Anyone who wants to know more about how films and TV shows are dis- tributed and exploited can learn a huge amount from this book. —Jim Morris, Pixar Animation Studios General Manager, EVP, Production, and Producer Wall•E The entertainment industry is an industry with ongoing challenges with constant change. Jeff provides a road map to see where you are going by understanding where you started. —Louis Feola, President, Paramount Famous Productions Ulin expertly depicts the fluid nature of content creation and distribution in a concise and understandable way. There’s never been a better insider’s look at the choices and challenges that studio executives face every day. —Gary Marenzi, President, MGM Worldwide Television Jeff Ulin’s broad spectrum of expertise, spanning all aspects of motion pic- ture and television distribution, from theatrical to home entertainment to new media and television licensing, render him uniquely qualified to illu- minate the business side of the entertainment business. —Hal Richardson, President of Paramount Worldwide Television Jeff Ulin’s book is a must read for practitioners, academics and potential in- vestors in the new media space. Having worked in all segments of the indus- try, Ulin brings together a unique combination of experience and analytical rigor to deconstruct the driving forces of an industry in dynamic change. —Pablo Spiller, Jeffrey A. Jacobs Distinguished Professor of Business and Technology, Haas School of Business. This is the book that everyone in the business has been waiting for — Jeff’s seen it all, and has written a must-read book for those wanting to under- stand the jigsaw of media distribution and in what ways the web is influ- encing how, when and where money is made. —Michael Uslan, Executive Producer, Batman, Batman Begins, The Dark Knight Every Silicon Valley start-up working with Hollywood needs to know what Jeff knows. With his knowledge, you’re better able to fast forward the future of online video. Without it, you risk being stuck on pause. —Kevin Yen, Director, Strategic Partnerships YouTube Focal Press is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Linacre House, Jordan Hill, Oxford OX2 8DP, UK © 2010 ELSEVIER Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. Library of Congress Cataloging-in-Publication Data Application submitted British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-0-240-81200-7 For information on all Focal Press publications visit our website at www.elsevierdirect.com 10 11 12 13 5 4 3 2 1 Printed in the United States of America Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org Dedication For Eve, Charlie, Teddy and the dogs Acknowledgment First, and most importantly, I would like to thank my family, includ- ing my wife Eve and sons Charlie and Teddy. I spent many long hours writing, and deeply appreciate their tolerance and patience. As noted at the outset of the book, the business side of the enter- tainment business is often apprentice-based in terms of learning. Beyond family and friends, there are a lot of people I would like to thank for their help, either for being willing to bounce ideas off of, contribute quotes, or review sections, as well as educating me (and serving as mentors, past and present) and simply offering encourage- ment: David Anderman, Tonik Barber, David Barron, Eric Besner, Chris Carvahlo, Ed Catmull, Alex Collmer, Jason Donnell, Mike Dunn, Marion Edwards, Louis Feola, Jeff Fino, Bill Gannon, Alexander Goethal, Lynne Hale, Jim Hedges, Michael Hoff, Carrie Hurwitz, Barry Jossen, Jayant Kadambi, Jack Kennedy, Cathy Kirkman, Michael Knobloch, Michael Kohn, Josh Kramer, Kevin Kurtz, Peter Levinsohn, xvii Michael Lopez, George Lucas, Rich Lyons, Gary Marenzi, Jamie McCabe, Jim Morris, Sean McGinn, Jim Mullany, Ned Nalle, Daniel Paul, Tom Quinn, Gordon Radley, Hal Richardson, Curtis Roberts, Howard Roffman, Craig Sherman, Pablo Spiller, Eric Stein, Steve Swassey, Michael Uslan, Pedro de Vasconsoles, Kul Wadhwa, Tom Warner, Jim Ward, Tom van Wavern, Blair Westlake, Catherine Winder, and Kevin Yen And, of course, everyone at Elsevier/Focal, including especially Elinor Actipis, Chris Simpson, and Paul Gottehrer. CHAPTER 1 Market Opportunity and Segmentation — The Diverse Role of Studios and Networks More content from this chapter is available on www.businessofmediadistribution.com 1 Introduction This book provides an overview of how the business side of the televi- sion and motion picture industry works. By the end of the text, read- ers will gain a practical understanding of how a film, television, or video project moves from concept to making money. Stars make the headlines, but marketing and distribution convert content into cash. To explain how the system works, this book charts the path entertain- ment content takes from development to financing to distribution, and attempts to demystify the submarkets through which a produc- tion is exhibited, sold, watched, rented, or otherwise consumed. In summary, this book explains the process by which a single idea turns into a unique piece of entertainment software capable of generating over a billion dollars and sustaining cash flow over decades. I will also attempt to put into context the growing array of Internet and other new media opportunities for content, exploring the emergence of digital-based distribution systems and the blurring of lines with traditional outlets. With the potential of generating great wealth also comes great risk, and motion picture studios today can be seen as venture capitalists managing a specialized portfolio. In contrast to traditional venture capitalist investments, though, film investors risk capital on a product whose initial value is rooted in subjective judgment. Valuing creativ- ity is tough enough, but investing in a film or TV show often asks people to judge a work before they can see it — literally a step back from the famous pornography standard “I know it when I see it.” Bets are accordingly hedged by vesting vast financial responsibility over productions in people who have developed successful creative track records. Focusing too much attention, though, on creative judg- ment as opposed to marketing and financial acumen risks failure, and managers who can balance competing creative and business agendas often become the corporate stars. Analysts seeking trends may pro- mote “content is king,” but in the trenches success tends to be linked with marrying creative and sales skills. As a result of this mix, there is no defined career path to breaking into the business or rising to success within it. Unlike attending law school and rising to partner, or business school and aspiring to in- vestment banking, leaders in the film and TV world are an eclectic group hailing from legal, finance, producing, directing, marketing, and talent management backgrounds. Without a clear educational starting point or defined career path, how do these leaders and entrepreneurs learn the so-called “business”? 2 Beyond what I hope will be a “we wish we’d had this book” reply, the simplest answer is that many executives learn by some form of apprenticeship. As an alternative to starting in the mailroom, which will always remain both a legendary and real option for breaking into the entertainment business, this book will equip readers with a basic understanding of the economics and business issues that affect virtu- ally every TV show and film. Behind every program or movie is a multi-year tale involving passion, risk, millions of dollars, and hun- dreds of people. In fact, every project is akin to an entrepreneurial venture where a business plan (concept) is sold, financing is raised, a product is made and tested (production), and a final product is released. While this sounds simple enough, the potential of overnight wealth, a culture of stars, and the power of studios and networks serve to throw up barriers to entry that segment the industry and make the entertainment production and distribution chain unique. The emer- gence of online and digital distribution is changing the equation, enabling cheaper, faster production and new ubiquitous and simul- taneous access to content; whether sustainable business models evolve to efficiently monetize content to launch on these new plat- forms, or these outlets simply serve as a supplementary access point for content is the question of the day.