Following on from the European Screens Conference, MeCETES has invited speakers to write a blog about their conference paper. Here, Michael Franklin considers the interrelated potential impacts of (S)VOD on film production, its financing and distribution.
The independent film business is well versed in interacting business models with imperfectly aligned values. The expansionist, multi-territory, closed data, subscription video-on-demand (SVOD) service is a more recent addition.
To develop a clearer understanding of potential future implications for the European market, it is important to unpack multiple features of the SVOD field, including the more sensationally reported aspects of SVOD activity, notably acquisition strategies, and data use and retention. This necessitates attention to:
I have spent time recently both looking at the detail of VOD company operations: from acquisition issues to content and consumption analytics and UX design; and also at the conceptualisation and management of risk across different film business models. Clearly, there are multiple ways in which these two fields interact.
Here, I attempt to show where our understanding of the implications of (S)VOD is perhaps not fully formed, where there are dots to be joined up, which may be facilitated by following the use of data in practice.
Open longer term questions
In its Q2 earnings interview, Netflix made a number of assertions that could potentially feed any uncertainty in the production sector of non-US domestic markets regarding their longer-term outlook. Netflix has stated aspirations of a 50/50 original/acquisition content mix, and its business model greatly relies on global rights ownership to simplify licensing arrangements and thus reduce costs. The scalability of globally distributing original content makes is an incredibly important component of company profitability.
Speaking to this issue the company commented: “Growth of original films has proven to be a great investment.” However, in the international context, the opportunity for local filmmakers to partake in this area may be limited, the company’s designation of the Netherlands’ local language versus US content of 20/80 is cited as a successful ratio.
Whilst film investment from SVOD continues, understanding the longer-term prospects is complex, not least because cross-calculating the demand from such counter-parties presents a new and difficult challenge. Whilst producers and original rights holders are well practiced at reverse engineering the derived demand from local distributors, and other buyers, the subscription model conversion is more difficult.
As SVOD services reach the potential of increased revenue driven by new subscription growth, reducing churn and justifying any price increases, become increasingly important goals. Serving the consumer is often evaluated by influential metrics such as “time spent per user” and these then feed into business decisions.
It is not hard to gather that extended TV series viewing delivers greater time engaging with the service than film on a per title basis, and the role of film investment has typically been seen as a high profile marketing tactic to attract new subscribers. This is a role that local independent films may fail to satisfy.
As ancillary windows’ value narrows in more markets to the (V)OD arena, the question of whether independent (local) film attracts and retain subscribers becomes increasingly important. The issue of viewership data is a factor here, and is an issue I will come back to, but the point to make for the moment, is that the contextualised use of that data by SVOD services in relation to their territorial business strategy is what informs action. Thus producers’ will have a tough time second-guessing their counter-parties motives in detail because viewing data (or the currently contested proxies for it) do not provide the whole story.
Company level impact of project deal terms
The overall volume of local product, and the relative balance between film and TV comprise one set of issues for producers. Another is the terms upon which these projects are acquired.
A key finding from a Nesta Digital R&D project concerned the business sustainability impact of the SVOD deals. If one contextualises the shift in consumption from DVD to SVOD, not only is the overarching total value gap important in the industry as a whole, but in the case of extremes, the breakout hits, the impact on licensors is significant.
Where a company might have benefited from enduring incremental revenues from sales of a hit that had gone into overages, the flat fee SVOD deal model means that route to financial success becomes increasingly cut off. Whilst a hit film is an extremely rare event, it is upon such events that companies are built.
Without the possibility to capitalise on the realisation of extreme events, the premise of company growth is fundamentally undermined. Given the tough nature of independent theatrical markets, ancillary revenues are crucial. See, for example, the demise of UK indie distributor Metrodome or the Dutch sales agent Fortissimo. The impact takes effect over an extended period of time, influencing library valuations, asset capitalisation and potentially future corporate financing options. As the upside of risk is eaten away by such changes, the overarching business logic is challenged.
Given the typical un-tenability of a pure play film production business model, one option pursued is to attempt both film and TV. Though in general the direction is from film to TV (successful TV production companies tend not to get side-tracked into film), if successful in realising TV series, the financial motivation to retain an interest in film development lessens. At scale this divergence in attraction of the two market positions was evidenced in many analysts’ reports during ITV’s proposed purchase of eOne, which recommended operation without the film division.
The strategies by which production companies and other rights holders have proposed to deal with the increased complexity of uncertainty in the business, especially in establishing or understanding the value of their content in the market place, is through attempts to access and use consumption data.
TVOD and SVOD
Over the last 4 years there has been a push from producers, often via the trade press for data transparency. This began with reference to transactional video-on-demand (TVOD) reporting at an industry level, and continues with SVOD viewing figures for original rights holders.
In some cases this ask is viewed as part of an overarching logic of connecting more materially with consumers e.g. via continued social media engagement and content dissemination through the life of a film project, to increase the chances of ultimate success. In other cases the demand is viewed in terms of better understanding the value of project A, to inform the financing and execution of project B in the future.
In general, a lot of these initiatives suffer from a lack of attention to conclusions that have been reached through robust research. This is a gap between schools of understanding that is often mirrored in the way that some research often ignores practice. Although to a degree general management scholarship has reflected on its contribution and recognised it is not a performative endeavour in the manner of economics (see Czarniawksa 2016) , the barriers to effective industry uptake of many econometric studies of film revenue performance are often glaring when one considers how a film actually gets made. Only now are connections between two worlds beginning to take shape.
Similarly, arguments for accessing past performance data as an instrumental tool ignore a swathe of established findings on forecasting future performance, as well as the complexities of deal structures organised according to derived demand, which now may not be clearly related to what were deemed important metrics in the past.
Evidence from independent films’ life cycles, including TVOD and marketing data, indicates the substantial challenges facing practices of inferring project financial performance from digital engagement metrics, or organising film value chain negotiations according to reverse engineering demand from supposedly objective consumption data.
Not least are the licencing and market competition practicalities that impinge on undistorted use of data analysis. When one considers a case in point for SVOD information, the problems become clear. Any content data that a rights originator might claim, would not include the collaborative filtering information, and thus forms only a small part of the producers’ counter-party’s (i.e. the SVOD service) valuation process (as Gomez-Uribe and Hunt discuss in a recent article).
Films are not positioned or recommended or linked-to equally in catalogues, and demand for content per type per territory varies over time. Engagement data like plays are inputs to calculations alongside Effective Catalogue Size per territory, and the output results inform the audiences reached by a piece of content and the value ascribed to it by licensors.
Rather than simple demands for access to, or standardised reporting of, business confidential information, which companies often guard as a competitive advantage, it is worth pursuing a stepwise procedure to review what kind of information disclosure might be both useful and viable.
Potential lessons from music
The Open Music Initiative driven by the Berklee College of Music has brought on board major industry players such as Universal, Pandora, Sirius, Warner, Youtube, as well as the tech and academic community. It pursues open source standards to deliver appropriate compensation for all market actors. This involves the development of blockchain use for licencing and revenue reporting through minimum viable data sets.
It is worth following how its project management deals with business confidentiality issues in respect of data sharing. There is opportunity at the European industry level, along with the regulatory and organisational framework to add to a technological infrastructure that could make film ownership and performance data available for anonymous, aggregated analysis. Such analysis could feed market performance indicators as the kind of underpinning proposed by Professor La Torre (2014) related to the EU cultural and creative guarantee facility. One might consider access to EU funding and tax structures etc., as incentives for engagement.
Whilst such market-wide analysis is purely hypothetical (given the existence of private collection agencies in film) it is worth considering in detail the practical use of data both bottom-up from project / company perspectives, and top down at an industry level. Their viability is likely co-dependent. I.E. Industry bodies won’t support any initiative that is not in the broad interests of their membership and individual companies will not find much use for small data sets.
A participant in the OMI, distributor The Orchard is making interesting strides in this wider area with their transparency project focusing on the wonderful documentary Cartel Land at present. It will be very worthwhile examining its use.
Michael Franklin is a Lecturer at Goldsmiths’ Institute for Creative and Cultural Entrepreneurship (ICCE), where he teaches in the areas of Creative and Social Enterprise and Perspectives on Capital. He currently has a Postdoctoral research project investigating risk in the film industry and related creative content businesses.