films that have already been through both the premium pay-TV and the free TV windows.  The classic film channels usually receive a fee-per-subscriber from the pay platform like other basic channels.  Sometimes, in some territories, there are also second pay-TV windows, before free-TV but after the first run.  In France, for example, Canal+ traditionally has the first run window, while the multi-channel cable and satellite services get a second pay-TV window before free TV.

Premium movie channels are often owned by the pay-TV platform, as they help to drive penetration.  This makes economic sense as sports and movie channels are more valuable to these services than the straight bottom line.  The studios also have interests in premium channels across the world.  Classic film channels and other pay-TV channels are often owned by the studios.  Time Warner and Universal own classic movie channels while most of the others have genre channels.  In addition, various studios have interests in HBO in different parts of the world.  In Latin America and in Central Europe Warners, Sony and Disney have a share of HBO, while in Asia Paramount, Sony and Universal have an interest.

The PPV services get the movies before the premium channels.  They cover Near-Video-on-Demand (NVOD) and true VOD.  An NVOD service staggers the start of several films across many channels, but choice is limited because it takes up so much capacity.
VOD allows viewers to watch any film on offer when they want to see it.  As with a video, they can pause, rewind or fast forward.  A VOD service has a catalogue of films on its servers, just as a video rental shop has a catalogue of films on its shelves.  Essentially it is the same service, delivered by different means.

The final stage in the value chain is delivery by the pay-TV operator.  Many platforms across the world, particularly the satellite services such as Britain’s BSkyB, Hong Kong’s Star TV and France’s CanalSatellite own the premium movie and sports channels that they broadcast.  Several of the studios have interests in these platforms.  For example Twentieth Century Fox-owner News Corporation also owns Star TV and has a controlling interest in BSkyB and Stream in Italy, as well as a share in KirchPayTV in Germany.  Universal, Paramount, MGM and Fox have a joint venture in Latin America as well as interests in HBO.

THE FUTURE

New digital technology is quickly changing the television landscape.  It has made possible the introduction of PPV and that has introduced pressure to collapse the window between video and pay-TV.  It has also meant more channels, including more film channels, with the ability to introduce several genres and cater more easily to minority tastes.

The wider choice from pay-TV as well as the introduction of VOD and the new hard-disk Personal Video Recorders will lead to the relative decline of free TV and the end of video rental.  As content becomes more readily available to the viewer, by whatever means, the windows will compress.  But they will also multiply – there will always be some scope for charging more for earlier showings of popular movies.

Films will continue to be a driver to bring new technologies into the home.  Content is enormously important for Internet services, while distribution is just as important for rights owners.  This is what has driven the AOL / Time Warner merger.

The Internet represents a huge opportunity for those that control copyright and have content, even if it is still unclear how the new model is going to work exactly.  The real challenge will be devising these new revenue models that will exploit the new opportunities effectively.  The studios are understandably worried about piracy and ensuring that the quality of their product does not suffer, but VOD via the Internet is an obvious way to get their films into people’s homes once broadband has become more established.

VOD services via DSL (Digital Subscriber Line) on telephone lines are already available, though for the moment the numbers are small and the services are limited.  A key question is whether the Internet will lead to the breakdown of the territory by territory/ windows model for distributing movies.  It will eventually become possible for the studios to sell their films via VOD directly to customers across the globe, but it is likely to make commercial sense to continue to sell on a territory by territory basis.

Film-makers benefit from having their content aggregated as well as distributed and marketed locally.  Each country has different tastes and culture and it is better to leave distribution in the hands of local companies.  A local distributor will usually understand a market much better and get the best deals.

Thus, while the Internet will eventually make it possible to distribute globally, local players providing services like VOD and premium movie channels using local servers is a more likely scenario.  The big trend, though, will be towards unicasting or VOD. VOD provides viewers with what they want to see when they want and this form of televised entertainment will become more popular at the expense of standard broadcast television.
Premium pay-TV movie channels will continue to be popular.  They offer value for money for people who want to watch movies regularly and are prepared to wait.  But VOD will reach new audiences as it targets specific segments of the market, and for content providers it is a lot cheaper than traditional broadcasting.

Content will be the key to success.  Those services that have the best content and the widest range will be the winners.  Both the suppliers of premium content and the packagers, whether premium film channels or PPV services, will be amongst the winners in the digital world as long as they embrace the new technology.

REPORT STRUCTURE

The report is in eight Sections.  The first is an introduction that provides a general background and explanation to the film and television business.  Section 2 looks more closely at the economics of film and television, with analysis of each part of the value chain, namely, production, distribution and delivery.  This analysis is taken further with Sections on the studios, on other distributors and producers and on film channels.  These three Sections include case studies of distributors, broadcasters and film channels.

This is followed by a Section covering the major markets for pay-TV movies and one which provides an overview of film channels throughout the world.  The final Section is on pay-per-view.  It provides an analysis of how the film and television sector is developing and what the future holds.