Weekly Update

The 360 degree movie deal

The movie industry seems finally to be coming to grips with the fact that the windfall profits it enjoyed for decades, thanks to the popularity of successive packaged media formats (VHS, DVD, Blu-ray Disc) a really, truly going away and will not be coming back. And Hollywood can no longer ignore the implications of that for how it makes and markets movies.

Speaking at an investor conference in New York this week, Viacom CEO Philippe Dauman was blunt. Previous assumptions about packaged-media sales of movie have changed, Dauman said, to the point where Viacom-owned Paramount has had to restructure the deals it makes with actors, producers and directors before “green-lighting” films, to better reflect a “partnership” relationship on the economics of the film rather than a high upfront cost.

“We don’t mind sharing the upside [of a movie with talent] as long as we don’t have a downside, or we have a sharing of that risk,” he said.

That’s a far cry from the days when actors, directors, and other “above-the-line talent” were guaranteed big, upfront payments for a movie, while the studio — secure in its ability to forecast the eventual home-video sales accurately — took most of the backend.

“We’re now making conservative assumptions in that regard,” Dauman said.

Hollywood’s transition to a post-packaged media world is still very much a work in progress. But there’s a model for a restructured relationship filmmaker, studio, and audience along the lines Dauman suggested that could prove instructive: the music business.

Like the movie studios, the record labels enjoyed windfall profits with the introduction of the CD, which drove a massive library replacement cycle among consumers and which carried much higher prices and margins than LPs or cassettes. Also like the movie industry, the whole structure and economics of the business, whether by design or simple inertia, came to reflect those windfall profits, from executive salaries, to the value of artists’ contracts, to the number and type of service vendors the industry relied on.

With the loss of those windfall profits, however, first from piracy and later from the disaggregation of the traditional high-margin music album in favor of low-margin single-track downloads, the assumptions that anchored the basic economic relationships within the industry no longer held. Paying artists substantial advances against future album sales, then treating touring as a cost center to promote the album only made sense while CDs were still delivering windfall profits. The same goes for label overhead, industry salaries, and vendor relationships. They all, to one degree or another, were pegged to sales of high-margin physical goods.

One of the more promising innovations to emerge in response to that upheaval has been the so-called “360” artist deal.  Under a 360 deal, artist and label for a kind of joint venture, in which both the risks and rewards of all the artist’s efforts are shared, including record sales (physical and digital), touring revenue, merchandise sales, sponsorships, streaming royalties, endorsements, and anything else that might generate some revenue. While not universal, 360 deals are increasingly popular in the industry.

A similar reckoning is now upon the movie business. The physical media windfall is fading fast as consumers buy fewer DVDs. Efforts to rekindle an interest in purchasing via digital formats will need to be based on different pricing assumptions, as 20th Century Fox implicitly acknowledge this week with the release of Prometheus in a new “format” the studio refers to as Digital HD, or DHD, three weeks ahead of its release on DVD and Blu-ray for $15, compared to nearly $30 for the Blu-ray. Going forward  all Fox movies will get a similar electronic sell-through release ahead of Blu-ray and at half the price.

Another important shift in revenue assumptions occurred earlier this month when Epix made its movies available for streaming through Amazon Prime Instant Video at the same time they are available through Netflix. Exclusive distribution deals, in exclusive windows has been basic business model of the movie industry for decades. But with so many more viewing options available to consumers, distributors are less willing to pay top dollar for exclusive access, making such deals no longer as lucrative for the studios.

Like the music industry, the movie industry is confronting a future in which revenue comes in smaller chunks but from a greater number of sources. In the case of movies, that likely means new and shorter release windows, fewer exclusive distribution arrangements and longer ROI horizons.

That’s not a formula that lends itself to big, guaranteed, upfront payments before the revenue starts to come in. But as Dauman hinted, the front end of the movie business may evolve to look more like the music industry, just as the backend already has. We may soon see the emergence of the 360 movie deal.

 

 

 

Question of the week

Could different financing models for movies lead to more interesting movies getting made?