Abstract
How can value be generated with entertainment products? We introduce a value creation framework that identifies the leading institutions in this process that connects producers with consumers. We then overview the major studios, labels, and publishers that have dominated entertainment for decades and key transformational strategies, as well as the economic developments for key forms of entertainment—films, games, books, and music. We then isolate the specific paths from which any firm can choose to generate revenues and to manage the risk that is inherent in launching entertainment products.
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Notes
- 1.
For example, Amazon states in the Terms of Use for its Kindle Store (Amazon 2016): “the Content Provider grants you a non-exclusive right to view, use, and display such .. Content an unlimited number of times. … Content is licensed, not sold, to you by the Content Provider.” Please note that, as with all other distribution modes, the consumer obtains no rights over the content itself (such as a movie or song), but only usage rights for a certain copy of the product.
- 2.
One might argue that YouTube, Google’s video streaming platform, should also be considered a venue—some consider it a social network, and it offers users room for social articulation. However, we are under the impression that, in contrast to sites like Facebook and Pinterest, people go to YouTube less for the platform itself and its experiential value, but rather for its specific content—and thus consider it predominantly a rental distributor.
- 3.
Our language choice does not ignore the challenge for producers to manage relationships with distributors. But we consider it as one of business-to-business sales rather than distribution—a task that we do not study in our book that mainly focuses on management activities directed at consumers.
- 4.
As in other sections of this book, we have worked hard to assure the information presented here to be as comprehensive, topical, and error-free as possible. Please be aware that, despite this effort, things might have changed in the meantime or we might have overlooked or misread information. When writing this in the winter of 2017, at least two major take-overs were in progress: the one of Warner by AT&T and the more recent one of Fox by Disney. Our description of the firms’ divisions and assets in this chapter thus have to be tentative; please keep these dynamics in mind. We’ll try to keep our readers updated on the book’s website http://entertainment-science.com.
- 5.
If no other date is mentioned, financial information named in this section refers to 2016.
- 6.
21st Century Fox itself was the result of a 2013 split of former media and entertainment conglomerate News Corporation initiated by large shareholder and then-CEO Rupert Murdoch. The other resources of the “old” News Corporation formed the “new” News Corp., which, after the acquisition of Fox by Disney, combines various publishing activities, including news services (such as the Wall Street Journal) and trade book publisher HarperCollins. HarperCollins and its several imprints have published books by numerous star authors, including Michael Crichton, Clive Barker, and Neal Stephenson . The firm makes about $8 billion in revenues; the trade publishing assets (as the firm’s “entertainment branch”) accounts for close to $2 billion of them and generates $0.2 billion in income.
- 7.
Walt Disney’s early vision for links between and synergetic integration across the different areas of entertainment is nicely captured in a map that dates back to 1957 and that can be found at several places on the Internet, such as at https://goo.gl/Acq856.
- 8.
Please see our comment regarding the merger of AT&T and Warner in footnote 51.
- 9.
The growth in theatrical revenues outside of North America has recently flattened somewhat, with a 37% increase since 2007 and a 9% increase since 2012, based on data reported by the MPAA.
- 10.
Kupferschmitt’s results are based on a nationwide representative survey of about 2,000 German-speaking consumers. His findings are quite similar for Amazon Prime Video, which is used at least weekly by 18% of consumers between 14 and 29, versus only 12% of the general population.
- 11.
See also our discussion of the “frenemy” concept later in this chapter.
- 12.
In addition to Penguin Random House, Bertelsmann also has stakes in the European TV business (as a “rental distributor,” owning Germany’s leading free-TV station RTL, but also as a content producer through historic firm UFA), in the music industry (as owner of BMG , which manages the rights of stars such as the Rolling Stones and Janet Jackson), and in magazine-publishing Gruner + Jahr, as well as in education and professional services. The family Mohn-owned conglomerate generates annual revenues of some $17 billion and an operating income of nearly $3 billion.
- 13.
The Lagardère Group also operates retail outlets at airports and train stations in France and other parts of Europe; it publishes magazines and owns major radio and TV channels in France as well as promotes sport events. Total annual revenues of the group are close to $8 billion, and the operating income is $0.5.
- 14.
For some informed speculation about this and potential signs of satiation for ebook demand, see for example Alter (2015).
- 15.
In addition to sales from (digital and physical) music to consumers and a comparably small amount paid by those who use music in movies etc. (less than half a billion), the ifpi report also lists about $2 billion in revenues from radio stations. We exclude the latter from music sales to avoid double counting (it is already included in radio revenues).
- 16.
In addition to owning Universal Music, Paris-headquartered Vivendi also has assets in TV and film distribution and production (via pay-TV station Canal+ and its subsidiary StudioCanal), gaming (it sold Activision Blizzard, now holds the majority of Gameloft ), and live entertainment and ticketing (via “Vivendi Village”). The firm’s total revenues were more than $11 billion in 2016, with Universal Music and the Canal+ segment contributing $5.5 billion each. The music division accounted for 80% of the conglomerate’s profits of about $1 billion.
- 17.
For example, Spotify has started to produce small-scaled formats of exclusive content, such as “Spotify Sessions” and “Spotify Singles,” featuring original recordings in their own recording studio (e.g., Dillet 2016), and Apple signed exclusive deals with a number of musicians (e.g., Frank Ocean ) and offers exclusive live events (Sanchez 2017). The industry is, however, sceptical toward such exclusive availability of music content by streaming firms as it believes it triggers music piracy, an issue we discuss in the distribution chapter of our book.
- 18.
In addition to its rumored steps into music publishing, Apple has announced plans to become more deeply involved in filmed entertainment, both by extending its role as a distributor (e.g., by offering streaming services) and also by becoming a producer of filmed content itself, with an annual budget of about $1 billion (Spangler 2017).
- 19.
Regarding exclusivity, both Netflix and Amazon are said to be notoriously hesitant to share information on how (many) consumers use their services and the products they offer, even with regard to their content partners and the creatives they work with (see Schrodt 2015).
- 20.
Mergers can also combine elements of vertical and horizontal integration. In late 2017, Comcast also reportedly showed interest in acquiring 21st Century Fox (e.g., Chmielewski and Hayes 2017)—which would have implied a merger of two film production studios (i.e., horizontal integration), as Comcast already owned Universal Studios, and also one of a technical infrastructure provider and a producer (i.e, vertcial integration).
- 21.
We discuss the synergic potential of “category extensions” in our chapter on entertainment brands.
- 22.
For some constellations in which a large retailer (such as Amazon) has more power than an independent producer, this approach also exists for physical media products where transactions are carried out on a “commission basis” (i.e., the retailer only pays for the copies he or she sells and returns the others).
- 23.
In some cases when the right to air a film is purchased very early in its creation, the fee TV stations pay is tied to its viewer numbers; however, this variable price element refers to the number of viewers of the film in a different channel (usually theater attendees), as a measure of its commercial value. Fuchs (2010, pp. 67–95) provides a detailed description of this process.
- 24.
See the section on “buzz”; we also discuss distributor effects in the context of advertising and the blockbuster concept of marketing.
- 25.
Dana and Spier (2001) analyzed the availability of new video titles in May 2000 in the Chicago area, finding an availability of 86% for Blockbuster, compared to 60% for other nation-wide chains and 48% for independent stores.
- 26.
The video rental revenue sharing model was originally developed by manager Ron Berger (under the somewhat misleading name “pay-per-transaction”), who applied the model for his video rental chain National Video as early as 1986. After facing competition from rising chain Blockbuster, Berger sold the 700+ outlets of National Video in 1988 (to West Coast Video), but kept the revenue sharing operation which he offered to all video rental under the Rentrak label.
- 27.
See also our discussion of the “long-tail” phenomenon which is spurred by small storage costs in our chapter on integrated marketing.
- 28.
As we have indicated above, revenue sharing is also used for the allocation of revenues between the producer of an entertainment product and the different creative parties involved in its creation. Such “internal” revenue sharing is standard when it comes to paying music performers and songwriters. It is also applied by movie studios for some of those creative players who have little negotiation power (as a substitute for fixed upfront salaries) and “superstars” (as a complement to fixed fees). “Internal” revenue sharing deals primarily with decisions about intraorganizational processes (i.e., the production of entertainment), rather than with decisions that relate to a product’s market and customers, and thus lies beyond the central scope of our book. If you are interested in such internal revenue sharing and contracts between creatives and the producing firm in general, we recommend Caves (2000), who has dedicated several chapters to this issue, starting on p. 19, as well as the work by Darlene Chisholm (e.g., Chisholm 1997, 2004). In addition, very detailed information on how revenues are allocated between artists and labels for different forms of music distribution can be accessed via Information is beautiful (2015). Finally, the insightful documentary Artifact sheds some light on the music industry’s “360 degree deals,” where record labels participate in all kinds of revenue streams of an artist, including touring, merchandise, and endorsement activities.
- 29.
This is also consistent with Cachon and Lariviere (2005) who provide analytical evidence that fixed compensation and revenue sharing are actually two variations of the same higher-level coordination model between producer and distributors. They show that the two only differ in a “wholesale price” parameter and a “revenue sharing” parameter (which specifies the intermediary’s share of revenues); in the case of “pure” fixed compensation the revenue sharing parameter is set to zero, whereas in the case of “pure” revenue sharing the wholesale parameter is set to zero.
- 30.
Mr. Bezos originally speaks of “readers,” the news industry’s term for consumers. He uses the term “customer” in the sentence that precedes our quote.
- 31.
Does this mean that placements are more effective than traditional advertising? Not necessarily so. Both communication means have strengths and weaknesses. In contrast to advertising, placements offer marketers limited flexibility for the design of placements and usually little control over the final way their brand is presented as part of the content. Whereas advertising enables explicit persuasive messages, placements do not allow that, at least not to the same degree. Placement works best when the goal is to influence a brand’s image: when James Bond uses Omega, his image as a premium, daring agent tends to spill over to the watch he wears, reinforcing its image as a premium, daring watch brand.
- 32.
As viewers of Spectre will have noticed, Sony eventually decided to let the offer pass and equipped its agent with their own Xperia devices.
- 33.
At the time of writing, the commercial for Casino Royale could be watched at https://goo.gl/unPRPV. Daniel Craig himself appears in Heineken spots for Quantum of Solace (https://goo.gl/9ZbRcQ) and Skyfall (https://goo.gl/YDeuQS).
- 34.
The Subway ad can be watched at https://goo.gl/RenYxr.
- 35.
Let us add that Mission: Impossible had an opening weekend of below $30 million, which was considered a disappointment by many. This raises the question whether its producers should better have used the promotional partnerships to further increase the audiences’ anticipation of the film (i.e., influencing the revenue side of the profit equation) instead of reducing the cost side of the profit equation (i.e., substituting their own advertising with “tie-in” advertising).
- 36.
A full version of the original film is available at https://goo.gl/YgXp3h.
- 37.
We recommend Owczarski (2017) for detailed coverage of the role of Chinese placements for the Transformers saga.
- 38.
Let us note that the managerial challenge can be somewhat similar for other products such as movies and TV shows, when the producer is vertically integrated—and thus has the ability to manage content production and distribution simultaneously. For example, when cable station AMC, (co-)producer of series such as The Walking Dead, interrupted their airing of the series with advertising for Hyundai, using the series settings and atmosphere, this constitutes an attempt to “include” the ad in the product (see https://goo.gl/JoqRrA). More generally, TV stations have to decide on the amount and number of commercial breaks when airing their own content to balance customer satisfaction and advertising revenues. For those who are interested in that challenge, Zhou (2004) offers an analytical econometric model of the optimal number, length, and timing of commercials for a particular piece of content (he does not account though for longer-term effects on the broadcaster’s brand or even media channel usage).
- 39.
Economists make a clear distinction between subsidies and tax incentives, stressing that being allowed to keep one’s income (as in the case of tax incentives) is different from having it given to you by your competitor (who pays the money through taxes that is then allocated to you). We will discuss them jointly in this section nevertheless, as our focus is on the level of the individual firm (for which both incentives have similar effects), not the economy as a whole.
- 40.
In 2012 alone, federal and state film subsidies totaled more than 310 million Euro (Posener 2014).
- 41.
See our discussion of the genre concept and the use of more than one genre in entertainment marketing in our chapter on search qualities for entertainment products and of the contributions stars can offer in the entertainment brand chapter.
- 42.
The importance of controlling for alternative success drivers in econometric works can be seen from the study by Meloni et al. (2015) who run a fixed-effects-panel regression with 754 Italian films released between 2002 and 2011. They find a negative effect of subsidies on performance—which is most probably a reflection of the lower budgets and commercial appeal of subsidized films, rather than evidence for a causal effect, as the authors do not control for any film characteristics (except genre).
- 43.
See our chapter on unbranded signals of quality for entertainment products for a closer investigation of the complex link between an entertainment product’s budget size and its success.
- 44.
The standard deviation is calculated by (1) subtracting the mean from each data point, (2) squaring, summing across all cases, and then averaging the differences (which produces what is named the “variance”), and finally (3) taking the square root of this variance. Empirically speaking, \( \sigma = \sqrt {\frac{{\mathop \sum \nolimits_{i = 1}^{n} \left( {x_{i} - \bar{x}} \right)^{2} }}{n}} \), where n is the number of data points (or entertainment products to be considered), \( x_{i} \) is the respective value (such as the returns) for a data point (entertainment product) named i, and \( \bar{x} \) is the mean value (return) of all data points (entertainment products).
- 45.
Empirical evidence is ample for this “portfolio effect”: the volatility (the finance term for standard deviation) of portfolios such as the S&P 500 or the Dow Jones is much lower than those of the individual stocks that are included in the portfolio (e.g., Berk and DeMarzo 2014, p. 328).
- 46.
Take the case of a movie company that specializes in producing horror films, but decides to diversify into romantic comedies, because that genre’s risks are largely independent from those for horror films. The firm has lower expertise in producing romantic comedies; it has no relationships with top rom-com artists, and also lacks experience in making the final editorial tweaks that often make the difference between a commercial success and a flop. In addition, the decision to diversify across genres also creates major organizational complexities, as the producer is now trying to supervise and control projects that are extremely heterogeneous and that require diverse skills.
- 47.
The nature of this figure is illustrative: we do not imply that genres should be used to define movie “types” as the sole criterion. Instead, the decision how to define product types needs to be made by every producer based on his or her own industry expertise and resources. Our discussion of the riskiness of specific kinds of entertainment products such as sequels and remakes in the book’s Part II might provide some additional guidance for this difficult task.
- 48.
Remember that the data we used to calculate genre averages comes from multiple producers who all have somewhat differing levels of capabilities and expertise across genres. Someone skilled in making comedies might outperform the genre’s industry averages for revenues and risk, just like Jason Blum’s Blumhouse Productions has been outperforming other producers when it comes to making horror films. A producer/studio could conduct this analysis using its own historic data from its own productions to account for its particular situation and expertise.
- 49.
All these assumptions could be released by adding more complexity, but we wanted to keep things simple and relatively straightforward for this illustration.
- 50.
We discuss the role of advertising for entertainment success in much detail in our chapter on paid entertainment communication.
- 51.
But we also find something positive that slate investors might take from Hofmann’s study, particularly those who are more interested in the artistic dimension of the entertainment industry: the slate-funded films in his sample have an above-average chance to be nominated for an Academy Award. This might have to do with those movies’ higher risk levels though, as their commercial success requires the hard-to-predict Oscar win.
- 52.
Remember that entertainment managers, particularly in film, refer to sales as “distribution.”
- 53.
See, for example, our upcoming discussions of “sequel risk” and of “star risk.”
- 54.
The average budget for such inter-studio co-financing is twice that of other studio films! Of course subtle differences might exist for the films which are selected for co-financing (like we have argued in the case of slate financing with external co-financiers), but information asymmetries will be much harder to establish when the financing partner is another studio who “knows the business.”
- 55.
Their risk measures are the standard deviations of the films’ ROI.
- 56.
Such contracts have a long tradition for U.S. pay-TV firms such as HBO and also in many international markets. Although the value of output deals is rarely disclosed, they can be enormous; for example, when German free-TV broadcaster RTL licensed new TV and theatrical productions for 5 years in 2000, the contract was reported to be priced at more than $200 million (Fuchs 2010). And Germany is just one country, and free-TV is just one channel…
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Hennig-Thurau, T., Houston, M.B. (2019). Creating Value, Making Money: Essential Business Models for Entertainment Products. In: Entertainment Science. Springer, Cham. https://doi.org/10.1007/978-3-319-89292-4_5
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