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Sunday, August 6, 2006

Fwd: movie business challenge-- an equity market for movies (aka how to align theatre and studio interests)

Recently Mark cuban make a blog entry with the following challenge. 
So if you want a job, and have a great idea on how to market movies in a completely different way. If your idea works for any and all kinds of movies. If it changes the dynamics and the economics of promoting movies, email it or post it. If its new and unique, i want to hear about it. If its a different way of doing the same thing you have seen before, it probably wont get you a job, but feel free to try.
Here is my response.

---------- Forwarded message ----------
From: mark johnson <double>




I am writing in response to your Movie business challenge blog entry from last week.  I have taken a slightly different approach than most of the others who have posted about ways to either get more people into the theatres or create a better value equation for those consumers.


Well these tactics may create some growth in the movie industry, they won't stem the existing tide of declining revenue for theatres.  Ultimately, growth in any industry must come through innovations.   For the movie industry, this means we need to change the business model for making a movie and getting mass distributions.  We need to take some costs out of the equation and reallocate some spending toward parties who can perform them better.


My proposal for you Mark, is the creation of an equity market for both movie financing and movie distributions.  In my market, studios will share equity portions of films at all stages of production.  In return for the equity, studios will receive either cash or more likely, guaranteed points of distribution or local marketing investment.   By pushing support for theatres down to the local levels, studios have now removed one of their biggest expenses.


This "efficient market" if you will, will make it easier for smaller films to be financed, while guaranteeing distribution at the same time.   As a result, marketing costs will be partially transferred from the studios to the theatres, who can market locally better anyway.  Films will now have an easier time being shown is cities other than New York and Los Angeles.


Current Scenario


There are currently three general key players in the movie industry rights—the movie studios(both large and small), the movie theatres and the consumers.   All they have in common is that they don't like doing business with the other two.


Consumers think they are paying too much for a commoditized experience.  Movie theatres complained about declining margins, lack of choice and little revenue from the back-end of the movies.   Studios are caught are suck in this high-spend situation because everyone else is doing it.


The biggest result from this scenario is the lack of quality films.  Marginal films can not be produced due to the problems described above.   What if there was some way to remove risk from the projects?  Let's find a way to make it easier for films to be financed and remove some of the risk from movie producers.


Some of these problem have been solved by the vertical integration of the process, which your companies have made significantly progress in.   As a result, you have created some differentiation between relatively similar chairs in the theatre.    I expect trends like this to continue.   However, given the declining number of theatres in America, the number of fully integrated movie companies will be limited as well.  We need to find another way to add more choice to market.


Problem 1:  Right now 80% of the screens are owned by a small number of companies.   Their efforts are centrally coordinated and relatively inefficient.   Since they are being squeezed on margins in both directions, they have little ability to promote content themselves.   As a result, these theaters are generally only interested in promoting films which have a huge general market media spend behind it.   As it stands, studios don't actively promote one film over another and really don't spend much behind any film at all.


Let's look at the income statement as a typical movie theatre.  Currently, it has a huge fixed cost base due to real estate.   As a result, theatres are doing whatever they can to push marginal consumers into the seats.   We saw this happen as 50-screen multiplexes opened up through the 90s.   Nice theory, however, when everyone else is doing it, it doesn't make much sense.  So now, we have a million screens out there some the exact same movies every 15 minutes.   Given the search for eyeballs, movie theatres are positioning themselves in high-traffic, high-population areas.  This is an expensive real estate strategy.   So let's reviews, we are adding a ton of costs to an undifferentiated movie experience.   Since consumers don't see any difference between theatres, these theatres has no incentive to market movies themselves since other competitors will just "Free ride" off their efforts.


Problem 2: Given problem 1, major movie studios need to make big bets.   In order to cut through the marketing clutter from advertising spending, only large pictures can be promoted.   As a result, many quality pictures are either not made, or made then not subsequently promoted because of poor intial test results.   There are more Direct-to-Video or limited  releases now than ever before simply because a full national release is not justified.


My solution


With an efficient market in place now, marginal films with risks of distribution due to poor support will now be able to be funded.  With distribution guaranteed, marketing effort can now be better targeted (hence, cheaper) and theatres will now have an interest in promoting certain pictures over another.  Moreover, under this system, there may be only one or two theatres within a city with a specific movie.  Now, there is some differentiation as well in the industry.


Additionally, we now have an alignment of goals between theatres and studios.  Those studios with distribution will now have a vested interest in promoting smaller films locally.  With guaranteed distribution, more films get made and will be shown outside of New York and LA.  The average consumer in Boise, who wants to go to the movies now has more choices.  With more choice, the movie industry will now get more share of these consumers' wallet.



Thanks for taking the time to read this.  Please shoot me an email back if you have any thoughts or would like to talk about this further.





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