Angry Birds

From a simple application to a successful film producer? (o.56 to 4.20)

Environment : Macroeconomic Forces

Global market conditions

The economy is in a bust phase. Europe is experiencing serious problems with Greece and the financial market reacts very badly. Regarding the USA, they face a huge indebtedness. We can conclude that the global economy is in financial crisis and the near future is going to be dark. As we can see below in the map[1], the only countries that have high GDP growth rate are the ones of the so called BRIC and some countries in Africa. Concerning the unemployment, it will increase.

Capital markets

The state of the capital market is yet not optimal which is normal because the world is in crisis. As consequences, the market becomes more and more volatile, the investments decreases and it’s not easy to obtain funds by banks. However, firms as Paramount, Fox or Warner Bros belong to huge entertainment and media groups et they don’t face this problem. After regarding the balance sheet of these groups, we observe that their debt are low regarding the total of balance sheet. In our view, movie firms could obtain easily the funds wanted if they need it. The group can raise funds with the market capital or banks. For example, News Corporation (Fox) and Time Warner (Warner Bros) paid last year an interest rate of approximately 7% for their borrowings[2]. These groups don’t have problem of financing.

Commodities and other resources 

The commodities are not essential in the business model of movie industry because the different firms are not in a goods industry, but first of all in a services industry. In this sector, the costs of commodities are incremental. Relating labor costs, they can employ people they want at the wage they want, because people who are very well paid should normally bring back much more.

Economic infrastructure

The market in which is the movie industry must have access to a cinema, a television or Internet. The infrastructure doesn’t need to be awesome. Excepting few places, everybody can consume what this industry produces. As consequences, the entire world can consume what movie industry produces and there is a constant growth in this sector. If we look at the case of the US and Canada Box office[3], we can see that the revenue don’t fall even if there is a crisis.

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[1] http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries?display=map

[2] Annual reports

[3] http://www.the-numbers.com/market/

Environment : Market Forces

Market Forces

Entertainment is in a big boom in most countries all over the world. Movie industry benefits from this growth but our production studios have to face the new competition of Internet.

Market Issues

The arrival of Internet and the possibility given to customers to download films or to watch movies live on web signed the definitive decline in sales of DVDs. Before, production studios earned money on sales (of tickets in theater + in VHS or DVD). Today this isn’t the case anymore and they earn more and more money from the royalties paid by companies offering films on a TV box instead of sales of DVDs. This results in two important consequences for the movie industry. First, the number of movies produced has declined in order to cut costs and studios try to increase the attendance for each film to earn the same amount. The development of by-products in the last few years is also a part of this new strategy. Second, the TV market has also changed recently and the movies have been surpassed by TV shows and TV series, which encourage the studios to develop a strong collaboration with companies such as SWISS TV.

Statistically, the main areas for production studios are still the same: USA and Europe. However, the biggest increase in terms of attendance for the past decade is in Asia and this geographical market is the key for potential growth of our studios. The next graph shows this point by analyzing where the profit of box office comes from.

 Market Segments

The most important customer segment for our industry is the mass market but more specifically people who are occasional or frequent moviegoers. These people represent 58% of the population in our developed countries but represent 98% of the tickets sold in the movie theaters (see chart).

The second segment is the TV channels & TV Box all of whom are an intermediary between studios and customers.

Earlier we spoke about growth potential geographically and discovered that Asia is the key geographical area in terms of potential. But there are also market segments that have a big growth potential. The Blu-Ray is the first because its quality associated with the quality of new home cinemas could allow people to find the same feelings as in cinemas by staying home. Linked with this is the pay-per-view system, which presents the same opportunity but even more simple because you don’t need to buy the physical support anymore. Finally, Web is the last potential growing segment. Since today, Internet acted like a competitor for the production studios. Now, with the apparition of movies on mobile phones and tablets, we are at a turning point. If the studio agrees with fabricants to deliver films on these new supports for royalties, this could be a very good new way to earn cash.

Needs & Demands

Movies’ production studios are fulfilling a basic need of human: leisure. With a film, you can distract and entertain yourself, have a good time and forget your problems. But this need is in constant evolution and the appearance of new technologies such as 3D motion capture modifies it sometimes deeply, and our studios must be aware of that in order to retain their customers. If they failed, our society yet offers us such a big panel of entertainment that movie industry could decline sensibly. This need of distraction create a demand for leisure firms, such as movies’ producers. This demand is in fact increasing, even in Europe or in North America but the biggest growth in demand comes from Asia. Be careful however: China has a tradition of censorship since the arrival of communist power. This threat could be very problematic because producing movies with differences for several markets would be expensive.

Switching Costs

In the movie industry we cannot really speak about switching costs. It is very easy and totally free to switch from paying entries in cinemas to downloaded films or streaming. In fact, the film is important for people, not the firm that produced it. In the same vein, brand isn’t very important for most producers. Movies are more and it’s not surprising to see that brands such as Star Wars, X-Men and so on are a lot more famous than companies that produced these films. The only way for production studios to bind their customers is to produce high quality movies in an acceptable delay.

Revenue attractiveness

Customers demands leisure and entertainment and are ready to pay for that, even if the proportion of people who prefer to have it for free is increasing. Movie companies have therefore to produce entertaining material that can transport the audience in another world, forget their problems and experience something very interesting. The traditional way to watch films is in danger with the apparition of Internet and the new TV box system. Those systems are cheaper in the long run than go in movie theaters. Therefore the best way to attract revenues for our firms isn’t cinemas tickets or DVDs sales anymore. Anyway DVDs can still be a good revenue stream because the margin is very high. Produce a DVD costs almost nothing when the movie has already been shot for movie theaters. In the movie theaters the margin is smaller and most of it goes to the intermediary. Last but not least TV channels buy films to show them on your screen. As for DVDs, the margin is very high when a producer sells the rights to show a movie to TV channels because the film has already been paid for cinemas. There are no real costs for selling these rights so the margin is more or less 100%.

Environment : Key Trends

Key Trends

The key trends for the movie industry and especially for the production studios we study are pretty the same for all the actors of the market. The biggest issue is the technological boom and the consequent change in our way to “consume” films.

Technology Trends

In the movie industry, the technological revolution of the last decade has sensibly modified the market. The development of the web allows people to watch films, documentaries and so on without moving and sometimes without paying anything. We can distinguish two types of new technologies in our market on the web. The first one is the explosion of the streaming, according free movies for everyone all over the world in just a few seconds. The second is downloading, which request a little bit more time but allows the client to have the movie on his computer and then watch it several times, do a copy… This explosion of movies’ offer on the web is clearly the most disruptive threat for all the actors on the “classic” movie industry and especially for the production studios.

The second technology issue for the movie market is the emergence of the pay per view and other similar systems on TV. The principle is simple. You buy a box, connect it to your television and then you can buy movies of the catalogue at your disposal. This system is relatively new but begins to be very successful.  For our production studios, this new technology could modify deeply their business model because it allows people to have access to movies in HD quality without moving from their couch. However, this isn’t a real threat because people must buy the movies and the companies producing this king of TV box pay royalties and copyrights to the production studios. We can therefore say that for the studios it’s a very better alternative than downloading or streaming.

Another technology improvement is the generalization of 3D and 3D motion capture in theaters but also on your TV screen. This represents the biggest opportunity for the production studios. This kind of movies is now the most successful and is in constant growth, as the next graph proves it:

We can see that in 2010, 3D movies represented more than 20% of the total box office revenues, 10 times more than two years earlier.

Finally, people began recently to use their tablets and mobile phone in order to watch movies. This is the newest emerging technology adopted by customers and the management of this new way of watching films is going to be very important in the near future.

Regulatory Trends

The cinema is a relative regulation-free world. Therefore regulation isn’t playing a big role for us. With the explosion of the Internet, a lot of problems appeared concerning copyrights and Intellectual Property (IP). This is the main regulatory problem that production studios face and it appears to us that this situation can survive for a long time. In addition, in February 2010, US government cancelled a tax break for the movie industry, arguing that this help is not needed anymore regarding the huge benefits maid by those. Finally, the present economic and budget crisis forces government to find new ways to earn money. One of the common way used is the increase of the TVA, which could diminish the consumption and the budget for leisure of the families. In France, we’ve seen the introduction of a tax on sodas, so why not on leisure? We must admit this isn’t very probable but could still happen. These two possible regulation points would have a negative impact on consumer demand for movies.

Socioeconomic Trends

Cinema is a worldwide leisure but we can separate this global market in two sub-categories. The advanced countries are the biggest market for movie production companies. In these countries, the population is stable and will become older in the next decades. An important point for our industry is the increase of urban area. More and more people live in cities and quit land. As a consequence, their access to cinemas is easier so this trend is a good one for us. On the other hand, in developed countries, the access to Internet is global and people are not willing to pay anymore for watching movies and series. We want all gratis. At the moment there is the crisis that enforces this trend. Therefore this market is destabilized by the explosion of streaming and downloads. The second geographical segment is the developing countries, where downloading and streaming are also available but in a more restricted form. Furthermore, these countries increase their GDP and their population. Those people are more and more adopting an occidental way of life. Cinema has consequently a big potential of growth in these countries.

Societal and Cultural Trends

As we said before, people are becoming meanly older in our occidental countries. Very often, older people aren’t as interested as younger people in new technologies. This has two consequences for the movie industry: older people use less Internet and more movie theaters to watch films but there are more defiant with 3D, like this graph shows it.

Asia is becoming more and more important for the film industry and we can ask ourselves if the American movies and their cultural values can be accepted in those countries, especially in Islamic ones.

Environment: Industry Forces

Competitors

The main competitor of the industry are WarnerBros, WaltDisney, Paramount, Fox, Universal Studio. According to the table below, Paramount is the bigest movie distributor in the world. But as we can see in the table, there is a strong concurrence with 90% of the market shares distributed between the five biggest distibutors.

Dreamworks has become one of the most well-known company in the movie industry with its great succes such as Shrek, Madagascar, Kung Fu Panda, etc. Their demonstrated technical skills are now well recognize and bring them strong advantage. However, Dreamworks does not figure in the table of the biggest distibution company for a simple reason. The company signed a distribution agreement with Paramount.

Source 1 : http://www.onlinemba.com/film/

These companies strive to offer great entertaining with their films, series and other services. They really focus on what will please their customers, however they can’t focus on everyone. Therefore, they most likely target Causian and Hispanic in the US market as we can see on the chart below.

To capture the attention of their customers, they have to spend a lot in product developement and advertising and marketing activities.

New entrants

It this concentrated market, it is really hard for new entrants to really make their place. There are indeed some new small producers who are successful, but it can be quite easy for main actors then just to buy them. Moreover, we see in this industry many barrier to entry, such as network, reputation, great need of money to promote and produce movies. We think that the only firms that could join the movie industry leaders are firms from countries such as India or China where the population represents a large part of the world’s population and where the purchasing power is increasing.

Substitute products and services

Streaming video and peer-to-peer download could be the first substitute in the industry. It is yet not a direct substitute since we still need movie producers, but we can substitute downloaded film or streaming video to DVD, BlueRay or cinemas’ ticket. It is quite easy to have acces to such substitute and it does not really cost anything to the user and the provider.

Live shows could be another type of substitute. Since customers basically look for entertainement, sport’s events, concerts or theaters can feed such a need. This kind of events are usually more expensive than a movie, but offer the opportunity to interact with others and can even lead to some strong identification of the customer.

Stakeholders

In this specific sector, the more powerful stakeholders are probably the medias and the employees (actors, scenearist…). As we could see it in the past, a strike of scenarists or actors can represent a big loss of revenues.

Suppliers and other value chain actors

Distributor, exhibitor and audience are the main actors of the value chain. All business models denpend strongly on the distributors and exhibitors. There are also other peripherals actors like streaming websites or pay per view system providers which could have their role in modifying the shape of the industry. The peripheral actors offer more benefical systems for customers, but producing a film and televison entertainement is still more profitable.

Environment

The Many Killers Of The Film Industry

The many killers of the film industry (Techdirt)

David and Goliath

Here is how small swiss cinemas resist to Hollywood :

LeTemps.ch | Les salles de cinéma suisses résistent au diktat financier que veut imposer Hollywood (Le Temps)

Business model : Fox

When Alfred Newman wrote in 1933 only a few bars long piece of music, he could not have foreseen that his work would one day stand as a world-known synonym for the big screen: the Fox fanfare. And just like them as well as the logo embodies the great *20th^th” and the moving headlights clearly the tradition of this studio. [1]

Here, the beginnings were modest and far away from Hollywood. William Fox in 1913 in New York, the greater New York Film Rental Company and Fox Co. office of Attractions and led them together as Fox Film Company. Only six years later he moved with his company to California, where Los Angeles has developed very gradually, the center of the fledgling film industry.

The next and crucial turning point in the company’s eventful history came in the early 1980’s.

Among the great Fox titles include movies such as Titanic, Avatar, Star Wars, Brave heart, Ice Age or Die Hard; but also television productions such as Ally McBeal, The Simpsons or 24.

[1] http://origin.fox.co.uk/jobs/division/dvd

Business model : Paramount

Paramount Pictures Corporation is an American film production and distribution company, located at Hollywood. Founded in 1912 and currently owned by media conglomerate Viacom, it is America’s oldest existing film studio; it is also the last major film studio still headquartered in the Hollywood district of Los Angeles. Paramount is consistently ranked as one of the top-grossing movies studios. [1]

The company’s labels include Paramount Pictures, Paramount Vantage, and Paramount classic, MTV Films, Nickelodeon Movies and DreamWorks Studios.PPC operations also include Paramount Digital Entertainment, Paramount Home Entertainment, Paramount licensing Inc, Paramount studios and worldwide Television Distribution. [2]

[1] http://en.wikipedia.org/wiki/Paramount_Pictures

[2] http://www.thecoca-colacompany.com/dynamic/press_center/2011/10/coke-zero-mission-impossible.html