2.12 YOUTH MARKET
3.4.2 The nature of the film industry Studios business model
The film value chain consists of five players, the movie-makers (Studios), the movie distributors, the movie exhibitors, home entertainment, and television stations. The studios make films for varying amounts of money. Some films are big budget films, and others small. Studios have different distribution companies that represent them throughout the world. In South Africa these distribution companies are Ster Kinekor Distribution, Nu Metro Distribution, United International Pictures (UIP), and some independent distribu- tors on an ad hoc basis. The distributors' prime objective is to get the best possible returns for their client's products, which are the studios films.
To do this, the distributors negotiate the best possible terms for the films, and place the films in cinemas that are likely to give the films the best returns. The model used be- tween cinema distributors and exhibitors is commonly known in the film industry as the revenue share model (definition of terms, pg xviii). The revenue share model works on the premise that the exhibitors never buy the film outright and therefore don't own the film print and this remains the property of the overseas studios. To offset the cost of the film print and the making of the film, the distributors negotiate terms with the exhibitors. The terms are the percentages of the box office takings that are due to the exhibitor and to the distributor. This percentage split is based on the likely box office takings of the film. There higher the box office expectations, the higher the terms that the distributor can negotiate.
Generally the distributors share of the box office starts of the highest the first week of the release (e.g. 65%), and slides downwards on a weekly basis (e.g. 60% for the second week and 55% for the third). It is important to note that the majority of the film takings are in the first two weeks of the release of the film.
The success of a film is determined by its box office takings. Once the film goes off circuit (not shown in theatres anymore), the next avenue for studios to get a return on their product is home entertainment. This takes the form of DVD sales and DVD rental. The two prominent home distribution networks in South Africa are Ster Kinekor Home Enter- tainment and Nu Metro Home Entertainment. Locally and overseas, in some cases the re- turns from home entertainment have been larger than those from film exhibition for a par- ticular film. This is contrary to industry norms, but shows the significant role those DVD
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sales and rentals play in the studios income streams. This also shows the challenge that home film watching poses to film exhibition.
The last significant revenue stream for the studios is television rights e.g. MNET, SABC and DSTV.
The increased importance of DVD sales to studio profits are putting pressure on the length of the window periods between the theatrical release of films and their DVD re- leases.
Shortening window periods
Traditionally the release of films across the various windows has been linear, starting with theatrical exhibition, moving through to D V D / Video rentals and sell through, and on to pay television (satellite), and finally to free television (SABC and ETV). SABC has an annual subscription, but is very small compared to a subscription to satellite television
(DSTV). There window periods where traditionally as follows.
6 months ^. Theatrical exhibition
6 months *" DVD/Video rental
6 months *" DVD/Video sell-through
12 months ,, • Pay TV /Free -TV
Table 1: Window period for a typical Hollywood block- buster: (BSAC Briefing paper on windows-14 October 1999)
All the companies involved in the film industry where given a period of exclusivity before the films passed on to the next window. What Appendix A illustrates is that a film would not come out for rental until after 6 months from its theatrical release no matter how long it plays at the cinemas. There window period where a compromise between the different sectors and the studios. This model allowed all the different players an opportu-
nity to maximise the returns from a film, however not at the detriment of the next sector.
Therefore if a film played for only 3 weeks at the cinema, there would be a compromise in that the studios would not have to wait for 6 months before is moved further along the sectors.
This model has, however, changed, with factors such as piracy and illegal download- ing of content making it financially viable and enticing for pirates to make a large profit within these windows and in the process diminish the profit potential of studios through the other sectors. There has also been an increasing demand for films on DVD and Satel- lite sooner than the traditional window periods. In order to curb piracy, and maximise their returns, studios have seen an opportunity to distribute films over the Internet and through DVD sales. This is likely to lead to distribution of products through parallel paths by means of simultaneous availability through theatrical exhibition, DVD sales and on satel- lite. On the 13th of September 2006, Steven Jobs of Apple Computer Inc, announced in San Francisco that Apple planned to introduce a product named ITV early 2007 which is an online film service that will allow people to watch films downloaded from the internet on Apples I tunes online store on their living room television, not on their office PC or the tiny screen of a portable device (www.latimes.com). This development is going to pose an even bigger challenge to the exhibitors, as the movies downloaded can now be played on a 60" high definition television, and not limited to the computer screen. This development is further backed by Walt Disney Company, which is one of the biggest studios, and other studios are likely to follow. According to Robert A. Iger, (President and CEO of Walt Dis- ney Co.), "You can't stop or slow down technology. If you try to prevent that, unfortu- nately you will fail" This development will make it even harder to maintain the traditional window period.
The windows between theatrical release and availability on DVD are already shorten- ing. According to the National Association of Theatre Owners (NATO) the window pe- riod between theatrical and rental/DVD sales has gone from an average of 5 months 13 days in year 2000, to an average of 4 months and 16 days at the end of year 2005.This has put pressure on the ability of cinema exhibitors to fully exploit films. The simultaneous re- lease of movies will further worsen this pressure, and is viewed against strongly by exhibi- tors. Further to trying to minimise losses to pirated DVD's, studios are shortening the window period to maximise Christmas sales of movies that were released in the summer in
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United States of America (June month). South Africa follows American release dates, and would therefore have the same Christmas DVD releases.
The challenge to cinema exhibitors is that short window periods mean that once movies are out on DVD for sale or rental, attendances in the cinemas decline. Also if con- sumers get used to movies coming out on DVD soon after their theatrical release, then they do not have to go to the cinemas, as the movies will be available to own or to rent soon after that. This puts pressure on the attendances at the cinema.