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Netflix is Changing the Way Films Are Financed

With the advance of Video-on-Demand (VoD) platforms like Netflix transforming the way media content is distributed and consumed, film business consultant Michael Franklin considers the implications for film financing.

Independent film financing relies upon the evaluation of future revenues in order to guide investment and pre-sales. Yet the revenue streams upon which such calculations are made are in a state of flux as traditional release windows (e.g. with films coming out on DVD 4-5 months after their initial cinema release) continue to collapse due to technological change and digitisation. At the same time, the traditionally geographically bounded territories allowing individual distribution rights sales are being threatened with agglomeration into an EU common market for digital content.

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VoD platforms like Netflix are transforming the new films are distributed and consumed across Europe.

How sales estimates are calculated (for the purposes of generating sales estimates, financing, acquisition, and presales decisions) is an opaque business. It is also a changing one, with issues of technology, economics, regulation and industry structure impacting how companies evaluate information at different times in a film’s life cycle.

Predictions of Video-on-Demand (VoD) revenues – as part of a film’s overall value – are beginning to be considered in relation to new digital engagement data sets. This is partly due to new release patterns generating new types of valuable data. Innovations in Subscription Video-on-Demand (SV0D) and ultra/day-date Transactional Video-on-Demand (TVoD) mean that Box Office based projections for Home Entertainment revenues are being undermined. As Richard Rapkowski, Senior Vice President of film distributor eOne, observes:

“For the independent space it is quite different (to the studios) because you are relying on revenue streams from all these different platforms to be able to justify what you’re spending to acquire a film, and when there’s changes and uncertainty it becomes a lot more difficult to justify certain acquisitions when you don’t see the downstream revenue as robust as it used to be to be able to cover that, so there is a lot of uncertainty in the market”.

Understanding and adapting to the changing environment for international and digital home entertainment rights exploitation is crucial to the future of film financing and distribution, and thus to filmmaking itself.

Netflix’s European expansion

The recent expansion of Netflix into European territories has prompted some apocalyptic commentary, with the American business magazine Forbes predicting: “Netflix will rip the heart out of pre-sale film financing.” While Netflix is unlikely to become immediately monopolistic, the arguments that pre-sales will need to be done to a single window Home Entertainment player; that distributors may be cut out; and that vast amounts of traditional value will be lost is a serious consideration.

The launch of Netflix in France – arguably a most hostile territory in terms of its industrial environment – has seen 100 thousand subscriptions in the first two weeks. One implication of increased SVoD carriage may be the continued exit of TV buyers from the feature film marketplace. Piracy and legal on-demand viewing culture has led to a current decrease in TV acquisition deals, traditionally part of distributors’ lifeblood for putting forward an Minimum Guarantee (i.e. the distributors advance to the film producer on expected revenues) and supporting their Prints & Advertising (P&A). Legal and regulatory forces at play supplement the business and technological trends pushing towards a dramatic re-organisation of the film-financing environment.

Measuring audiences in the digital age

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Services like ListenFirst’s Digital Enagement Ratings are changing the way audience interest is being measured.

As the chronological distribution norms dissolve, traditional frameworks for evaluating films’ value such as the variables included in Slated’s weighted packaging scores (talent and company track records) are being supplemented with new information. Digital licensing services such as Digital Film Cloud Network and analytics companies such as Way to Blue and ListenFirst incorporate the digital “capture” of potential audiences to capitalise on ephemeral concepts like “buzz”. As Variety’s Co-Editor-in-Chief Andrew Wallerstein says of ListenFirst’s Digital Audience Rating (DAR) system:

“DAR can provide a side-by-side comparison of how impactful online a trailer for a movie coming out in 2016 is, alongside a movie being released next week… We’re providing the measurement standard to quantify audience engagement in a way that complements traditional tracking and ratings that don’t take these critical indicators into account.”

Digital social connections are developing a role as a currency and a combined marketing and distribution mechanism. As Timothy Havens of the University of Iowa explains in a recent article for the new on-line journal Media Industries:

“[there is a] shift from an era of scarcity of audience data to an era of overabundance …we have some information regarding how executives and creators managed a paucity of data, including a reliance on gut instincts, industry lore, and complicated power plays among creators and gatekeepers that often deployed different conceptualizations of the audience. In an age of data overabundance, however, different individuals and organizationsdifferent ‘power roles’, to use Joseph Turow’s generative conceptuse data to try and gain acquiescence and advantage.”

New models of calculating sales estimates

Various market actors are now taking such metrics into account at different stages of the film life cycle. According to Netflix’s Chief Content Officer, Ted Sarandos, “We don’t really use the data to tell us what we should and shouldn’t have on the site. We use it to indicate how much I should or shouldn’t pay” However, few companies have informational resources anywhere comparable to Netflix, yet they still need to evaluate their content

Thus proxies for Netflix’s geographic and content specific databases must come to the fore in an environment of increasing day-and-date release, and when international and home entertainment rights are vital for profitability. The question of how a distributor, sales agent, investor will evaluate a film project without Box Office-led projections becomes incredibly important for all market actors.

Best practice elements of the film business rely on agreed templates for calculation, such as the sales estimate sheet. Such a device informs not only the work of agents themselves, but also banks, distributors providing Minimum Guarantees, and producers who want to develop a package with value in certain territories in order to complete their budget.

Thus there is a need to grips with the new ways in which a film can be evaluated for the benefit of all market actors. Looking to studies of valuation, socio-technical arrangements, Actor Network Theory (ANT), and market devices is a productive route and represents a great opportunity for research. Academic research by Baym on metrics and digital distribution systems, Vonderau on constructed digital markets, and Couldry on black-boxing media networks give great illustrations of addressing social, technical networks of digital media components with a focus on the co-construction of industry elements.

Michael Franklin is a consultant for film businesses and companies in other creative industries. He is also researcher at the Institute for Capitalising on Creativity at the University of St Andrews and affiliated with Creative Scotland: the national leader for Scotland’s arts, screen and creative industries. @filmbizresearch

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