The question is, do the studios (and government for that matter) think that they will ever successfully prevent film piracy in this way?

Obviously they do, otherwise they wouldn’t be spending so much time and money on it (see here for the latest UK initiative costing £5million)  but is it merely a matter of prevention and education?

One of the major factors that is not being sufficiently addressed is that of supply and demand in the marketplace.  Arguably, one of the key conditions for the creation of a black market is for a product to be unavailable at a certain time and price, and for the public to disagree with this delay in access to and cost of the product to the point that they are willing to seek it elsewhere.

Imposing a value on a product that the general consumer disagrees with will create a black market for it.  Trying to prevent this black market will in the long run be fruitless.  New sites will spring up as soon as the law enforcers can close them down.  The studios need to find a realistic value for the products and work back from there.  It can work.  Take Lovefilm and Netflix as good examples of a modern business model creating value from the products.  I doubt that many subscription rental customers are active downloaders.

The article that prompted this blog post is here.  Note a couple of paragraphs from the bottom the line “..the venue’s success has driven DVD pirates out of business.”   They didn’t win the piracy war in this neighbourhood by prevention, it was won by offering the product at a realistic value.

In the DVD sales markets and to a certain extent the theatrical exhibition market the product has been overvalued.  The cost of the production of a DVD as a fraction of the sale price is well known, and for a while was sustainable whilst the novelty of the new technology was there.  But now new technology via the internet and filesharing has come along and the product value of a DVD has plummeted.

The value of the product has changed, whether you like it or not, and whether for good or bad.  Don’t forget, this is the product that when valued highly meant that film stars and producers earnt tens of millions of pounds per film.  The studio business models were created in a time where the value of the product was much higher, so they are trying to maintain the existing model.  And failing.  The value of the product has changed.  Just look at the music industry to understand how much.  Trying to hold on to this old business model by threatening and putting up barriers in the market won’t work.  Finding new solutions such as the one in Rio, or new models of revenue such as Netflix and Lovefilm are the way forward.

One further note to the debate is the actual cost of film piracy.  Ridiculous figures of the amount of revenue it is costing the film industry are regularly bandied around, but know what the most illegally downloaded film ever is?  Avatar.  Yes, that film that broke all box-office and DVD sales records and made Hollywood a whole heap of cash.  The illegal downloading didn’t seem to have much affect there then, unless they expected to make even more money…

What’s interesting here is the seeming reversal of cinema trends over the past 20 years.  Once, all cinemas were in town and city centres, and then the multiplexes started springing up in shopping centres and parks out of town and city centre cinemas started closing down.  Whilst multiplexes continue to spring up as part of the big cinema chains, usually connected with the latest big shopping mall (a recent new VUE opening in the Westfield shopping centre in London) CurzonAE are now bucking this trend and going back to the town-centres.  So why?

When multiplexes first started appearing, it was a wise business move – rather than pay expensive rent, and employ 1 team of staff to operate 1 or 2 screens, multiplexes could open several screens on cheap land out of town, and employ not much more than the 1 team of staff to operate several screens at once, thus making considerable savings.  This co-incided with a social move to large out of town shopping centres and malls and the increase of the large supermarket chains.

Now however, we’re starting to see a reversal in social habits, underpinned by the recession, with many of the large shopping malls unable to fill all their retail outlets.  The cost too of opening in the Westfield for VUE must have been relatively expensive too in terms of rent.  Witness Tescos and Sainsbury’s with the spread of Metros and Expresses in town centres as opposed to the large out of town superstores.

So for CurzonAE, looking to expand and open more cinemas, they have gone to where the cheaper rents are now – not in the new shopping malls, but in the declining city centres, and specifically in the larger retail stores that due to changes in technology are no longer as big or successful as they once were and as a result, have space to spare.  This is a smart move, not only just financially, but in recognition of the Curzon target audience – much older and cultured than the teen multiplex audiences and a target audience that have been falling out of love with the out of town shopping centres and malls due to their social impact.

So in terms of connecting with their audiences desires and combining this with the more economical overheads from linking up with town centre HMVs, CurzonAE appear to be making a very smart move at the right time.

But if this was a done deal beforehand, as long as she’s right for the job, I don’t think we need to complain too much.  One thing that did strike me however, was from a line in the Guardian coverage of her appointment and the combining of the funding strands:

“The UKFC intends to top-up the £15m annual fund with money it recoups from its investments, which are expected to provide at least another £2m a year.”

£2m a year?  So previously we had the Premiere Fund, with a chest of £8m in production financing, the New Cinema Fund, with £5m a year, and the Development Fund with £4m a year.  Now you could say that the Development Fund was purely a fund for encouraging writers and producers to spend longer on development to improve films, and that the money was in the way of a grant, and unlikely to be returned, which is being generous to say the least, but I wanted to concentrate on the production funds here.

The New Cinema Fund was the more cultural side of funding, encouraging excellence, innovation etc. etc. but there are some pretty successful titles in there, including recently: In the Loop, Man On Wire, This Is England, Adulthood etc.  You could understand if the films the fund invested in didn’t all make money, but undoubtedly some of them should have and did.  Maybe 20% of the films made their money back?  If so, that should be £1m a year coming in from the New Cinema Fund’s investments.

N0w the Premiere Fund with its £8 of funding a year, was never meant to be a token cultural gesture.  This was all about boosting the industry, backing successful British films, boosting post-production facilities and film crews.  According to their website, they backed on average 8-9 films a year.  That’s £1m per film give or take some loose change.  And in total the Film Council are only getting back £2m a year?  Even if the New Cinema Fund investments didn’t provide any return, that’s only 2 out of 8-9 films making their money back.   And whilst you might not be thrilled by The Film Council investing it’s money into films like St Trinian’s, with a sequel in the pipeline the film surely made enough money to repay it’s investors.  Ok, there are several flops in the list of films invested in (full list here) but out of about 56 films, at least 10 did some serious box office, and several haven’t even been released yet.

So where’s the money?  Are the Film Council not strong enough to negotiate good returns from their investments?  Or are they happy for the producers to hide away all the profits and not receive their investment back?  Either way, if they’re expecting just a return of £2m on £17m investment, then it would seem that this is a glorified pot of money with no strings attached.  Which leads to the question of what criteria these investments in the Premiere Fund are being judged on?  Sex Lives of the Potato Men and St Trinians?  L’Homme du Train?  Curious…

One part that particularly caught my eye:

He was preparing to open a second when the head of a rival chain invited him to lunch. “I thought this was a nice social lunch, and the CEO said to me: “I just want to let you know that I am going to build across the street from where you just signed a deal, and not only that, I am going to open across the street from you at every single site you sign up until you go under.” That was before the food had arrived.

“I had no idea how to respond. I said: ‘I am not a threat: I am a nobody, I have one cinema’. And he said: ‘I want to send a message to private equity that you don’t mess with the incumbents and I want to prevent anyone new coming into the market’.”

In light of the defensive, protectionist tactics taken by the cinemas against Disney with Alice, this does seem to be a deep-routed, and particularly negative stance.  They know they’re under threat, and all they can do is try to kill off new developments or competitors.

The trouble as I’ve noted before, is that back in the 20′s and 30′s when cinema was booming, it was an area into which many businessmen moved in order to make some money.  These often weren’t people with a love of cinema, they were just good businessmen with an eye for a good business opportunity.  80, 90 years on, these cinemas have either closed or been taken on by second generations and more often than not people with a love for film and not necessarily a love of business.  Apart from a few exceptions, too many people of power in exhibition are still trying to run their businesses on an outdated model, and treat any developments as a threat, to be cut down.

As I wrote in July last year, this really was inevitable.  With dwindling DVD revenues, which were previously the major revenue source, producers and studios need to maximise the revenues from each film, and shortening windows even to the point of same day theatrical and DVD (plus VoD etc.) releases start to make sense (see http://verncinema.wordpress.com/2009/07/04/the-future-of-release-windows/ for full argument).

Apparently Disney first put this shorter 12 week window forward in December with Up, but backed down under pressure.  Now it seems, they’ve got the bit between their teeth, with arguably what’s on paper a bigger star-led ‘event’ movie.  And the chains aren’t happy.  Which leads to a few observations; firstly, wasn’t 3D supposed to save cinema?  This is a 3D film we’re talking about here, so the comparison between watching in 3D at the cinema as opposed to in 2D at home is quite different.  It doesn’t seem as if that extra few weeks is going to make much of a difference to a large cinema chain, at least a lot less of a difference to losing out revenue to what is likely to be quite a major blockbuster.  So this is more of a point of principle argument.  Disney have said that they are only planning this with a few releases a year, but Odeon and UCI are adamant about the threat to their business.

Secondly, the chains might have had a bit of weight if they stuck together with a blanket boycott.  But this is business, and a competitive business at that, and with several key players in the market, they were never going to hold ranks successfully.  So Odeon and UCI make a stand, and Cineworld etc. get packed houses.

But even if Disney does suffer and Odeon and UCI win the battle, are they going to win the war?  Hell no.  These cinemas are running scared, with an outdated business model, and they know it.  Trying to protect it isn’t going to work.  The multiplex model took over from the inner-city cinemas because it enabled cinema owners to reduce overheads and maintain income, but now this model is under threat with narrowing demographics and poor atmosphere and is looking dated.  If they’re not to follow the likes of EMI into the red, they need to re-evaluate their business model.  Curzon Artifical Eye (who were behind several joint Sky Box Office / Theatrical releases last year) have already opened the first of what could be several if not dozens of cinemas above HMV shops and it looks like a very successful partnership for both partners.  Oh, and the headline on their e-shot yesterday?  “Exclusive to Wimbledon: Alice in Wonderland 3D”

As an update to this, Odeon have now backed down.  A sensible business decision obviously, particularly given Alice’s massive opening week box office, but the war has just started, and they’ve already lost the first battle…

The Barbican arts venue is publically funded, albeit via the Corporation of London (which in itself derives most of its monies through the companies within the square mile rather than residents) rather than the general tax-payers funded Arts Council.  So in essence, it’s funded on public money, but what strings does this attached with, and indeed should come attached with? Firstly, it should be noted that the Barbican cinema does apparently (or according to the Artistic Director about a year ago) actually turn a profit, i.e. could live off tickets sales and hires alone.  Though you’d have to say that the inclusion within a massive arts centre and programmes and central marketing / advertising teams certainly doesn’t do any harm to the business of the cinema.

But what of the programming?  It’s widely acknowledged that the Barbican Cinemas do have a varied mix of festivals, seasons and the like alongside the pick of recent releases and is a good model of cultural cinema programming.  So cultural cinema and profitable?  Do these things go together?   It’s often believed that cultural and commercial are at the opposite ends of the spectrum and that by showing ‘cultural’ films you take a hit which is made up by screening the commercial ‘profitable’ films.  Is this what the Barbican is doing?  I’d say it’s unlikely.  What the Barbican does very well is attract big audiences to big cultural events, across all the artforms, and backed up by a very good marketing department.   And it appears that cultural success is not  the enemy of commercial success here. The subsidy may be necessary to cover the costs of the infrastructure, building and central marketing teams etc. as well as funding the larger flagship events at the centre, but it doesn’t appear to be exclusively necessary for the promotion of culture over commerce.  Which is partly why one of the comments “Sometimes limited financial revenue is a very small price to pay for cultural education.” does grate on me.  Does all cultural education mean limited financial revenue?  And should the Barbican be required to offer ‘cultural education’ regardless?  Shouldn’t the Barbican be left alone as a model of good cultural provision?  If they choose to close two cinemas for commercial reasons with a view to improving the offering in the next 2 years should they be allowed to? Maybe it’s a little easier to answer by looking at another publically funded institution.

Rich Mix on Bethnal Green Road was opened a few years ago to great fanfare and claims of cultural programming.  This cost many millions to open and receives around £700,000 a year from the Arts Council to ‘contribute to its Arts programming’  (see http://www.artscouncil.org.uk/rfo/rich-mix-cultural-foundation/)  yet what actually does it provide in terms of cinema programming?  Last week its playing A Single Man, Wolfman and Lovely Bones.  So one ‘arthouse’ film, albeit from a world famous fashion designer, with a very popular leading man in Colin Firth, destined for many awards or at least nominations, a big budget blockbuster, and a big budget adaptation from Peter Jackson.  So far, pretty mainstream.  But it has a section for Independent, Art and World right?  Well, Jazz on film every third Sunday of the month, a monthly shorts night and the occasional retrospective screening on Sunday afternoons at 2pm is not in my opinion much of a cultural programme.  Sunday at 2pm?  A retrospective of Yavar Abbas or Satyajit Ray with only 4 films in each?  Frankly, this is poor.  The cinema might be providing a service to an underscreened area of London, but when it’s only showing what is screening at the local multiplex, £700,000 for ‘arts programing’ does seem an awful lot of money for very little. So what’s going on here?  From the grapevine Rich Mix is doing pretty badly and is badly run and managed.  But as a flagship new arts centre, can it be allowed to fail or close?  Obviously not.  At least not yet.

But over in the West End of London, there is another flagship arts centre for which the prospect of closure seems very real. The Institute of Contemporary Arts, or ICA was founded in 1946 more as an artist’s space, but with the 2 cinemas in its Pall Mall home, film has been a central part of the organisation for a long time.  Here around £1.3million a year is pumped into this organisation, presumably with a view to providing ‘cultural education’ from limited financial revenue.  Yet is this successful?  Is the ICA film programme particularly good / worthwhile?  And even if it is, with the threat of closure hanging over, it doesn’t seem a particularly sustainable business model.

What is required is a change in thinking, from the people that write comments on blogs, right through up to the funders and decision makers.  Should cultural education = limited financial revenue?  In some occasions it should be argued that yes, the arts are not finanically self-sustaining in today’s current marketplace.  By and large the Arts Council can be seen to be a successful organisation in terms of improving the cultural provision of ‘the Arts’.  But particularly with film exhibition, which is a cultural and commercial marketplace, it seems to be accepted that a lot of public money can be thrown at large organisations in exchange for a measly amount of cultural provision.  The Barbican should be held up as a shining example of a large arts organisation.  If publically funded arts organisations are to be held to account for their lack of cultural provision, the list should start with the ones that are poorly run and rely on cultural education to require limited (read publically supported) financial revenue.

It used to be recently that the theatrical window had become virtually a shop ‘window’ for the release of the film, to get it into press and the minds of the consumers so that when the DVD came out, the real money could be made on DVD sales.  But with DVD sales falling due to threats of piracy, downloads and increased availability, the DVD release is no longer the money-making exercise it once was.  See here for an interesting article from the Guardian, which points out the decline in DVD sales for movies that performed badly at the Box Office.  So if a big theatrical release with a large P&A spend doesn’t guarantee income from DVD sales, what is the future for theatrical windows?

With the help of digital, more and more films (specifically the big blockbusters) are reliant on a big opening weekend to make their money back.  It’s a question of build the hype and get it out everywhere all at once so that people go to see it before bad press and bad word of mouth reduce audiences.  Now this doesn’t apply to everything, but it does make you think that if DVD sales are under threat, are the big producers willing to take a gamble on the second DVD window?  It already costs them twice in terms of advertising; once for the theatrical release, and then again for the DVD release.  And if DVD prices continue to fall, taking with them the potential revenues, would it not be better to release on a multi-platform level and maximise the revenues all in one go?  After all, if you consider that the primary markets for these blockbusters are the 16-24 year olds, and you consider that the market most likely to download / share a copy of a newly released blockbuster are the same, then wouldn’t releasing the film in cinemas and on DVD at the same time make sense?  Although I’m only speculating, I’d imagine that most of the people that bought a DVD had already seen it at the cinema, so in terms of different windows reaching different audience sectors, this isn’t an argument.  If you went to see a film at the cinema, loved it and then had the opportunity to buy the DVD at a reduced price in the foyer on the way out, wouldn’t you do that?

Of course the exhibitors won’t like it.  Earlier this year in response to the multi-platform release of low-budget British feature Mum & Dad from Revolver entertainment the Cinema Exhibitors Association reacted predictably… (here).  Ok, this isn’t a Hollywood release, and wasn’t much of a threat to anyone, but it shows the passions this kind of move provokes.  But are exhibitors in a position to prevent the shortening or even disappearance of theatrical windows?  Does the power not lie with the big studios, and the big distributors (which are mostly owned or integrated into the big studios)?

If the point of staggering releases across the different platforms in order to make money doesn’t hold anymore in today’s market, and indeed means increased spending in terms of multiple advertising then wouldn’t it be more efficient for a studio to release it across all platforms?  Earlier this year, Curzon Artificial Eye, one of the most forward thinking exhibition and distribution companies, released The Edge of Heaven at cinemas at the same time as on Sky Box Office  (see here) and whilst there aren’t any official figures available, with the idea repeated with the film Julia, CurzonAE CEO Philip Knatchbull was reported as saying ‘In our first partnership with Sky on Edge of Heaven there was evidence to show that our simultaneous release did not have a marked effect on cinema admissions, in fact it fulfilled a previously unrealised appetite for independent films amongst a wider public.’   Obviously these are smaller, independent films and not the big budget Blockbusters, but if we reach a tipping point where the majors start to see overwhelming advantages in terms of reduced advertising spends and piracy prevention for multi-platform releases for the majority of their films (remember that the studio system is based on a 1 in 10 or so hit rate in order to remain profitable) will we start to see the end of some of the major release windows?

In thinking about cinema exhibition a while back, I found a useful analogy with the music industry.  Here is an industry which was changed by advents in technology and is continuing to change to this day.  Historically film has developed later than music, purely because of the more complex marriage of sound and picture, as opposed to pure sound. 

Around 20 years ago, the advent of digital technology started to have an impact in the music industry.  First, as is often the case, it was picked up in production terms.  Previously, the recording and production of records or cds was in the hands of big businesses.  Then with the development of computers, synthesisers and samplers, production became accessible to anyone with some spare cash and a bit of computer know-how.  And what happened?  Broadly speaking, music diversified.  No longer was popular music and the charts the dominant force that it was.  New and different genres of electronic music were spawned, and continue to develop every year, with the birth of drum and bass a few years ago, and now the development of dubstep.  Charts underwent a massive decline and hundreds of new genres developed and diversified as the means of production became accessible to everyone.

Although the major labels still continued to dominate the industry, more and more people became interested in other forms of music and other smaller labels.

Developments in production then led to developments in distribution.  No longer was music only available in the big chain high-street stores.  Hundreds of smaller record shops and online shops sprang up offering often very specific, narrow ranges of music, and overall the choice for the consumer multiplied hugely.

In terms of the film industry, digital technology had led advances in the production of film, resulting in the great digital revolution and such pioneers as Dogme 95, which eschewed traditional production methods of the majors, but was still able to compete in the film exhibition marketplace.  It seemed at the time, that the development of production was similarly diversifying and broadening the range of films that could be made, increasing the choice and range of films available to the consumer, and that the dominance of Hollywood was going to be undermined.   Undoubtedly, the range of films has increased, and the rise of small DVD labels (equivalent to the independent record shops) has resulted.  However, one major factor would slow the comparable change, and that was that whilst someone could create in their bedroom a record that would stand up alongside something produced in expensive studios, big-budget films would always stand apart from smaller-budget films, not necessarily in terms of critical quality, but in terms of production values and technical (cgi and the like) values.  But across the world, big-budgets were not uncommon, and it can be argued that the playing field has levelled considerably over the last 20 years.

There are undoubtedly a number of DVD labels that are doing similar things to record labels, there are differences between the two industries that are important.  Firstly the scale.  Every year there is a vast number more records released than films, mainly due to factors of production costs.  The result of this is that there is far greater choice, innovation and ultimately quality in the music industry.  One need only compare the aggregate scores in Metacritic.com for films and music to see the vast gulf.  This difference means it is much harder to sustain any kind of niche film business than it is a niche music business. 

Secondly, marketing.  Marketing, advertising and the star system are always going to be a deciding factor in the consumption of films and music.  Interestingly, one can see a connection between the widening of film consumption and the ever greater reliance of stars in the financing of movies.  Stars, and the marketing and advertising of them are always going to be a massive force in the music and film industries.

So, whilst perhaps the distribution of DVDs has developed in comparison to the independent record labels, the reach of digital technology in the music industry has reached beyond production and distribution.  Whilst, for a time, it seemed that digital advancements would create a more level playing field in terms of distribution and choice, we are now starting to see a decline in the number of independent record shops and an overall decline in the music industry as a whole.  The reason?  Digital downloads. 

Whilst there are many arguments as to who the download culture hurts more, the majors or the smaller independents, undoubtedly it is affecting them all.  And when digital technology develops to the same extent for films, it will undoubtedly come to affect not only the major Hollywood distributors, but the smaller distributors as well. The value of music in terms of a packaged product has decreased hugely, and in the next decade, when films will be even more easily downloaded and copied, the value of film as a packaged product will follow suit.

What has happened now with the Internet and digital age, is a radical re-evaluation in the value of cultural production.  Now, the value of a band lies not in it’s ability to shift CDs from the shelf of a shop to the general public, but in their fanbase, their following who are willing to pay money for CDs and merchandise and get the band into other revenue streams from tv and magazines and most importantly, their ability to sell tickets for live gigs.   What is important now in financial terms is the development of a band as a brand.  And yes, this marketing term does reflect the continued importance of marketing and advertising in today’s commercial climate.  Nowadays it is common for new bands to give away their music via MySpace and the like in order to develop their fanbase, whilst at the top end, established bands like Radiohead and Prince are giving away their music for free via websites or newspaper giveaways.  Although the value of the ‘gimmick’ as it stands is not to be underestimated in terms of exposure, they are doing this because of the belief that they will make more money through ancillary revenues of tv etc. and sell a great deal more tickets to live gigs than they would through selling CDs in the shops.

So how does this relate to the future of film and film exhibition?  Firstly, in terms of distribution, the value of a DVD release will decline.  When you can download the film for free (or for a small fee direct from the producer) why buy an expensive DVD copy?  More importantly, film exhibition becomes increasingly important for the value of the product, both as the shop window for DVD sales as is currently happening more often, but also for the experience that it offers.

It is my belief that with the developments of digital technology the film market will follow that of the music market in due course.  This means a devaluing of the actual product and a rise in the ancillary values or exploitation of the product.  One of the biggest distributors of music now is Apple and iTunes.  Why?  Because the positioning of iTunes as the media player and download centre of choice means that Apple will sell more Mac, iPods and iPhones.  Selling music only seems to have value now in relation to other financial gains and smaller music download sites are going to struggle because they cannot compete with Apple’s small or non-existent profit margins.  Music downloads have become a brand or marketing tool.

Will there be a similar model followed in film?  It seems unlikely that a DVD player manufacturer would harness film downloads in such a way and the relative differences in the scale and value of films and music seem to rule this out.  It also seems unlikely that the major multiplexes will fail to continue to fill the weekends with its core teenage audiences for the latest blockbuster.  However, the one thing that does seem certain for distributors and exhibitors is the value of the brand be it that of a director, movement or season, and in particular, the exhibition experience.  And in the film world, this value is of use to the rights owner, or the distributor.

It is hardly a secret though – witness the successes of the revamped Curzon Soho, the full houses at the Rex for obscure films screening way beyond their release dates, and also, significantly, the moves of the majors towards the ‘cinema de lux’.  Live music is not dead.  It is becoming more important than ever, if the venue can develop a strong enough brand and large enough b(r)ands.  Cinema neither is dead.  In the next decade it’s value to distributors and rights owners will become crucial.  But the way forward for the independents lies beyond the traditional cinema model.  The inflated ticket prices of the West End in order to maintain the rents, will not hold.  The audiences are there, as seen in the comment regarding the Other Cinema.  But running a cinema is an expensive business, and new business models need to be adapted if a cinema is to survive.  And, with shortening windows of play and diminishing terms for distributors, it is essential that the high quality cinema experience is maintained for the value to be extracted.

This is why I believe that the way forward for the independent or non-Hollywood distributors and exhibitors is integration, not only so that there is only 1 share of the diminishing profit, rather than 2, but so that the exploitation of each film can be maximised with regards raising the profile of the film and extracting the financial value of the exhibition of the film, at a time when the face product value of the film is falling.  Whether or not the value of cinema exhibition will rise or fall is open to question.  Certainly Radiohead have no problem in selling out with tickets costing over 5 times the price of a CD, and The Electric Cinema continues to thrive with £12 ticket prices, but the value here is the allround cinema experience, the seats, the surroundings, the comfort, and the extras. 

Further note to changing trends – an example of an explosion of diversity led by small independents is the alcopop market which exploded out with dozens and dozens of different small brands.  15 or so years later, the alcopop market is totally dominated by the big brands Smirnoff and Bacardi, with WKD being an exception (although probably owned by a big brand). 

In relation to film?  Perhaps that the major cinemas will at some point come to re-dominate the exhibition market, although probably through mass marketing to the widest market groups – generally teenagers etc. leaving the independents to satisfy demand in the more culturally-led, discerning, more mature audiences.  Analogous perhaps to the wine market – dominated by the big brands certainly, but because of associations of wine and the general wine drinking audience, the independents (both in production and distribution) still thrive.

Sometimes it feels like we really are living through a major shift of traditional business models that are leaving behind the traditional buy low, sell high businesses where the value is in the core product to models where the value or profit is ancilliary to the product or service.  I wonder whether we’ll look back in twenty years time and think it was a major turning point.

Anyway, focussing on digital distribution and online distribution specifically, is this becoming a viable financial model for filmmakers and creatives to get their work out and earn a living?  Like many of these kinds of areas, there are a few that have done it and made it big, (see Power to the Pixel for many examples) but it’s yet to really to reach any kind of tipping point.  Or at least, currently it seems that for particularly niche areas it’s a lot more viable than for the mainstream, in being able to reach niche audiences who are prepared to pay or respond to products passionately.

For the mainstream, online distribution still seems to be more of a promotional tool, a way of reaching more people and raising the profile of the film / music etc. and maybe making some money, but a fraction compared to their tradtional revenue streams.  That’s not to say they’re not taking it seriously, not wanting to miss out on the next big thing, with many of the major studios committed to and backing the Hulu website.  But whether digital i.e. online distribution will ever become more important or valuable than traditional distribution remains to be seen.  And would depend on a number of shifts in order to really advance:

Firstly, the distance between computers and televisions needs to close.  Currently, online distribution is pretty much limited and very much associated with computers, whether that be a desktop PC or some kind of fancy mobile phone.  And because of this, content is being tailoured to these enviornments more and more, so that the differences between content produced for tv and content produced for online is widening rather than closing.  For online distribution to really work and challenge traditinal distribution forms, it really does need to be available on your tv.  It kind of is already with 4OD and bbc iPlayer available on Virgin’s cable service allowing viewers to watch a massive amount of content already transmitted.  But at the moment this isn’t much more than a very large and extensive Sky+ box.  TV on-demand rather than online distribution.

The revenue models for this are also pretty important in terms of what would you pay for?  Or to put it another way, what can you get for free?  There are basically 3 models for revenue (or 4, if you include models that don’t make revenue directly). 

1) Traditional sales model.  You want this, you pay for it, whether buying a DVD (either in person at HMV, or online at Amazon), paying for a Video On Demand movie, or going to the cinema.  (I’m using film as my example here, but it applies to most creative sectors).  

 2)  Ad-based model.  You can watch this for free, but we’ll make you watch some adverts before / during / after it.  Examples including commercial TV, video sites like YouTube and to a certain extent cinemas, where without the advertisements, the admission ticket price would be higher. 

3) Subscription based model.  Pay us a monthly / annual etc. fee and you can watch a certain / unlimited of content.  Lovefilm’s DVD rental service, SKY and funnily enough one of the oldest ‘new’ models – the Beeb.

4) Loss-leader model.  iTunes is a good example here.  It’s currently the market leader and probably does make money, but it’s a secondary market for Apple in terms of a promotion for it’s primary business, that of selling hardware – iPods, Macs, and iPhones.  In terms of video content, mobile phone companies seem to be leading this, with investments in content being repaid in handset and call revenue models. 

Not unsuprisingly, music is leading the way in a lot of these models, with the smaller file sizes enabling easier distribution (and copying / sharing).  (See my other Future of Film post for a more detailed account).  Recent entrant to the ad and subscription based models is Spotify, but rumours of not enough people signing up fo the subscription model may threaten it’s continued existence.  Do we have a different attitude to consumption and availability of music than to films?  Currently it does seem that more people take free music more for granted than film certainly.

Generally, it does seem that the strength and resources of the business are key to success in any of the revenue models.  Apple is dominating the online music category with their weight and primary revenue model in hardware, making it very difficult for a mainstream online music company to compete (although niche market models are sustainable).  The likes of Sky and BBC are so well-established and have such penetration that any similar competition is very difficult, the recent collapse of Setanta being a good example of this.

So it remains to be seen whether one model will come to dominate.  The Hollywood majors seem to be backing the traditional model through the Hulu pay as you go model, but could this be overtaken by a subscription model in the future?  Certainly Lovefilm is well positioned to develop it’s online downloads sector, but with a current sell-off in progress, it points to a business where the future is uncertain.

In the physical world of cinemas, a combination of all four models seems to be best way forward, with direct tickets sales, subscriptions either in the form of a monthly payment for unlimited movies or a membership card giving discounted tickets, pre-feature adverts, and ancilliary sales of food and drink all contributing revnues.

Similarly for rights holders, it’s also a combination approach, with music and film sold in traditional and modern distribution routes all counting.  Ultimately though, it will depend on inherent values of the product and social acceptance as to which models dominate in the future.  The subscription model has become the leading one for mobile phones over pay as you go, because we make phonecalls on a daily basis, whereas if we only watch films once a week or more more traditional sales models work best.  And unless the gap between computers and televisions is bridged, then it will be hard to fully exploit online distribution.