A Film Industry Analysis

When entertainment industry insiders and outsiders comment on the use of data in the sector, I often hear a fear expressed that it will lead to more sequels, remakes / IP based content versus original content and therefore will have a negative effect on creativity.

This view could not be further from the truth. It is often based on a limited understanding of how to use data correctly. I will discuss the film industry from a business perspective and how the right combination of advanced data analytics combined with creativity will benefit original content and create a more sustainable industry.

The industry’s struggle with changes in consumer behavior

The film industry can be classified as a high-risk industry as any new project needs to be financed upfront, then produced, marketed and distributed. It can take two years from the financing stage to the initial release plus another two/three years of ancillary release windows such as home video and TV to generate the bulk of revenues. Thus, studios and production companies/financiers need to prepare for the majority of film revenue to be generated over a five year period.

This prolonged revenue/return time frame creates an industry risk profile that requires studios and independent content financiers to understand and diversify risks in order to continue as a going concern. At times when revenues were plentiful, such as during the days of strong high margin DVD sales, Studios were able to create healthy bottom lines and placed more “bets” on original ideas.

In the past ten years, DVD revenues or “physical home video” have evaporated from $16.2bn in 2010 to $4.7bn in 2019 and have yet to be replaced by its digital counterpart (See Graph 1).

IP based content as the solution?

The loss of these high margin revenues has made it more difficult for film investments to be recouped and increased financial risks for all companies involved. Large parts of streaming revenues were consumed by new entrants such as Netflix and Amazon. Studios have resorted to focusing on content based on known IP such as comic books, remakes and sequels to be able to tap into built-in audiences and marketing appeal. This strategy worked well for many studios and was embraced by audiences — expressed in the enduring success of a variety of franchises to date. These strategies did not rely on sophisticated data strategies but on the simple need to mitigate risk (See Graph 2).

With the risk of rising franchise/remake fatigue and increased competition for younger audiences from new technologies whether video games, apps and social media, Studios will have to find new frameworks to assess the economic viability of original content.

While the disappearance of DVD revenues was negative, the digitalization of data collection can be seen as a positive. Data availability has broadened substantially allowing for better than ever insight into what content works and why. The famous phrase “nobody knows anything” is no longer valid. The key is knowing what to do with the gigantic amount of data generated every day. The good news is that recent developments in new analytics technologies allow for new and more refined ways to use data when assessing the business case around Film and TV content.

This has already occurred successfully in other creative industries such as marketing and fashion. What made studios and financiers resort to “safe IP” strategies is the fact that they often do not have a sufficient framework to assess new and original ideas. This problem can be solved by combining the vast amounts of data available with modern analytics technologies such as ML/AI that help with the number crunching for content prototyping. Embedded in software, these technologies can provide decision-makers with real-time tools and inspire confidence to assess all types of content from the idea stage.

And let’s be clear: The key part that needs to work in order for content to be successful is the story and creative execution — data analysis can only be additive for creative decisions but can make a huge difference for more successful business decisions. It is crucial to know how to use and integrate data into work processes — especially in creative industries.

Independent Film in dire straits

An additional benefit of using data is an increased level of transparency. Certain segments of the Film industry are broken and solutions can only be found by looking at the data. For example, the truly independent Film sector is in dire straits. Today only 3–4% of independently produced films in the US break-even i.e. pay back their investment. Every year the Sundance Festival receives submissions that total $3bn in production value. These titles want to participate in the festival to secure distribution in the US theatrical market. The issue is that the independent space in 2019 only garnered $100m in net theatrical revenues (Box Office net of exhibitor share and distribution fees & expenses).

Meaning that of the $3bn in production value that applied to Sundance, there existed only $100m of net revenues to contribute back to the investment. Ancillary revenues including Home Video and TV might double these net revenues to a total of $200m, but not nearly enough to recoup the $3bn production value spent upfront (See Graph 3).

The independent sector largely ignores data for various reasons. It requires 5–8 different companies (producer, financier, sales agent, distributor, exhibitor…) with completely different business models to bring a story to the screen, which makes it nearly impossible to share data and create a film business case that can be recouped successfully. Some companies even benefit from the lack of transparency — I often heard the phrase “sell it, don’t smell it”. Most companies simply do not have the knowledge of how to use data in the right way. In addition, ignorance and stubbornness to hold onto traditional/legacy processes have created an industry in which creative potential is killed as many stories never reach their audiences and investors lose billions every year. This situation leads to numerous failed/troubled film businesses such as Broad Green, Open Road, Aviron, Worldview, Annapurna to name a few.

A brighter future

Incorporating data insights in the right way will provide new and better frameworks that allow studios and independent companies to maximize success— especially with original content. I think that the current crisis provides an opportunity to reflect on our values but also on the state of the industry and how business is done. I strongly believe that having an open mind towards new data-driven technology solutions combined with industry experience and creative instinct will create a more sustainable industry that will benefit all.