Film distribution media: what’s next to retain customers?

Film distribution media

Film distribution remains inefficient and not user-friendly enough, despite the many disruptions caused by online piracy and the advent of film streaming. Is the outcome of the streaming wars going to bring more consolidation in film distribution? What about aggregating film streaming services together, to make them more affordable to end-users? Let’s explore.

1. Which distribution media exist for films?

Film distribution (also known as ‟film exhibition” and ‟film distribution and exhibition”) is the process of making a movie available for viewing by an audience.

This is usually the task of a professional film distributor, who would determine the marketing and release strategy for a movie, the media by which a film is to be exhibited or made available for viewing.

The film may be exhibited directly to the public through movie theatres, television or personal home viewing (including physical media, video-on-demande, download, television programs through broadcast syndication).

1.1. Movie theatres

The film industry was invented, at the end of the 19th century, when the Lumière brothers organised the first ever commercial and public screening of their ten short films in Paris, on 28 December 1895, which took place in the basement of the ‟salon indien du grand café” with Louis and Auguste Lumière’s ‟cinématographe”.

After that, and during the first decade of motion pictures, the demand for movies, as well as the amount of new productions and the average runtime of movies, became such, that it became viable to have theatres that would no longer program live acts, but only films.

Claimants for the title of the earliest movie theatre include the Eden Theatre in La Ciotat, France, where ‟L’arrivée d’un train en gare de la Ciotat” was screened on 21 March 1899.

In the United States of America (‟USA”), many small and simple theatres were set up, usually in converted storefronts. They typically charged five cents for admission, and thus became known as nickelodeons. They flourished between 1905 and 1915.

The design and technical sophistication of picture theatres developed and expanded, offering consumers more and more different types of venues in which to watch films, such as multiplexes and megaplexes, drive-ins, outdoor movie theatres, 3D movie cinemas, IMAX and Premium Large Format cinemas. Moreover, a new classification by the type of movies these theatres show was set up, as follows:

  • first-run theatre: a cinema that runs primarily mainstream film fare from the major film companies and distributors, during the initial new release period of each film;
  • second-run or discount theatre: a movie house that runs films that have already shown in the first-run theatres and are presented at a lower ticket price (also known as ‟dollar theatres” or ‟cheap seats”);
  • repertoire/repertory theatre or arthouse: a theatre that presents more alternative and art films as well as second-run and classic films (often known as an ‟independent cinema” in the United Kingdom (‟UK”));
  • IMAX theatre: this theatre can show conventional movies, but the major benefits of the IMAX system are only available when showing movies filmed using it (IMAX movies are often documentaries featuring natural scenery, and may be limited to a 45-minute length of a single reel of IMAX film).

1.2. Television

The second film distribution channel to have seen the light of day, was television (from the Greek word ‟tele” (far) and the Latin word ‟visio” (sight)) in the late 1920s. After several years of further development, the new technology started becoming marketed to consumers. After World War II, an improved form of black-and-white television broadcasting became popular in the UK and the USA, and television sets became commonplace in homes, businesses and institutions during the 1950s.

While television, or ‟TV” as it is also known, evolved from black-and-white, to color in the mid-60s, to digital in the late 2000s, to 3D from 2010 onwards and to smart television from 2015 onwards, various broadcast systems were used, and experimented with, as listed below:

  • terrestrial television: programming is broadcast by television stations (channels), as stations are licensed by the governments of the countries they are located in, to broadcast only over assigned channels in the television band;
  • cable television: a system of broadcasting television programming to paying subscribers via radio frequency signals transmitted through coaxial cables or light pulses through fiber-optic cables;
  • satellite television: a system of supplying television programming using broadcast signals relayed from communication satellites, in which the signals are received via an outdoor parabolic reflector antenna usually referred to as a satellite dish and a low-noise block downconverter, and
  • internet television (or online television): the digital distribution of television content via the internet as opposed to traditional systems such as terrestrial, cable or satellite, which covers the delivery of television series, and other video content, over the internet by video streaming technology, typically by major traditional television broadcasters.

1.3. Personal home viewing

Home video is pre-recorded media content sold, or rented, for home viewing.

The term originates from the Video Home System (‟VHS”) and Betamax era (mid 1970s), when the predominant medium was videotapes, but has carried over to optical disc formats such as DVD, Blu-ray and streaming media.

The home-video business distributes films, television series, telefilms and other audiovisual media in the form of videos, in various formats, to the public. These are either bought, or rented, and then watched privately in consumers’ homes.

Most theatrically released films are now released on digital media, both optical and download-based, replacing the largely obsolete videotape medium.

While DVDs remain popular in Asia, the Video CD format has gradually lost popularity since the late 2010s and early 2020s, when streaming media became mainstream.

The transition from disk-based viewing to a streaming culture is best illustrated by Netflix’s business case: Netflix used to have a DVD-by-mail service (which, in 2015, still served 5.3 million subscribers), before, and then while, expanding its streaming services (which, in 2015, had 65 million members).

Alongside early-entrant Netflix, the film streaming business counts the following streaming services as Netflix’s competitors:

  • Streaming Video On-Demand service providers (‟SVoD providers”): subscription-based, or ad-based, online platforms which provide streaming video on-demand services to users, by allowing them to access, via streaming, videos without a traditional video playback device (such as a desktop client application) and the constraints of a typical static broadcasting schedule, such as Netflix, Amazon Prime, Hulu, Disney+, Peacock, HBO Max and Paramount+.

1.4. In-flight entertainment

In-flight entertainment refers to entertainment available to aircraft passengers during a flight, and is a popular way to watch films and other video entertainment, either via a large video screen at the front of a cabin section, or (more commonly) via personal television sets located in front of each passengers’ seat.

Other types of journey film watching facilities can exist on trains, cars, ferries, boats, hotels, space crafts, etc.

2. Which contractual models are used to distribute films?

First and foremost, let’s have a look at the various stakeholders involved in entering into distribution agreements:

  • the owner, which is the person who, or legal entity that, owns the distribution rights (i.e. theatrical rights – referring to film screenings in cinemas -, TV rights and Video-on-Demand rights) to a film title, and
  • the distributor which is the legal entity which will distribute the film title, in a defined territory, for a defined term, via a license, or an assignment, of the above-mentioned distribution rights, granted by the owner.

While the categorisation of contractual parties seems plain and simple, it is less often so, in practice. Many distributors find themselves dealing with a ‟producer” who neither owns, nor controls, the distribution rights.

Therefore, to identify the owner, a review of the chain of title (i.e. the process whereby the documentation that establishes proprietary rights in a film is reviewed in detail, in order to clarify who, exactly, owns such rights) must be performed.

Also, like producers, there are many different kinds of entities that go by the name of ‟distributors”, while they do not all have the same function or structure. That function or structure is critical for the owner to understand, as it will determine, among other things, the resources of the distributor, their business practices, and how many different parties are taking a piece of the revenues generated by the owner’s motion picture before any of it will come back to him/her.

As set out on the professional version of IMDB, when one opens the ‟Companies” dropdown menu to click on ‟Distributors”, one will find what appears to be an almost infinite number of companies, literally thousands of entities, that define themselves as ‟distributors”. This list of ‟distributors” can be sub-categorised as follows:

  • major studios (or ‟majors” or ‟studios”), such as Warner Bros, Paramount, Universal, Disney, Fox and Sony Pictures, which, due to their size, can distribute directly (including via subsidiaries and affiliates) throughout (most of) the world – Their size typically makes the majors less flexible in their agreements, more likely to rely on precedent, and more concerned with their liability as the deep-pocketed party in any transaction, as well as with the release of ‟major” films (i.e. movies in the highest budget range, i.e. USD100 million and above) which they tend to be the exclusive distributors of;
  • independent distributors (or ‟mini-majors”), such as Lionsgate, (now defunct) The Weinstein Company, STX, (now defunct) Broad Green, which, in the USA, maintain their own theatrical distribution (i.e. license their pictures to movie theatres and collect their share of box office receipts from cinemas), home video distribution (although physical distribution of DVDs may be serviced by a major) and license directly to VOD and television and, outside the USA, license their motion pictures territory by territory to local distributors, although some, like Lionsgate, may also have ownership interests in one or more of those foreign distributors as well;
  • divisions of the majors, with their own personalities and histories, such as Universal-owned Focus, Sony-owned Screen Gems, Disney-owned Searchlight Pictures, Warner-owned New Line, which, in the USA, have access to their parent companies’ distribution operations, but typically administer their own marketing and, outside the USA, may be able to use the parent company output deals and other distribution advantages, and/or act as a foreign sales agent, licensing territory by territory;
  • sales agents, such as FilmNation and XYZ Films, which, although technically not distributors (since they do not generally own the copyrights/distribution rights in the pictures that they license), are mandated by the producer/copyright owner to market their picture to foreign distributors, to negotiate territorial agreements with those distributors, often on a ‟pre-buy” basis before the picture is even produced, and to deliver the picture to the distributors when it is completed, all on behalf of the owner as his/her exclusive agent;
  • financiers and productions companies, such as Participant, RatPac and Legendary, which, although being listed as ‟distributors” on IMDB, are not – with the clarification that many significant production companies maintain the in-house capability to also directly license the pictures they produce to (foreign) territorial distributors, such as a foreign sales agent, and
  • SVoD providers, such as Netflix, Amazon Studios and Disney+, although they are better characterised as end users rather than distributors in the various territories in which they operate – their distribution agreements, more properly characterised as ‟digital licenses”, are distinguished primarily by the fact that there is no division of revenues involved – Netflix, for example, is not sharing the subscription fees it receives with any owner; Thus, even when Netflix acquires all worldwide rights in perpetuity to a motion picture prior to production, and bills it as a ‟Netflix Original”, they agree to make a fixed ‟buyout” payment with no additional net profits, royalties or other accountings.

Now that the various parties to a distribution agreement have been identified, let’s delve into the main types of film distribution agreements available on the market:

  • the acquisition agreement, which is an agreement that may be used by a US-based distributor to acquire rights in all (or many) media in the USA and, often, Canada, the so-called ‟domestic” territory. Many of the provisions in this agreement reflect the leverage that US distributors have by virtue of the importance of their domestic territory, both because of its size and the usual leading role US release takes in marketing English-language movies worldwide;
  • the IFTA distribution agreement, which is a template form provided by the Independent Film & Television Alliance (‟IFTA”), the self-described ‟global trade association for the independent motion picture and television industry” – the distribution agreement is used, in many variations, primarily by foreign sales agents when licensing motion picture rights to foreign territorial distributors. Many of the differences between this template form and the acquisition agreement serve to illustrate the relatively weaker leverage of typical foreign distributors, excluding those in major foreign territories such as China, the UK, France and Japan;
  • the negative pickup agreement, which, while there is no ‟negative” to ‟pick up”, these days, still survives in its title and concept – the distributor, primarily US-based and probably a major studio, agrees before a picture is produced to pay the entire cost of production of the picture upon delivery, in return for the copyright and all other rights to the picture worldwide and in perpetuity. This agreement is in many ways an extreme version of the acquisition agreement, and
  • the sales agency agreement, in which no distribution rights are granted to the sales agent, so this is not really a distribution agreement at all – yet, the agent is engaged by the copyright owner/filmmaker to find, negotiate and enter into distribution agreements on behalf of the filmmaker as its exclusive agent. In this agreement, the approvals and controls shift to the filmmaker, and the sales agent typically provides no advance or minimum guarantee (more on this below) to the filmmaker. Sales agents, however, often play a significant role in assisting filmmakers finance their pictures through pre-sales.

Some of the crucial provisions set out in a film distribution agreement are:

  • picture specifications, to identify the commodity that the distributor is purchasing or licensing, such as its title, the date it was screened by the distributor, the promised rating (usually formulated with reference to the Motion Picture Association of America categories, but sometimes including local rating designations as well), the length and technical specifications (relating to whether the picture is being shot on film or, more commonly, in digital HD) and, if the distributor is acquiring distribution rights earlier in the production process, screenplay, genre, production budget, cast, director;
  • essential elements, since the value of pictures sold on a pre-buy basis is determined by the attachment of star actors or, less frequently, a star director (i.e. essential elements);
  • advertising rights, which are the right to advertise the picture using the name and likeness of the above-mentioned essential elements, granted to the distributor;
  • approvals of the respective distributor or agent, which may range from almost none in the sales agency agreement, to virtually total control of every production element and the respective agreements relating to those elements in the negative pickup agreement;
  • the term, which, in large territories such as the USA, may extend for 15, 25 or more years, or even perpetuity, while is usually 7 years from delivery of the picture to the distributor, in smaller foreign territories;
  • the territory, which is defined on a granular level, still, in most distribution agreements, given the vested commercial interests of distributors and rights owners in the territorial system of distribution, but which is becoming increasingly irrelevant and out-of-touch with reality, in the SVoD and streaming era where the expectation of consumers is that all content will be immediately available everywhere (more on this below);
  • the rights, i.e. exploitation rights (on which media the film can be exploited), advertising rights (to advertise and promote the motion picture to the public), ancillary rights (such as, for example, the right to exhibit the picture on airlines, ships and in hotels, but also the right to create action figures and T shirts via merchandising) and derivative rights (right to create sequels, prequels, remakes and television series);
  • holdbacks and windows, since the theatrical exhibition business still relies commercially on being the first medium of exploitation of motion pictures, with theatre owners – and particularly large chains – pushing back against screening films in any significant numbers that are available in any other medium at the same time;
  • the minimum guarantee, which is the amount payable by the distributor to the owner as an advance against the owner’s share of distribution revenues, and which is the basis for much of independent motion picture financing as lenders will loan a discounted amount against the aggregate minimum guarantees already secured by the owner or its agent;
  • gross receipts and their application: gross receipts mean the revenues actually received by the distributor less ‟off the top” deduction of certain limited expenses such as collection costs and bank fees, but also less distribution fees (formulated as a percentage of gross receipts) and less distribution expenses (in particular advertising, attending film markets such as Cannes, Toronto, IFTA’s AFM and Berlin), and less the recoupment of the minimum guarantee, and
  • theatrical release commitments, which, despite the ongoing disruption of the traditional motion picture theatrical release model, by SVoD providers and UGCs sites, remain the Holy Grail of many filmmakers, sought after for the prestige, exposure and potential financial bonanza that they believe their picture and career deserve.

3. How streaming changed the game in film distribution

While the music industry was plagued by the likes of Napster in the early noughties, the film sector has also been seriously disrupted by consumers’ ability to download peer-to-peer files, in particular video format files such as .mp4 or .mov, illegally, on the internet. Illegal peer-to-peer websites, such as eMule, qBittorent, uTorrent and Seedr, still exist today, but consumers may prefer to use illegal SVoD providers such as PopcornTime, which are much easier to use.

This acceleration into the digitalisation of film distribution, thanks to better internet connections and speeds, as well as the above-mentioned peer-to-peer technology, has permanently, negatively and irremediably affected the scale of film distribution in all other non-digital media (movie theatres, of course, but also TV networks, DVDs, Blue Ray, etc.).

The music industry, which swiftly understood that CDs, cassettes, vinyls and mini-discs were things of the past, decided to take back control of the narrative, by making music streaming legal, via subscription-based or ad-based, digital service providers (i.e. tech companies providing music streaming services, such as Apple Music, Spotify, Deezer, Tidal and Amazon Music) (‟DSPs”). These easily-affordable monthly subscription plans, offered by DSPs, gave a fatal blow to peer-to-peer music sites, in the mid-noughties, since consumers would rather pay between GBP5 to GBP20 per month, to access catalogues of millions of songs, rather than spend time, energy and efforts – not to mention, risking having their internet connection terminated by their internet service provider for acts of piracy – downloading files.

However, the film industry was, and still is, much less nimble, realistic and flexible in adapting to the new realities of this digital era. The distribution side of the business, in particular, has resisted, and still does resist, any cost-effective, customer-friendly and affordable digital solution to its film distribution model. As a result, piracy has, and still is, thriving in the motion picture sector, with customers routinely using peer-to-peer platforms and illegal SVoD providers to find movies they want to watch for free. Even people who use music streaming services via DSPs, and/or who use SVoD services via SVoD providers (but cannot find the film they want to watch on that streaming platform), still download movies and TV series illegally.

And that is the crux of the matter, in film distribution today: customers want to have access to all the video content, all at once, anywhere, anytime, while film distributors and owners, as well as states and governments, are only prepared to drip-feed movies, on a limited number of SVoD platforms, usually after the theatrical window has elapsed (which, for example, in France, is between 22 and 36 months following theatrical release, to allow for pay-TV release, and then free-TV window, before streaming!).

Not only that, but the number of streaming platforms has shot up through the roof, with every major studio now having its own SVoD provider, and therefore pulling off its own catalogue from competing SVoD providers owned by pure tech companies, such as Netflix, Apple TV and Amazon Prime, or owned by rival studios such as HBO Max, Paramount+, Disney+ and Hulu, or owned by media conglomerates such as Peacock.

There are now streaming platforms for each genre and sub-genre, for documentaries-enthusiasts (such as History Vault, MagellanTV, PBS Documentaries, GuideDoc), horror fans (such as Shudder and Tubi), etc.

Therefore, customers who want to ‟play by the rules” have to subscribe, and pay monthly subscription fees, to 4 to 10 SVoD providers at once, in order to “cover the market”, in terms of accessing large libraries and catalogues of movies (ancient and new). This is all the more perplexing since a Spotify premium plan user will have access to more than 80 million music tracks (i.e. around 80 percent of the total number of songs in the world), on that DSP, for the modest sum of GBP9.99 per month.

No wonder that piracy is still very much an issue in the movie business, with only few (and, to be frank, quite stupid) customers ready to fork hundreds of USD, GBP or euros per month, in order to have lawful access to vast catalogues of films and video content online.

4. A need for consolidation and aggregation in the film distribution business model

It is clear that film owners and distributors need to become more self-aware, by taking a long and hard look at the licensing value of their content, in this new market paradigm in which no consumer in their right mind will spend more than between 25 to 50 GBP/USD/euros per month, in order to have access to large catalogues of newly-released movies as well as catalogues of old films, via SVoD platforms.

Also, film distribution via traditional media, such as movie theatres, is bound to decrease over time, due to changing consumer habits (who prefer to cocoon at home) and in the wake of the covid pandemic. In 2021, US adults saw on average 1.4 movies in a cinema in the past 12 months. Cable TV and pay TV are on the path of extinction too, with the numbers of US pay-TV subscribers forecasted to fall by 28 per cent, each year, between 2013 and 2023.

The only diversification that we foresee, for film distribution media, is in the in-flight entertainment segment, with the increase and development of space tourism, space’s commercial exploitation by behemoths such as SpaceX-Tesla and BlueOrigin-Amazon, as well as space stations set up by governments, space agencies and private companies.

What does this all mean for stakeholders in the film industry?

Since the development of the above-mentioned in-flight entertainment segment is a very-long-term game, stakeholders in the movie industry need to focus on making the digital film distribution channels more efficient, streamlined and consumer-friendly.

First, there will be some consolidation in the film streaming sector, with many existing SVoD providers either going extinct, or being the targets of acquisitions, in the next five years. Additional consolidation will be largely driven by SVoD providers’ need for larger content catalogues, to satisfy consumers’ insatiable demand for hit content. Also, pure digital players like Netflix, Amazon Prime and Apple TV, managed by high tech executives – steeped with the cost-cutting, data-driven decisions and lean management methods professed by Silicon Valley – will force, via competition, SVoD providers owned by media & entertainment conglomerates, major studios and film distributors to shed dead weight and increase efficiencies and profitability.

Second, there will be an even more aggressive push towards aggregation of SVoD services, via super-aggregators which bundle non-competing tech services together (for example, the purchase of an iPad from Apple Store gives you access to a free one-year license to Apple TV) and via ‟ad hoc” subscription-based apps bundling several SVoD services all in one app, to combine the content libraries from different SVoD providers, such as Struum.

Eventually, when the current streaming wars will have dried out, only a few winners will remain. These lucky winners will shop around ferociously, either by way of mergers & acquisitions, and/or assignments or licensing of catalogues, in order to grab the largest possible content libraries.

It is at this cost, and after weeding all these weaker competitors out, that this handful of appropriate film streaming services will finally be on offer, in the video content industry, for consumers. Piracy will subside, because consumers will no longer need it to have access to very large content libraries, while only paying reasonably-priced monthly subscription fees to the lucky few streamers still standing.

What an inordinate and wasteful amount of money and time, to reach more or less exactly the exact same status quo than in the music streaming industry, but with a 10 to 15 years’ delay, in the movie streaming sector.

 

Crefovi’s live webinar: Film distribution media – what’s next to retain customers? – 19 October 2022

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