Tides of Change

Marty Shindler reports on the paradigm shift in the entertainment industry, and offers a few helpful business hints to VFX providers.

Declining growth in U.S. and global box office and their counterparts in the home entertainment industry prove that a paradigm shift is currently underway that will impact our businesses.

If you do not go to the movies, my kids wont eat, is a statement that I have used over the years in my various management and consulting roles. It is meant to be both comical and deadly serious at the same time, as the trickle down effect of large numbers of people choosing to attend or not attend the movies impacts a lot of businesses along the entertainment and entertainment technology food chain.

Even before the final year-end 2005 figures are reported for a declining U.S. and global box office and their counterparts in the home entertainment industry experiencing vastly reduced growth, one thing is for certain: the tides are changing in the entertainment industry and a paradigm shift is upon us.

No one along the food chain will be immune. Production, post-production, visual effects providers, hardware and software vendors, etc. will be affected in one way or another. Some will be caught up in the next wave and will be able to surf to continued success and others will need to be thrown a life preserver, with a few organizations not surviving the tides of change.

This paradigm shift that is currently underway is a direct result of a number of factors, all of which are consumer driven, driven by changing buying patterns and all impacting the way content is distributed and consumed from a technology point of view. It is not a creative change, but one that will impact our businesses.

These factors include:

  • The maturation of the markets for traditional content.

  • Higher broadband penetration around the world.

  • Downloads of TV shows available for a low fee on products such as the video iPod.

  • Wireless content delivery technology making in roads with an impact that will most likely be felt in late 2006 and certainly in 2007.

  • The increased penetration of DVD burners.

  • The forthcoming wave of video-on-demand: this technology has long been on the horizon, but only now has achieved critical mass. Consumer demand and the availability of the technology enabled this revenue stream to be realized, even though some of the early product is available for free.

This paradigm shift is a direct result of a number of factors, including the downloads of TV shows available for a low fee on products such as the video iPod.

Of particular concern are the declining box office, currently estimated to be off by 5-6% with admissions down 11% from 2004, and dramatic slow down of the home entertainment industry. The DVD portion of the home entertainment industry was up approximately 8%, but that is less than a third of the prior years increase.

Along the way, studios have collapsed the home entertainment release window to just a little more than four months from theatrical release, when it seemed that only a few years ago it was at six months, in order to salvage revenue and to maximize the advertising and promotion dollars spent for the theatrical release. Fox has even announced that the new window for its products to come out in high-definition will be 60 days after theatrical release.

Can the other studios be far behind from making a similar decision and one that involves all product?

Furthermore, the market will be further impacted by the Jan. 27 release of Bubble from director Steven Soderbergh and produced by Mark Cuban and 2929 Prods. This film will be the first day-and-date release of a film in theaters, on DVD and on TV. It is not yet determinable how many theaters other than the Landmark circuit owned by Cuban will take the film. Nor is it discernable how well the DVD will fare in a declining market place. And as far as TV goes, the movie may be limited to HDNet, also a Cuban owned organization.

Wireless content delivery technology will have an impact that will most likely be felt in late 2006 and certainly in 2007.

None of these factors taken alone is important, no matter how well or how poorly the film performs in its release. What is important is the bold and potentially disruptive move that is being made. Whether or not the release of Bubble is successful, that this is happening is what is important. All eyes, from producer to distributor to exhibitor and on to the home entertainment industry, will be on this modestly budgeted film release.

The end result: the distribution windows will continue to collapse as the studios seek to continue to maximize their revenue while gaining a better understanding of how the paradigm shift is affecting them and how they intend to react.

Is this disastrous? No, but it represents a significant change that is forthcoming as vendors involved in the industry attempt to grapple with its impact and decide how best to respond.

So, how does this impact the food chain? The answer is that as/if the studios continue to earn less revenue on their releases and in turn a lower profit in a low margin business, two likely scenarios will occur: fewer films will be made and those films that are made will have lower budgets.

How can this be stratified? Will this impact films at all levels, i.e., small, medium and studio event films? Will it only affect the mid-range, where there is a different level of exposure for the studios? Will it impact the extravaganzas that include significant visual effects budgets? Chances are the answer is yes to all of the questions.

For the small to mid-size visual effects facilities and post-production companies, it means that there is bound to be further squeezing of budgets. Some may respond that this is not new; it is something that these companies have experienced for years.

Studios have collapsed the home entertainment release window to just a little more than four months from theatrical release. This has an effect on the already declining box office.

While this is true, this shift may be more dramatic than the downturn of the mid-90s, when after attempting to produce digital effects extravaganzas in large numbers, the films failures at the box office caused the studios to all rethink those strategies. As a result, many of the small to medium sized companies that sprang up during that time to meet the demand started to fall by the way side.

This was not due just to the downturn in business that occurred, since there are certainly facilities in the marketplace that existed during that time period and are still operating. This was due in part to the general lack of capital in the small to medium sized company and the often lack of sophisticated management in those companies. This is not a reflection on production management as much as the financial and administrative management.

During that time period when I met with small to medium sized companies, it became apparent that as they were pushed for lower bids, that they were bidding below cost, often unknowingly, as producers and others pushed these facilities hard to lower the overall below-the-line budget.

Hampering the problem further was the fact that many facilities used the cash flow from current projects to pay the remaining bills from the prior projects.

In the mid-90s many companies were pushed out of business or were forced to merge with other companies, only to find themselves in the same predicament a few years later.

There are those who do not think this will come to pass this time and that the increase in new revenue streams will negate the downturn in the traditional distribution windows. Some contend that the current bidding frenzy that visual effects facilities are involved in means there is a lot of work around the corner. They may be right.

However, there are also those that believe that the frenzy is being driven by the studios protecting themselves in the event of a strike by building up an inventory of product or as a bargaining tool, to give the illusion that there are a lot of productions in process. It is possible, given the latter scenario that many of the projects being bid will evaporate, especially if they cannot be made for the right price. Those who believe this scenario may be right.

Of course, given the lead time to plan and budget a film, it is possible that the lower budget/fewer films scenario might not play itself out until late 2006 or even into 2007.

So, what is a facility to do? To start, there is no choice, albeit a welcome one, but to continue the bidding process. However, over the long term, each facility needs to take a hard look at its operations and to make sure that the business side of their company is sound and efficient.

Companies need to take a hard look at operations to make sure that their business plan is efficient. They need to review staffing, management, costs, budget and the possibility of working with other industry segments.

Here are a few areas that should be reviewed:

  • Staffing balancing the number of people between staff and project. While this is frequently a common practice, it may be time to do the annual re-examination.

  • Management often in small to mid-sized companies the management is the creative or technology head of the company as well. As such, despite what may seem like more overhead, it may be time to bring in professional management. This frees up the head of the company to do what he/she likes best the hands on process of being involved in the day to day production operations, making that area more efficient and not having to be stretched to handle the less enjoyable administrative management requirements.

  • Costs facilities of all sizes need to have a solid handle on their entire cost structures. This includes not only knowing what it may cost to do the work, especially in the bidding process, but also tracking the costs in sufficient detail once work commences to know if the project is being done within the budget that was bid.

  • Budgets it constantly astounds me that there are numerous facilities that do not prepare an annual budget, let alone a 2-3 year plan.

  • Other industry segments facilities should review what the costs would be for them to become more involved in other industry segments that may help to even the cash flow. For example, a company that is heavily involved in feature films might consider commercials, TV, broadcast graphics or music videos. While each of those segments has its own challenges, it may help to offset some of the risk in their current business. Of course, a jump to another industry segment must be carefully planned. Look before you leap!

While the final outcome of the changing tides will not be known for some time, being prepared with the best business methods to support the creative and technology operations is vital if the facility is to survive over the long term and ride the crest of the waves. Not being prepared could mean being swept away and out to sea without a life preserver.

Marty Shindler is the ceo of The Shindler Perspective Inc., a management consulting firm that specializes in the business side of creative, technology and emerging companies. Visit iShindler.com to review the types of projects in which the firm has been involved, the companies with which it has worked and the firms credentials. Shindler may be contacted at Marty@iShindler.com.