Motion Picture Production and Distribution
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Industry Overview
The US motion picture production and distribution industry includes about 11,000 companies with combined annual revenue of $33 billion. Major companies include Disney, Sony Pictures, MGM, Paramount, FOX, Universal, and Warner Bros. The top motion picture studios are generally part of larger media companies. The industry is highly concentrated: the 50 largest companies account for about 80 percent of industry revenue. Most companies are small and privately held. Most of the industry, including many independent firms, engages in both production and distribution; about 500 firms are solely distributors.
Competitive Landscape
Consumer spending drives demand. The profitability of individual companies depends on creativity, marketing, and distribution. Large companies often have the advantages of long-term contracts with key actors and directors, a permanent staff of technical employees, and wide distribution networks. Small companies can compete successfully by creating marketable movies, often for niche audiences, on low budgets. Although production work is labor-intensive, the value of the product results in high average annual industry revenue of $300,000 per employee.
Products, Operations & Technology
The motion picture industry produces mainly first-run movies and secondary releases, distributed first through theatres and later on various media through a variety of commercial outlets. Secondary releases, mainly on DVD through wholesale and retail channels, contribute 50 percent of industry revenue, while first-runs account for about 20 percent. Other products include commercials, music videos, special features, and post-production and technical services. Some companies sell merchandise or earn fees from licensing brand names to third-party manufacturers. Distribution of previously released products is through theatres; wholesalers and retailers; network, local, cable, and satellite TV; the Internet; and other distributors. Companies that both produce and distribute product account for 97 percent of industry revenue.
Production may be on a proprietary or fee-for-service (contract production) basis. Because long-term profit from successful motion pictures can be very high compared to upfront production costs, companies often prefer to produce movies on a proprietary basis and own the product. When customers own the product, they pay fees for production and distribution services, a common arrangement for non-movie products, such as commercials, educational features, music videos, and direct-to-video DVDs. Independent production companies increasingly contract with major studios for distribution services, which include marketing.
Creating a movie goes through four phases: development, pre-production, production, and post-production. In development, the producer creates or acquires a screenplay, gets tentative commitments from a director and principal actors, and develops a budget. Once these elements are in place, the producer secures financing from a movie studio or independent source. Much of the work of producers involves assembling a pre-production package that financial backers will approve.
After project approval and financing, the movie goes into pre-production. The producer finalizes director, cinematographer, and lead actor contracts, and most details of the screenplay; hires a production crew; ensures development of a detailed schedule that identifies timing and need for cast, costumes, equipment, and other production elements; and monitors rehearsals. Filming (“principal photography”) for a movie may run from a few weeks to several months.
Once shooting is complete, the movie goes into post-production, which includes processes and tasks such as editing, music scoring, audiovisual synchronization, special effects, and titles. The result of the cumulative post-production work is a master negative that will serve as the source for exhibition copies of the movie. The industry refers to expenses through production of the master negative as “negative costs.” An independent company may produce one movie per year; larger studios may produce over a dozen.
Distribution of finished product typically goes through the large studios, which have relationships with extensive numbers of theatres, TV networks, major retailers, and other secondary outlets. Distribution of first-release motion pictures includes marketing to theatres (“exhibitors”) that rent (“license”) movies; obtaining exhibitor contracts; advertising; and providing promotional materials and copies of the film. Contracts specify what percentage of gross ticket sales go to the exhibitor, the distributor, and the production company.
License fees from multi-phased distribution are important to the financial success of most projects. Usually, movies first go into theatrical release, then to video or DVD after about six months, then to cable and pay-per-view TV channels, and eventually to free TV. A production company typically sells licenses separately for distribution through these different outlets. To ensure revenue, independent producers may enter a “negative pickup” contract through which they sell their ownership rights in the master negative, as of a specific date, to a studio or an independent distributor before completing the film. Typically, the new owner pays costs, the producer finishes the film, and the two parties split net profit.
The industry uses advanced technology for business forecasts and production. Computer forecasting models help predict success of projects and decision-support tools help determine a marketing and distribution strategy. The technology in movie production changes rapidly, due to the increasing power, visual, and sound capabilities of computers. Many crews use digital cameras to shoot movies and specialized computer software for editing. Special effects are mainly computer-generated imagery (CGI). Digital files have enabled electronic distribution to customers.