Impact of Recession on Movie Industry

Impact of Recession on Movie Industry Foreword Writing this dissertation was a long and exhausting process which included many setbacks and failures. Nevertheless it also was fulfilling and exciting as I was driven by my passion and interest in movies and cinemas in general. I always intended to work for the movie industry one day and hold well- grounded hopes of achieving this goal in the near future. Maybe this dissertation will help to convince the studios of my passion and capabilities. My thanks go to Mr Nick Bowen, who was an outstanding tutor and helped me through rough and inconvenient times with his competence and great sense of humour. I also would like to thank me interviewees Mr Arwed Fischer and Mr Jan Fantl, who provided me with many important information and an inside into the industry. Without them, a big part of the report would not have reached the standard it has now. Finally, I am very grateful for the help of my parents who made it possible for me to go to London and provided me with everything I needed in order to be successful and happy in the future. I do not want to forget to thank everybody else who supported me during this tough time and cheered me up after one of the occasional setbacks. Executive Summary Recently the film studios are experiencing a boost of attendances and ticket sales despite the financial crisis. This already happened in past recessions and therefore will be analysed in this report. One reason for that economical immunity seems to be the technological development such as sound and colour in the past or 3D cinema nowadays. Nevertheless there are some issues the industry has to deal with at the moment, e.g. piracy or substitution goods like videogames. Although 3D movies did fail continuously in the past in terms of economical success, the studios tried it again with an advanced technology and exceeded all expectations when Avatar was released. In this context factors such as rising ticket prices or the limited number of 3D capable cinemas play a big role as well in order to determine the future potential the 3D technology. A few companies already started to produce and sell 3D capable TVs which are supposed to the next economical success the movie landscape. IMAX cinemas suffered a long period of very low attendances and decreasing ticket sales until advanced 3D technology has been used to produce movies. Since then the IMAX group notes record breaking attendances and boosting profits. Two surveys have been analyzed and compared to each other. One, published in 2005 by Opinion Dynamics Corporation alre ady showed some curious facts on 3D cinema and its likely success in the future. The second one has been generated online by the author of this report in 2010 amongst a group of people from 10 countries. In terms of forecasting a success of 3D movies it is very hard for the studios to forecast the success of a single movie or even a whole new technology. They mostly try to find what is most appealing to the audience (unlike independent productions) and therefore have their analysts forecasting risks and returns. Nevertheless DisplaySearch 3D Display Technology conducted a forecast which is quite optimistic and expects increases in every sector of the movie industry (cinemas, home cinemas etc). The recommendations include the authors personal opinion of how the 3D technology will influence the cinema landscape and the options studios have to market it properly. By interviewing people from the movie industry the author gathered some inside knowledge which he tried to apply to his recommendations. Therefore it is expected that the boom of 3D movies will slow down slightly but continue to strengthen again. In the long term it is expected that the new technology will have a positive impac t on the movie industry. 1. Introduction According to Dreamworks Animation CEO Jeffrey Katzenberg, the upcoming 3D movie technology is the greatest innovation to occur in the movie business in 70 years. (CNN Online, 2008) This statement shows the hope of the whole industry for more attendances and a revolution in the movie market. An increasing amount of movie studios shift their productions towards the new technology. As a result this is discussed in a rising number of TV-shows, magazines and newspapers. Despite the fact that videogames are becoming more popular and the financial credit crisis has reduced average income, going to the movies still seems to be a big part of daily life all over the world. This happens even though the whole film industry seems to be in a crisis, as will be explained below. Initially 3D movies were produced using 2 separate projectors to produce one double image and running two separate rolls of film. Nowadays the technology is far more advanced which means that digital projectors are installed in cinemas producing sharper and steadier images. There also is a difference in production between real movies and animated ones. Animated movies are not produced with real cameras but use computers to create and render every single shot from two angles. Live action movies on the other hand are filmed by new dual lens digital cameras that are able to capture two points of view. (BBC news, 2009) Movie attendances in the United States decreased by 2, 6 %, falling to its lowest level since 1997, whereas revenues fell from $1,484 billion in 2004 to $1,364 billion in 2008. In the same period the amount of screens jumped from 35,993 to 39,476. To be able to show 3D movies, it is necessary to upgrade to digital screens; here the number increased from only 138 in 2004 to 4,576 in 2008, a rising trend. (Marche du film, 2009) Linking these data leads to the conclusion that the movie industry is keen to establish and invest in a new technology in order to make going to the cinema more attractive to its customers and increase attendances in the short and long-term. The following report analyses the current status of the movie industry and shows the likely economic impact in times of recession on the worldwide market. The industries main current issues and a forecast based on trends and profound market research are also examined. 2. Literature Review This chapter summarises and evaluates the related research of what has been written about the research topic. Opinions and data from many different people, working for the movie industry or being close enough to venture a forecast, have been taken into account and evaluated objectively. The chapter also defines and explains the new 3D movie technology, its history and its characteristics from different perspectives. Furthermore it covers several models and theories and talks about reports and how to estimate their importance. This is followed by an evaluation to point out weaknesses or gaps in the literature. The final part will consist of a link to the initial research question and what the plan for proceeding is. Overall, there are 3 main questions to be covered in this chapter: 1. How did big studios fight back in past recessions? 2. How have technical developments influenced business in the past in different markets? 3. What are current issues in the industry? It also is evident that due to the newness of the topic chosen, there are certain constraints in terms of what kind of literature is currently available. Therefore the main sources cited are websites as well as primary research. 2.1 Comebacks of the Studios in Past Recessions After the first big Wall Street Crash in 1929, admissions rose by 58% compared to the previous year. (Entertainment times online, 2008) According to John Fithian, president of the National Association of Theatre Owners in America, this means that â€Å"In the past four decades there have been seven recession years in this country, and the box office has climbed strongly in five of those years,† (Entertainment times online, 2008) According to the Academy of Management Journal (1996), between 1936 -1950 property based resources such as long-term contracts with stars and theatres helped financial performance to stabilize. Contrary to the period of 1951-65, when knowledge- based resources such as coordination and production talent and budgets increased financial performance. (Academy of Management Journal, 1996, pp. 519-543) Asking some of the most important and powerful people in the U.S. and UK movie industry shows that the majority believes that the current recession either is an opportunity or even a reason for rising sales. But what is the reason for that surprising success in economic downturns? Besides new technologies, which unfortunately are not always released at the right time, the studios decide to publish more comedies and action movies, to help the audience to escape from their monetary problems. In the USA, three of the top-five movies in terms of gross profit of 2009 are comedies: Mall Cop, Hes Just Not That into You and Bride Wars. (CNN movies, 2009) This permits us to draw the conclusion that a recession does not necessarily lead to a break-down of sales in the movie industry. But did past recessions really have no impact or even a positive impact on the movie industry? Not everyone agrees with the theory of increasing sales in recessions though. Gerald Peary, a documentary filmmaker and critic in Boston, Massachusetts, believes that the market will be flooded with intellectually less challenging movies since they are the ones that are more likely to succeed on the audience with smaller budget. In his opinion The dumber the movie is, sometimes, the more money it makes, which states that Those movies are somehow both critic proof and depression proof. (CNN movies, 2009) Another point of view is represented by Basinger, the film historian who assumes that it is still too soon to predict any trends concerning the recession and movies. She points out that recessions leads to faster changes in the movie scene. Also for her, going to the movies is not highly affected by the crisis, as it still is [] the cheapest and fullest way to abandon your troubles and lose yourself in a story. (CNN movies, 2009) Even in some of the worst recessions, economy ever has experienced, the movie industry mostly has been of the few sectors that was able to maintain its position in the market or even increase admissions. This is due to peoples not changing consumer behaviour. Even though they got affected by economic downturns, most of them still wanted to escape from their misery for a few hours. It also is an opportunity for independent film makers to realize low-budget productions, as movie studios get more cost- conscious when their stocks fall during a crisis. Henceforth studios prefer to invest little money in innovative productions and directors hoping for a reasonable return of investment. 2.2 Technological influence on Business in the past Around 120 years ago, films were little more than drawings that seemed to come alive with motion. Then, in 1877 Emile Reynaud had patented a machine, the ‘Praxinoscope, which projected seemingly moving paintings onto a screen. An upgrade of his invention, the Projection Praxinoscope, which was a large-scale Praxinoscope, got patented in 1888 and was used for public projection. Reynaud started to screen his films, accompanied by music on a regular base. Yet that early atmosphere and technology were very similar to today screenings. (Kinogeschichte, 2009) Using spools to feed and take-up the extended picture band, sequences were no longer limited to short cyclic movements. This was the first and important step for commercial use which has been so essential for successful cinematography. (Exeter, 2000) Nevertheless, there were still many issues concerning films, amongst other things the length of them or the lack of sound. To compensate this problem, it was tried to create a more realistic, narrative and psychological atmosphere using on-screen text and a pianist accompanying the film. Back in 1927, after the introduction of movies with full sound, cinema attendances jumped up from 57 million to 90 million in 1930 (Shmoop statistics, 2009) and made them even more popular. This demonstrates that introducing a revolutionary technology can lead to soaring attendances and higher box office sales for the studios. Also the lack of colour on screen was tried to be compensated to improve the movie experience. One of the first ideas was to tint the film reels but later prising companies such as ‘Technicolor and ‘Eastmancolor, made it possible to use new ways of colouring and achieved the objective of a deeper and more intense atmosphere. (Inventors library) Nowadays black/white movies disappeared almost completely from the world of movies. Although, the success of films like ‘Schindlers List (Steven Spielberg, 1993) and ‘Clerks (Kevin Smith, 1994) shows that it is still possible to achieve commercial and critical success with monochrome. (David Parkinson 1995, pg 112) After releasing the first full-colour, La Cucaracha (1934), coloured movies became more and more popular. In the late 1930s, the films,Snow White and the Seven Dwarfs (1937, Disney), were a huge success. Last one still is considered a milestone as it was thefirstfeature-length animated film. (Filmsite, 2007) Introducing new, revolutionary technologies and giving them the chance to go to maturity stage of the product lifecycle always has been very profitable for movie studios. Be it the implementation of sound or the introduction of colour, people loved to spend their money on being amused in cinemas. 2.3. Current issues in the industry There are more problems and issues the movie industry has to deal with besides the current substantial crisis and recessions. These will be examined in the following sections. 2.3.1 Videogames as substitution goods Amongst many threats for the movie industry such as the highly developed internet, DVDs and an increasing amount of home activities, one of the main problems for the movie theatres and studios is the rising and durable success of videogames. First released in the 1980s, videogames have been designed for a significantly smaller target audience. This was attributed to the fact computers were still in the early stage of their product life cycle and thus the presence of computers in the average household was a much less common occurrence. The commercial use of computers was much more prominent during this period, than their household residential usage. Even with the introduction of platforms such as the SNES (Super Nintendo Entertainment System) in the 1990s, the Videogame industry was still viewed as a niche market. It was never anticipated to develop into a competitor of the movie industry as it is nowadays. Currently, the profit generated from videogames equates to that of their movie counterparts. Current trends indicate that consumers have a tendency to spend more on buying videogames as opposed to going to the movies which has been identified as a huge threat for the studios. Just recently, in the beginning of November 2009, Activision Blizzard Incs released Call of Duty: Modern Warfare 2 and anticipated more than $660 million in sales from 11-13 million sold units by the end of 2009. Also previous games were big hits in terms of sales as the table below shows. Top video games sales on their first day ( Reuters, 2009) Figure 1 These data can be compared to Top Hollywood worldwide opening weekends: ( Reuters, 2009) Figure 2 As aforementioned and illustrated by the tables (Figure 1 Figure 2) above, it is evident that data solidifies the trend that an increasing number of consumers are changing their consumer behaviour and purchasing videogames which they may enjoy at home. Another possibility for the rising success of videogames could be the fact of potential consumers rather staying home than spending money on transport for getting there and quite expensive snacks and drinks in the cinema. This data backs up the trend that more and more consumers tend to shift from going to the movies to buying videogames which they can enjoy at home. Even if they are more expensive (around $50/ unit depending on the platform) the duration of playing them is far higher than only two hours. This makes them a substitution good with which the studios have to deal with now and most likely even more in the future. On the other hand this also creates new opportunities for the movie and the game industry to work together and create profits by co-operating. This is already working in terms of converting movies to videogames but also the other way around. 2.3.2 Piracy Another very recent issue and problem for the movie industry is the rapid spread of illegal movie copies, also known as pirate copy. In 2007, downloads of movies rose by 50 % in Germany, mostly saved as digital copies. ( Welt online, 2009) According to The Institute for Policy Innovation (IPI), the cost of motion picture piracy is significant high and an essential threat to the studios and the whole industry. The loss for the movie industry was $6, 1 billion in 2006. Taking all industries into account that are related to the movies that number would add up to $20.5 billion annually. This means that not only the studios and related companies lose money. It also means that people are losing jobs. Piracy being absent, 141,030 new jobs would have been added to the U.S. economy in 2006 (IPI, 2006) Henceforth the studios are in an on-going war with the movie pirates trying to reduce losses. The enormous impact on U.S. and worldwide economy forced the industry to consider distinct strategie s to decrease or even stop piracy. Besides Ads, showing movie pirates chased by police and going to prison as for every other federal crime, the industry also adopted a hard line by suing them for compensation. This found its peak in sending four men to prison for one year and ordering them to pay $3.6 million of compensation to major film companies such as Warner Brothers, Columbia, Twentieth Century Fox, Sony BMG and EMI. (CNN Piracy, 2009) They operated a Swedish movie pirate website which has been judged of being illegal. In total, piracy and the recession have reduced DVD sales in the UK by around 10 % and in the US by even 13 %. The problem for the studios is that DVD sales are responsible for half a titles long-term profits and more than double the revenue than from tickets sold. (Independent Online 3D Revolution, 2010) Hence Hollywood always tries to find new ways of protecting their movies and anticipate copyright theft. Consequently they always need new technologies which cannot be hacked but according to Arwed Fischer (Fischer, 2010), it is almost impossible to find the perfect safety. Hackers are able to break any copy protection within days or hours. In fact, this made him quit the job as resources seem to be wasted on nothing. Critics on the other hand state that the way of how to calculate losses for the movie industry is neither transparent nor comprehensible. The studios claim that each single pirate copy is the same as one loss of attendance. This is one of the reasons why mentioned losses are extraordinary high. People that just downloaded the movie and never considered going to the cinema or buying it on DVD are not included in these statistics which makes them quite subjective. On the other hand, the new 3D technology makes studios feel quite safe at the moment as it yet is impossible to pirate 3D featured movies. Hence people who want to experience this new way of cinema must go to the m ovies and pay for their tickets. James Cameron also is aware of this unique selling point when he says: You can pirate a 3D movie but you cant pirate it in 3D, so you cant bottle that 3D experience. (New Yorker Online, 2009) Although this is a justifiable and legitimate objection, piracy remains one of the industries biggest problems. Even if not each ‘pirate can be considered a loss of attendance and ticket sales, it remains an act of stealing. The studios spend millions of Dollars to produce profitable movies which are linked to many jobs. That should not be undermined by downloading movies instead of going to see them in the cinemas and pay the entrance fee. 3. Research Methodology 3.1 Introduction This chapter explains the approaches used to facilitate a precise and specific answer to the initial research question. In order to gather relevant and accurate information both, quantitative and qualitative data will be used. However the authors focus will be on qualitative data collection. The potential bias of primary is quite low due to a wide range of interview partners, all from different sides. Secondary data has been gathered under same criteria in order to minimise the risk of potential bias. Where, if possible, the author tried to look for alternative explanations and to show that he was aware of any potential bias. 3.2 Justification of Research Perspective Every research requires distinct methods recommended for structuring research programs. In this dissertation, it has been chosen to base all outcomes and results on actual data or professional forecasts like interviews, surveys and questionnaires. Copies of them can be found in the appendix. A high level of discipline was necessary and essential at the beginning of the research. Even though it got disappointing at some points, as the researcher took a wrong path, objectives from books by Mark Saunders (2009) helped the author to keep focused and motivated. According to Saunders * â€Å"Data are collected systematically * Data are interpreted systematically * There is a clear purpose; to find things out† (Saunders et al, 2009) 3.3 Primary Data Collection The author attempted to use all the important primary data collection methods such as interviews, networking and surveys in order to analyse the data objectively. This leads towards an accurate answer to the initial research question. Interviews with people from the movie industry such as former employees of copyright companies and cinema owners have given a deep insight into the topic. Interviewees are: * Arwed Fischer, former employee of X-Protect GmbH in Munich * Representative of the Kinopolis group, one of the biggest German cinema chains, who wants to stay anonymous. * Jan Fantl, producer, production manager and former director Several approaches for the interview structure have been considered and led to the following conclusion: Although unstructured interviews have the advantage of complete freedom in terms of content and structure ( Kumar R, 2005), the author of this report decided to mostly use structured or hybrid interviews for his research purposes. This represents a spot in-between the unstructured and structured interviews in Figure 3. That was given due to the fact that face-to face interview were not possible for a number of reasons such as travelling cost or lack of time of the interviewees. Nevertheless personal interviews would have given the author some advantages such as observing his interviewee as well as listening to him or the chance to gather the data more efficiently. (Hollwitz, J. Wilson, C.E. 41-52) Therefore it has been decided to make use of telephone interviews, which are far less costly than personal ones, and mail questionnaires which require accurate question design to match reading comprehension of the interviewees. (Using Structured Interviewing Techniques, 1991) Especially mail interviews have been proofed to be quite efficient because interviewees took their time to think about the questions before answering them. An online survey has been generated and distributed by the author of this report. 47 people aged 22- 50 and from 10 countries filled out this online survey which has been piloted before with 5 people in order to make it more precise and accurate for a wider audience. It was created on the 07.April 2010 and has been closed on the 07.May 2010 .To generate it the online platform www.surveymonkey.com has been used. The complete survey can be found in the appendix of this report. Due to easier access given times and resources it was not possible to have interviews in other countries like the USA or India. At a later point in this report it has been compared to another survey taken by Opinion Dynamics Corporation in 2005 before the 3D technology boomed yet. This will show the process and change of customers opinion on 3D movies. Also a questionnaire has been conducted by the author. It has been sent via to several people of the movie industry. The response rate was rather poor as asked peo ple seemed to be busy. Standard questions have been used in order to facilitate the collection of data and due to limitations in terms of time and resources. The questionnaire can be found in the appendices in section 8.1 As aforementioned, the potential bias has been considered in the evaluation process. Another option to be deemed is the use of a supervisor or mentor. He made sure that collected data was rather objective than subjective and could provide the author with constructive criticism. 3.4 Secondary Data Collection Thanks to a wider range of secondary data available, the author collected a lot of relevant information on the topic. He did this through a critical evaluation of literature, not only from the USA but also from Europe to accomplish a fair and accurate picture of the industry and its potential in the future. Parts of the research were also based on past and current trends and forecasts that justify arguments and recommendations. In order to sufficiently cut down the total amount of data, the author interpreted data sourced mainly from smaller subgroups rather than â€Å"all possible groups† (Saunders et al 2009, p 150 152)This method saves the author valuable time and also makes research and evaluation of data more efficient by using a smaller pool of information. As every other method, this one also has disadvantages, such as gathering the wrong kind of data or using irrelevant data which cannot answer the initial research question accurately. Also some academic literature such as the The Academy of Management Journal has been used to provide a different angle of the research question. A SWOT analysis on the current situation of the 3D Technology and outline possible threats and opportunities for the whole movie industry has been carried out. As a planning tool a SWOT analysis has many benefits like the simplicity of taking one. Nevertheless this can lead to problems like underestimating the value of a SWOT analysis or to an imprecise and weakly conducted analysis. (Ferrel Hardline, 2007, p. 119-120) More benefits can be seen in Figure 4: (Ferrel Hardline, 2007) Figure 4 3.5 Conclusion of Methodology Using all the aforementioned methods and approaches, the author attempted to find an accurate answer to the research question. Giving the reader a deep insight into the topic and a widespread view of the 3D Technology opportunities and risks has lead to a complete understanding of the subject. All data has been analyzed and evaluated neutrally so a conclusion has been objectively drawn. 4. Findings and Analysis This chapter starts with an explanation of the technical side of 3D technology used today followed by an overview of the history of 3D movies and a SWOT analysis. After that, the role of 3D movies in general and in combination with IMAX cinemas as well as the importance of Avatar will be discussed. The chapter will concluded with the comparison of two surveys (for further information please see research methodology) and a forecast. 4.1. How does 3D technology exactly work? First of all, the binocular vision system is based on the fact that the eyes of a human being are spaced 5 cm apart. Consequently each eye sees the picture from a different angle. At the same time the binocular vision system in a brain is using the difference to calculate the distance. The brain also has the ability to show a relationship between those images even though they are slightly different. The brain can choose objects in the two scenes and work out how far an object is between those images. (How Stuff works 3D glasses, 2010) The reason for wearing 3d glasses is to provide different images into your eyes. The movie screen in fact shows two different images and the glasses cause one of the images to go into one eye and the other one to enter the second eye. There are two widespread systems of doing it * Polarization: The majority of the big studios such as Disney or Universal the first choice are polarized lenses for the glasses because they allow colour viewing. Two synchronized projectors project two individual views onto the screen, each with a diverse polarization. The glasses only let one of the images to enter each eye because they hold lenses that are polarized as well. This is comparable with the polarization of sunglasses. (Filmindustry, 2009) * Red/Green or Red/ Blue. Since polarization cannot be used on a traditional TV screen (unlike on upcoming 3D TVs which will be dealt with later on in section 4.7) the red/green system is used. Again 2 images are displayed on the screen, one in red and one in blue/green. The filters of the glasses only allow one picture to enter each eye. The brain has to correlate those pictures as aforementioned. It is not really possible to use a nor