1.1.1. The audiovisual market
1.1.2. The film market
1.3.1. The audiovisual industry's sources of revenue
1.3.2. The film industry and its revenue
2.2.1. Purchase of distribution rights by television channels
2.2.2. High definition digital broadcasting
Marked by the development of digital transmission and the increasing diversification of communication media, this past year has signalled the entry of the audio-visual sector into a new era of abundant programming and content, facing the user-viewer with an ever-growing variety of choices.
In this context, the European film market is acquiring more strategic importance than ever as a key element in a much more diversified distribution universe. The renewed interest in national productions in cinemas everywhere is a positive indication of the real potential for European film in all kinds of media, and in particular on digital clusters.
As this report makes clear, the trends show that the European film industry is gathering strength and momentum on the European and international markets: the revitalisation of national productions, the growing phenomenon of production operators, the implementation of Europe-wide distribution strategies, the opening of large companies to external markets and the bigger investments which television channels are making in production, all bear witness to this.
The rate of growth of the sector in Europe is superior to that in the principal audio-visual markets of the world; this healthy growth is an indication that the sustained development of a strong and competitive film industry must be supported so that it can contribute to the greater cultural wealth and variety of the offerings of the audio-visual media.
At the same time, there is an awareness in Europe of the increasing presence of American capital in the development of digital television and the use and distribution of audio-visual works; this must deprive Europe of a substantial share of the profits that will eventually be generated by the revival of the sector.
To face the new challenges emerging from the current transformation of the markets, as well as the increasing threat from outside Europe, the European audio-visual industry must continue to work along three distinct lines to improve its competitiveness; it must
- develop financial investment, both in production and in the constitution of European user-right catalogues.
The audiovisual market
The audiovisual industry is entering a new age, the age of digital broadcasting, the trade marks of which are a profusion of images and increasing global consumption.
The three biggest audiovisual markets – Europe, Japan and the United States – are worth USD 173 billion (ECU 157 billion) in terms of final consumption(1). From 1994 to 1995, they expanded by 8.2%. The European market has grown fastest, at a rate of 13.1%,(2) followed by Japan at 10.6% with the US and, trailing far behind at 4.8%. Pay TV companies and the recording industry have seen the highest growth rates.
The United States accounts for 51% of the world audiovisual market compared with just 31% for Europe. However, the growth rates achieved by Europe in recent times point to a more vigorous and sustained expansion, driven by the trend for pay-as-you-consume services. By 2010, Europe may well have caught up with the US and have a comparable market. The aggregate turnover of the world's top fifty audiovisual companies in 1995 lends support to this idea: Europe accounted for 38% of the total against the US's 36% and Japan's 21%.
The last two years, 1996 and 1997, have seen crucial changes in the structure of the global audiovisual market. The mergers between a number of major companies, both in the US and Europe, have heralded some important new developments, highlighting the move towards greater concentration, both horizontally and vertically.
After the big US mergers and acquisitions (e.g. Viacom, Paramount and Blockbuster; Walt Disney and Capital Cities/ABC; Time Warner and the Turner Broadcasting Group; NBC and Westinghouse) came a wave of European mergers and agreements in late 1996 and 1997: Bertelsmann AG merged with Audiofina SA, leading to the emergence of CLT-UFA, with the biggest turnover in Europe; Canal Plus merged with Nethold; Canal Plus and Pathé concluded a distribution agreement; and Kirch and CLT-UFA reached a compromise on the development of digital pay TV in Germany. These were just the most important moves in an industry which is busy adapting to this new and increasingly competitive global market. Companies from across the EU are having to join forces to produce the investment and economies of scale required in this capital-intensive industry.
Europe still has a large trade deficit in this area, amounting to USD 6 billion, or some 250 000 jobs: making our companies more competitive is a priority if we want to take full advantage of our "old continent's" cultural and linguistic diversity, enable the European public to enjoy all the possible benefits of the new media, and boost the number of jobs in the industry (1.8 million) to the United States (2.4 million). The audiovisual industry has the potential to create significant number of highly qualified jobs. Europe needs to realise this potential.
The film market
The film market, including cinema screenings and videos, accounts for 21.9% of the world audiovisual market. Cinemas alone account for just 6.3% of the total(3).
The three biggest cinema markets – North America, Europe and Japan/Hong Kong – have all developed in very different ways. They also differ greatly in size: the EU market is half the size of the US market, while the Japanese market is half the size of western Europe's.
In terms of tickets sold, the European cinema market has grown by 18% since 1993, when the industry's revival began in earnest, having bottomed out at 590 million admissions a year in 1988. However, the American market started its recovery much earlier: ticket seats reached their lowest point in the 70s (at 820 million a year). The American recovery has been spread over 25 years, during which time ticket sales have increased by 60%.
It is significant that, at its peak in 1954, the European market, with annual ticket sales of 4 billion, exceeded the 3 billion sold by American cinemas in their heyday after the Second World War. Though for 40 years the American market outperformed Europe's in terms of growth, the 1990s have seen the beginnings of a convergence of growth rates – a sure sign of the current up-turn in Europe. In the 1980s Europe's growth rate lagged behind by around 15%, but in the early 90s the American lead was cut back to around 7.5% and, eventually, 0.6% in 1996.(4) As far as growth rates are concerned, the American and European markets are more in step with each other now than ever before.
The video market is another important part of the film market, accounting in global terms for 16% of the audiovisual market's revenues. Growth is modest at 4.2% for the world market and 1.3% for the US, but is stronger in Europe at 7.8% and Japan at 9.3%, where the markets are not yet fully mature.(5)
A recent study carried out for the European Commission confirmed the economic potential of the European audiovisual sector and the existence of a large potential for "audiovisual consumption" in Europe. For the period from 1995 to 2005 the industry's takings are expected to rise by 69% and the proportion of household spending it accounts for is forecast to increase from 33% to 48%.(6)
Digital technology, which definitively arrived in Europe in 1996-97, has had a great impact on the audiovisual environment. Resources are increasingly channelled towards "content", i.e. the production and distribution of films, television programmes and multimedia products. As the 21st century approaches, the focus is shifting away from the development of new communications infrastructure to images and content.
The audiovisual industry is becoming ever more diversified but, as a result of the increase in television-viewing and the rapid growth in the number of channels needing films to attract and keep their audiences, the importance of the feature film for the audiovisual industry will continue to grow. The volume of investment, particularly from television channels, is rising, cinema-going is on the increase and video sales are up.
Films have become part of a new, expanding industry which is now moving into other areas of activity such as training, education, information and trade, to name but a few, which will surelygenerate a large number of highly-qualified jobs.
After the major decline in cinema-going in Europe from 1960 onwards, the situation started to improve in the early 1990s, largely as a result of the pulling power of American films and the modernisation of cinemas, in turn linked to the rise of the multiplex on a number of national markets as well as the revitalisation of some European national film industries. Over the last four years, there has been an 18% rise in cinema-going in the EU, which accounted for 17% of total audiovisual "consumption" in 1996. If consumption of films through pay TV were included, that proportion would rise to an estimated 28%.
Between 1988 and 1996 there was a remarkable change in the breakdown of film consumption in the EU by format: video sales and pay TV made spectacular progress, while the figure for video rentals was quite small compared with the figure for the US market.
| EU, 1988 | EU, 1996 | US, 1988 | US, 1996 | |
| Cinema | 41.0% | 31.3% | 36.7% | 23.9% |
| Video rental | 39.9% | 14.2% | 26.4% | 32.4% |
| Video sales | 5.1% | 20.4% | 5.3% | 19.7% |
| Pay TV | 13.9% | 34.0% | 31.6% | 21.9% |
Source: Screen Digest
In the US, consumption of feature films continues to form an essential part of information and leisure-media consumption. Together home video, subscriptions and cinema-going account for 48% of total consumption, which is forecast to increase by as much as 49.3% by 2001.(7) The US film market is worth over USD 15 billion (ECU 13.6 billion), or 25% of the total US audiovisual market.
The audiovisual industry's sources of revenue
In Europe, as in the United States, changes in the audiovisual sectors' sources of revenue reflect changing consumption patterns. The increase in revenue from television advertising has been below average, while "direct" income, from cable subscriptions, pay TV, pay-per-view, video and cinema ticket sales, has grown fastest over the last ten years.
The European audiovisual industry's revenue amounted to USD 57 billion (ECU 51.8 billion) in 1995, with television, including income from advertising, cable, satellite and pay TV subscriptions, accounting for more than 80 % of this figure.
The foreseen diversification of the media will, in years to come, affect production, which will find outlets through multimedia and new types of services, as well as the traditional media. However, unencoded television will continue to dominate, with around two-thirds of the market, and will maintain its prime position as a cultural medium. The growth forecast for the audiovisual industry should bring with it a 55% rise in revenue for programme producers(8).
| Source of revenue | World | Growth 94-95 | United States | Growth 94-95 | Europe | Growth 94-95 |
| Advertising | 46.9% | 9.1% | 46.7% | 4.2% | 42.5% | 15.8% |
| Video | 15.6% | 4.2% | 18.6% | 1.3% | 10.9% | 7.8% |
| Cable | 13.1% | 12.2% | 20.6% | 10.0% | 7.7% | 23.0% |
| Licence fees | 10.7% | 3.5% | 0.4% | 3.0% | 21.4% | 2.8% |
| Cinemas | 6.3% | 4.5% | 6.5% | 1.8% | 7.2% | 9.5% |
| Pay TV | 7.4% | 14.7% | 6.2% | 4.4% | 10.7% | 22.8% |
| PPV | 0.5% | 1.0% | 0.0% |
Source: IDATE
The film industry and its revenue
The cinema occupies a steadily diminishing place in the business cycle and the revenue structure of the film industry in terms of consumption. While exploitation in cinema theaters (the so-called "show-case") provides the criteria for setting the price at which the film will put on the market in all the other medias, only a very small proportion of the revenue for a film comes from box-office takings, and that proportion is set to shrink further, to 5% by 2020 according to some forecasts.
The lion's share of the revenue comes from the sale of broadcasting rights to television channels (unencoded and pay TV) and videos. A number of companies generate extra income through side-lines such as video games and accessories relating to the film.
In Europe, income from video sales has exceeded box-office takings since 1994, and television is now the second biggest income-generator. Over the last five years revenue from films shown on pay TV has risen by 66%, making it the medium par excellence for the consumption of feature films in the EU. In four years, revenue from pay TV has risen to double that of video rentals.(9)
The market is being transformed by the development of pay-per-view, near-video-on-demand and VoD proper, as digital technology catches on. Television may soon become the biggest source of income for the film industry.
Disregarding the problems involved in producing financial statistics for European film production companies and for the films themselves, it is clear that there is an over-abundance of small production companies in Europe, not all of which are constantly producing. In fact there are more such companies than films produced each year.
There is no equivalent in Europe of the "studio" structure to which the American industry is so attached. Producers are not organised in any commercial structure which could properly be called a studio. The majority of European productions are made by small producers in a highly fragmented industry where 80% of companies produce no more than one film a year. However, the emergence of large integrated audiovisual groups should make it easier for European producers to supply products suitable for sale on international markets.
A number of the larger production companies are starting to look towards the US market, with pre-sales and distribution agreements with the "majors". One thing that has helped is the increasing tendency to produce a mixture of films in the local language and Hollywood-style, English-language films which lend themselves to international distribution. This strategy has helped European producers such as French majors Studio Canal Plus and Gaumont and the Spanish company Sogepaq, to boost their international sales spectacularly over the last two years.
PolyGram is one of the European companies currently applying a new strategy to its film division. Though its production criteria are the same as independent producers', it is not dissimilar to a major studio in terms of its profile and size. Having first built up a solid production structure and a European distribution network, the company, or more precisely PolyGram Films, set about penetrating the American distribution market. Its first move came in September 1997, with the launch of "The Game" on over 2000 screens in the United States, backed up by an ambitious marketing campaign. The next five big PolyGram productions are due to arrive on American screens by the end of 1997. The company's production output should rise now that it has acquired this new outlet.
In 1997, the British Arts Council introduced a scheme whereby funds from the National Lottery are disbursed through a system of six-year franchises for the production of English-language feature films. This could well lead to the establishment of a system of mini-studios, which in turn may result in a concentration of the European industry and encourage it to produce films for the international market.
In Europe an independent producer is one who is independent from broadcasters, whereas in the United States it is independence from the big film-production groups, the "majors", that counts.
Television is very differently structured from one European country to another and some national production industries are more open than others. To take account of this diversity, the European Commission felt it was inappropriate to define the term "independent producer" too strictly. However, the new "television without frontiers" Directive, adopted in summer 1997 by the European Parliament and the Council (10), provides that the Member States should establish a definition of "independent producer" in order to make it easier to apply the rule that 10% of broadcasting time or 10% of the programming budget must be allocated to independent producers.
Moreover, the Media II Programme also set out to bolster this part of the industry by concentrating its support this year on the task of promoting independent producers and distributors and helping them get a foot-hold on the market. In 1996more than 2000 independents were supported through around twenty-five promotion initiatives throughout the main international markets in support of the independents, of which there are over 2000.
Support for the programme industry has been one of the pillars of the Community's strategy for the audiovisual sector for almost ten years. The Media Programme, adopted in 1990, has encouraged the re-structuring of the cinema and programme industries, promoting certain working habits and forging cooperation links between the professionals, as required by the single market. Renewed in 1996, and allocated ECU 310 million over five years, the Media II Programme focuses on three key areas: training, the development of potentially successful works and the transnational distribution of films and audiovisual programmes.
The Programme does not contain measures directly concerning production but concentrates instead on the pre- and post-production stages. Nevertheless, the renaissance of the European film industry throughout the EU doubtless owes much to the support provided by Community schemes. By streamlining the instruments it used and identifying priority areas, the Community was able to exert a significant influence on the way the industry is structured. The mid-term assessment of the Media II Programme(11) is due in 1998. Over the five years of its duration the programme is expected to yield the following results:
Development grants (ECU 60 million)
– 30 multi-media investment funds – 1 400 projects (feature films, films for TV, documentaries, animation and multimedia)
Distribution grants (ECU 205 million)
– 1 700 cinema distribution campaigns, for 280 films – 2 000 works produced on video by 200 companies
– 250 television productions broadcast
– 100 catalogues covering 2 000 productions
– 100 promotion initiatives
Training grants (ECU 45 million)
– 200 training initiatives (involving 1 700 professionals and 650 institutions)
In addition to the measures referred to above and their effect on the structure of the industry, the beneficial effects of the Community's audiovisual policy are clearly visible: the industry has woken up to Europe. The people who are familiar with the realities of the market now take notice of the need for cooperation, to enable them to take advantage of the economies of scale and new outlets provided by the European single market in audiovisual products, the fastest growing audiovisual market in the world.
Production in Europe really started to take off in 1996: 610 films were made in that year alone in the EU, an increase of 7.8% on the previous year.(12)Co-productions accounted for 43.6% of the total. And the last few months have seen the conclusion or renewal of several agreements (between Italy and France, Spain and France, and Germany and Spain, for instance) that should increase the number of co-productions in the EU still further – a sign that there is a great deal of interest in this form of cooperation in the European film industry.
A strong revival of production took place in Italy, Spain and the United Kingdom, where output has risen by 80% since 1991. In 1996 UK annual production exceeded 100 films, for the first time in over twenty years. There was also a significant upturn in most of the countries of central and eastern Europe.
Many companies, such as Pathé, Canal Plus, Gaumont and PolyGram, started to produce commercial films for the international market. However, despite a substantial rise in total investment in production in the European Union (+3.3% between 1995 and 1996), the average investment per film, estimated at USD 3 million (ECU 2.7 million) in 1996, has not increased much since 1994.
| 1996 | F | UK | I | E | D | Others | EU |
| No. of films, of which: | 134 | 111 | 99 | 91 | 63 | 212 | 610 |
| national | 74 | 59 | 77 | 66 | 37 | 68 | 381 |
| co-productions | 60 | 52 | 22 | 25 | 26 | 44 | 229 |
| Investment in production (ECU million) | 577 | 605 | 224.8 | 141.2 | 235.1 | 221.5 | 2 004 |
| Average budget per film (ECU million) | 4.3 | 5.5 | 2.3 | 1.5 | 3.7 | – | 2.7 |
Source: Screen Digest
Film production is also on the increase in the United States: 686 films were made in 1996. And the average cost of a film was up by 6.5% in 1995, while promotion and marketing costs rose by around 9%. The average estimated cost of a film was USD 12.3 million (ECU 11.2 million), a figure which jumps to USD 39.8 million (ECU 36.2 million) for the films produced by the Majors (USD 60 million, i.e. ECU 54.5 million including promotional expenditure)(13).
| Market | 1996 | Average 1990-96 |
| 1. Hong Kong | – |
34.7 |
| 2. Iceland | 7.3 | 13.5 |
| 3. Switzerland | – | 5.1 |
| 4. Ireland | 5 | 3.3 |
| 5. Israel | – | 2.8 |
| 6. Sweden | 3.5 | 2.8 |
| 7. Norway | 3.2 | 2.6 |
| 8. Denmark | 4 | 2.5 |
| 9. France | 2.2 | 2.5 |
| 10. United States | 2.6 | 2.2 |
| 11. EU (average) | 1.6 | 1.5 |
Source: Screen Digest
The linguistic and cultural homogeneity of the American market, and its receptiveness towards commercial products made for mass consumption, are at the root of Hollywood's strength. The size and potential of the European market has been very well understood by the American industry, which has been adept at taking advantage of the weaknesses of the fragmented European film industry.
The increase in sales of American audiovisual programmes in the EU in recent years has produced an inevitable trade imbalance between the United States and Europe. The EU's trade deficit in audiovisual products for 1995 has been estimated at USD 6.3 billion (ECU 5.04 billion)(14).
The majors' export income has been rising strongly over the last ten years. In 1996 it was up 6% on the previous year to USD 5 billion (ECU 5 billion), or 43% of total revenue (estimated at USD 24 billion - ECU 21.8 billion). Ten years ago, exports accounted for only 30% of total revenue(15).
Over the last ten year exports to non-American television channels have taken over from cinema screenings and the domestic video market as the majors' main engine for growth. Sales to foreign unencoded channels jumped by an average of 21% a year from 1986 to 1996. The figure for the rapidly expanding market in pay TV was even higher at 32.3%.
In 1996, the EU accounted for 22.4% of the total turnover of the members of the MPAA. This translates to USD 5.2 billion (ECU 4.7 billion) in absolute terms. The majors' revenue from pay TV in Europe has increased by 56% and now accounts for 25.7% of their total income(16).
As well as exporting single programmes, the majors are now starting to export American theme channels digital to package operators and cable and satellite channels in Europe. A good example is the Disney Channel in France, which has surpassed all expectations, gaining twice as many subscribers as forecast in 1997. CanalSatellite, the French package offering seven US-based channels, and Canal Satélite Digital, the Spanish package with four American channels, are further evidence at this trend.
Though the big studios have expressed an interest in transferring a part of their production operations to Europe on several occasions, only three of them – Buena Vista International, Warner Bros and Sony Pictures Entertainment – have actually produced films abroad through links with local film-makers. So far most of the majors' investment outside the United States has gone into buying films which have already been made. They remain highly cautious about international co-productions because of the their complexity. Instead, they usually prefer to involve international directors and actors in their own productions.
Independent American producers who make up the membership of AFMA achieved a 21% increase in their export revenues from USD 1.4 billion (ECU 1.3 billion) in 1995 to USD 1.7 billion (ECU 1.5 billion) in 1996, demonstrating the extraordinary vitality of the independent sector. Sales were dominated by television, which accounted for 44.5% of the total, against 30.3% for cinemas.(17)
In Europe, which accounted for 55.7% of the American independents' total sales in 1996, the biggest markets for AFMA's products are Germany (second only to Japan), Spain, Scandinavia and the Netherlands. There has been a significant reduction in sales to the United Kingdom and France.
However, it must be pointed out that home-made productions have staged quite a come-back in Europe since 1996. At 63.2% this year, the proportion of American films in the EU is substantially down on previous years, especially in comparison to the early 90s, highlighting the improved performance of European films. Furthermore, the American distributors' market share has gone down (e.g. Warner) while that of European distributors (e.g. PolyGram) is up – by 4.2% in 1996.(18)
Although traditionally regarded as two distinct functions, distribution and screening have, since 1980, shown a tendency to become integrated in both Europe and the United States, with the larger distributors gradually increasing their market share. At the same time the large companies have become increasingly dependent on income from the distribution of a combination of feature and television fiction films without any clear demarcation between the two income sources. This trend is intensifying as a result of the excellent financial prospects opened up for distributors by packages of television channels.
With respect to the distribution of feature films, it is almost universally agreed that the difficulty of distributing European films is not so much due to their quality but rather to the weak and fragmented nature of distribution circuits. The American majors on the other hand have set up efficient networks giving them control of the sector in Europe.
However, the large number of distributors which used to operate in Europe is on the decline, some 300 having gone out of business in recent years. In 1996, 450 distributors were still operating in the European Union, but there is a trend towards concentration.
The large groups are beginning to develop Europe-wide distribution strategies. In recent years PolyGram took the first step by building up a network based on national distribution structures; this was followed by the agreement between Pathé and Canal Plus in 1997 to share their networks for the purchase and distribution of films in Europe. This group is becoming all the more substantial since it also covers films shown on pay television networks.
Now there is a hard bloc of distributors in Europe composed of a few integrated companies; while they may create problems for independent companies, they are beginning to challenge the American majors. Some of these companies have concluded cooperation agreements with American companies offering them the possibility of distributing European films in the United States and direct access to American catalogues for distribution in Europe.
In 1995-96, the film distribution market in the European Union grossed USD 1 760 million (ECU 1 600 million) - a 3.2% increase in market share. Distribution in the United States accounted for 45.8% of the world market - an increase of 7.6% against the previous year, grossing USD 2 250 million (ECU 2 045 million). Gross takings per film are much higher across the Atlantic than they are in Europe, where the average per film is USD 1 million (ECU 900 000) against USD 5.3 million (ECU 4.8 million) in the States.(19) Distribution remains highly concentrated in the United States, with the five main companies holding an aggregate 72.6% share of the market, which is almost wholly controlled by the top 10 national distributors.
In 1995, national films generated 103 million admissions in their domestic markets, that is 16% of the total audience in the European Union. Although aggregate figures for 1996 are not yet available, if we take the figures for the five European countries with the highest production rates in 1996, their average market share was 19%, 5 points up on 1995. The greatest increase was in British films, which have more than quadrupled their market share since 1993.
1995 |
1996 |
|
| Germany | 6.3 | 19.5* |
| France | 35.4 | 37.5 |
| United Kingdom | 10.2 | 12.8 |
| Spain | 11.9 | 10.8* |
| Italy | 21.1 | 23.6* |
Source: OEA * January-June
In the absence of data it is difficult to assess with any accuracy the proportion of non-national European films screened. Some data about the screening of non-national European films can be found in the study made by the FIAD (Fédération Internationale des Associations de Distributeurs) for the MEDIA II Programme. Average attendance topped 1 million only in the case of 21 of the 700 films under review; it was below 50 000 for the great majority of films.
In the EuropeanUnion, films seldom travel outside their country of origin in the European Union. In 1996, a total of 700 million tickets were sold in Europe as a whole, some 100 million tickets were sold at home for domestic productions, i.e. 16% of the market share against about 6% for European films outside their country of origin.
Recent information obtained from distributors by the MEDIA Programme for the implementation of the system of automatic support for the distribution of non-national European films shows that the bulk of the audience for these films is in France and Spain, which together account for almost 50% of the market for them. In a country like Spain, with no more than 14% of the total audience in Europe, a figure of 22% of cinema-goers for non-national European films is surprising. On the other hand the low figure for non-national European films in Britain, which is the third largest cinema market in Europe, is equally surprising given the success of British films in Europe in general.
| France | 23% |
| Spain | 22% |
| Germany | 13% |
| Italy | 10% |
| Belgium | 6% |
| United Kingdom | 3% |
| Other | 23% |
Source: MEDIA II Programme
Based on an analysis of 70% of the tickets sold in the European Union, the European Audiovisual Observatory has drawn up a list of the 40 greatest commercial hits in the whole of the European Union in 1996. Only 10 films are European productions, the first 20 are American, apart from Trainspotting in 13th place with 7.95 million tickets sold (Independence Day topped the list with 35 million). Films which were a success in Europe in general are on a par with comedies like Werner - Das Muß Kesseln!, Il Ciclone and Les Trois Frères, having only a limited geographical distribution, which demonstrates the limited market potential for this genre outside national frontiers.
The third part of the MEDIA II Programme encourages transnational distribution of films and audiovisual programmes in cinemas, on video and multimedia and on television. The main objectives of the measure are to promote groups of distributors, multiply the number of television co-productions and build up catalogues of European programmes. It also supports the screening of European films in cinemas via the Europa Cinemas network, and the promotion of European works and companies on the main markets of the industry.
Coordination and cooperation are developed between European distributors in order to open up prospects for the transnational distribution of European films. On average six distributors can come together to promote a single film in the framework of distribution campaigns supported by MEDIA; a joint effort may involve as many as 10 distributors for a particularly promising film. The average budget for such films is about ECU 3 million.
This measure achieved remarkable results in 1996: 50 European films were distributed throughout Europe, leading to 305 launch and promotion campaigns organised by 101 distributors; 450 European cinema and television films were published and distributed on video cassettes; 458 European works were included in catalogues sold by 22 European distributors. In the first half of 1997, 21 European films were supported, with an average of 105 launch campaigns organised by 64 distributors.
In 1997, with the unanimous support of the Member States, a new system of automatic support for film distribution proportioned to the number of cinema tickets sold, has been added to selective support for transnational distribution campaigns. The system seeks to support the wider distribution of non-national European films in Europe outside the country of production. The amounts granted are based on parameters which take account of the size of the market and origin of the film, and they must be reinvested in production financing in the form of guaranteed minimum amounts or in the distribution of non-national films.
The underlying idea is to promote and develop links between production and distribution, the better to meet public expectations.
Given the lack of harmonised ticketing and box office systems in Europe, the first step in calculating Community support is to collect information on non-national European films distributed in 1996. Some 123 distributors located in 18 European countries have supplied data concerning 850 distribution campaigns for 400 films, representing a total of nearly 30 million admissions. France, Spain, Germany and Italy are the countries with the highest numbers of admissions for non-national European films. Spain heads the list for the number of non-national European films distributed, with 121 titles, followed by Belgium, Portugal and Austria.
(Declaration of admissions in 1996*)
| Country | No of distributors | No of films screened | No of admissions |
| Austria | 4 | 73 | 1 020 852 |
| Belgium | 12 | 89 | 1 936 497 |
| Denmark | 7 | 43 | 788 132 |
| Germany | 10 | 40 | 4 030 272 |
| Spain | 19 | 121 | 6 665 380 |
| Finland | 6 | 55 | 161 675 |
| France | 19 | 62 | 7 179 023 |
| Greece | 4 | 29 | 422 114 |
| Ireland | 2 | 10 | 358 993 |
| Iceland | 3 | 33 | 53 257 |
| Italy | 6 | 39 | 2 997 208 |
| Luxembourg | 6 | 40 | 24 694 |
| Netherlands | 6 | 41 | 448 516 |
| Norway | 5 | 56 | 1 184 265 |
| Portugal | 3 | 77 | 683 503 |
| Sweden | 6 | 39 | 794 239 |
| United Kingdom | 6 | 23 | 839 046 |
| TOTAL | 124 | 870 | 29 587 666 |
Source: MEDIA II Programme (Data anailable at: http://www.d-and-s.com.)
* Raw data being checked by national bodies.
Promoting the screening of European films in cinemas is supported through Europa Cinemas. Today there are 658 cinemas in the network, evenly distributed in 33 countries, showing 61% of European films, 45% of which are non-national European films and 16% national films. In 1996, in the European Union alone, Europa Cinemas sold 12 million tickets (i.e. 1.7% of total ticket sales in the European Union) and made ECU 60 million in box office takings for European films.
Since 1996, the MEDIA II Programme has supported the Euro Kids network, an initiative aimed to increase the number of European films for children shown in cinemas.
Of an estimated 141 million households in the European Union, 89 million (over 60%) in 1995 and over 100 million in 1996 had at least one VCR. Of an estimated 95 million households in the United States, 78 million (83%) had a VCR. The growth rate of the VCR market, depending on saturation levels, stands at 3.7% for the European Union and 0.6% for the United States(20).
Video receipts represent about 16% of the audiovisual industry's global income, with a spectacular rise in sales in recent years to the detriment of video rentals, which, nonetheless, have been picking up again since 1993.
In the 15 Member States of the European Union the volume of rentals has stabilised at around 640 million in the last three years. Video sales rose from 92 million in 1990 to 220 million in 1995, and today have overtaken receipts from rentals by over 65%, and have overtaken cinema box office takings in Europe. There still seems to be considerable room for growth for video sales, since 40% of VCR owners do not buy pre-recorded cassettes: recent studies have shown that managerial occupations and the professions account for only 12% of sales, compared with retired persons with 23.8% and manual workers with 19.3% .
In 1996 receipts from the video market - sales and rentals combined - topped ECU 5 billion for the first time. This sector has recorded modest growth world-wide and is continuing to expand in Europe (+7.8%), where, although the market has multiplied by 10 in the past decade, it is still below the level in the United States.(21) The strongest national markets are in the United Kingdom (26% of the total European Union market), France (22%) and Germany (16.5%). With Italy and Spain, these markets account for 78.5% of the turnover in Europe(22).
An analysis of the European market in terms of genre shows that feature films, especially American films, constitute the largest segment (43%), followed by animated films for children (37%). The remaining 20% includes a wide variety of productions: documentaries, sports, music and shows. Editorial policies confirm the wish to offer a wide range of both films and audiovisual works. In 1996, many new titles were added to the repertory available. The United Kingdom was the market leader, publishing 4 600 new titles in 1996.
Estimated total domestic video consumption in the United States, at USD 16.5 billion (ECU 15 billion), also increased (+7% in 1996). The 30% increase in Disney's incomes is at the heart of the good results. The very effective marketing of animated films for children continues to be at the root of the company's success, thus confirming the positive trend of home video collecting. Action movies are also starting to benefit from this consumer trend.
The key role of the video market for the film industry is highlighted in the United States, where total income from video sales rose from USD 7 billion (ECU 6.4 billion) in 1995 to USD 8.3 billion (ECU 7.5 billion) in 1996.(23) Video sales provide over 40% of the income of a feature film, compared with 20% from the box office(24). Direct sales of packaged audiovisual products (video, laserdisc, and soon DVD - digital versatile disk) is accounting for an increasing proportion of the film and television industry's income.
The revival of the video market cannot be regarded as altogether stable. 1998 will see new competitors for leisure time and expenditure. More films will be shown on television, and consequently there will be less demand for rental or purchase. The advent of digital television, especially the supply of films by PPV, VoD and near-VoD, and television by Internet and the DVD format will be a serious threat to the video market.
The launch of DVD (digital versatile disk) in Europe in 1998 will be an important step in the supply of programmes in pre-recorded format. The new digital format is likely to become a new source of growth for publishers, and should result in a new mode of home viewing of films. In addition to high resolution (500 points per line, as against 340 on a laserdisc and 250 on a VHS cassette), DVD offers better sound quality than a CD. It offers a number of interactive functions (up to eight languages and about 32 sub-titled versions) and the possibility of selecting either 4/3 or 16/9 format.
Recent analyses, however, confirm that the new technology will not oust a popular medium like VHS, nor will its development be halted. It will continue to provide the main market for recorded audiovisual programmes.
At present 800 audiovisual festivals take place during the year in the European Union for an estimated public of around 10 million. Audiences at these festivals have grown by over 66% between 1992 and 1996, which is testimony to the popularity of these events with the European public.
The festivals play a prime cultural role as an alternative method of film distribution to the commercial cinema circuit, and enable the public to see films which would otherwise not have been distributed very widely, if at all. They also play a considerable social role, offering the public, sometimes far from major conurbations, a rich and diversified programme. They also play a part in bringing the world of the cinema to young people and introducing them to other cultures. In addition, since they are the main channel for the circulation of European films, festivals have a commercial function too, very often launching campaigns for the distribution of the films shown, especially when they receive a prize.
Every year, the European Union provides active support for these events, which is a real encouragement for scheduling European works. In 1996 almost 450 applications were received and 64 festivals were supported and attended by some 2.5 million people.
Since the festivals are committed to European programming criteria, this Community measure has a positive overall impact: in four years (1992-96) European films shown at festivals in the European Union increased their share by nearly 45%. Programmes for supported events are almost 80% European, and 75% are non-national works. Thus they play an essential role in making European cinema more widely known. In addition, they have a measurable commercial impact: in 1996, nearly 600 films of all types were purchased by distributors following their screening at supported festivals.
More than 100 European festivals were recently grouped under the "European Coordinationof Film Festivals" to enable them to compare experience, work together in a broader European framework and seek to resolve collectively problems like subtitling or the spiralling cost of copies.
In line with the upward trend noted in 1991-94 there was a 3.61% increase in the number of cinemas in 1994-95. The total number of cinemas in the European Union is 20 208. The same trend can be observed in the United States where the growth rate is still higher (+6.78%) and the number of cinemas totals 29 731.(25)
Attendance has risen by 18% since 1993, the year when the recovery started. The European market is only half the size of the American market even though the European population is 25% larger than the United States'. In the last 10 years, 1996 was the record year, when the estimated growth rate of attendance was over 7%, with 700 million seats having been sold. The growth potential has not yet peaked, considering it is estimated that the annual average is 1.8 cinema visits per person in Europe, compared with 4.2 in the United States.(26)
Audiences are growing most rapidly in Spain, and this year the United Kingdom and Germany may oust France from pole position. In the European Union the five largest markets, which are also the largest producers, account for 85% of the seats sold.
| Country | 1995 | 1996 | Trend |
| Germany | 124.5 | 132.9 | +6.7% |
| Spain | 89.1 | 101.1 | +22.2% |
| France | 130.1 | 136.3 | +4.8% |
| Italy (6 months) | 44.3 | 46.6 | +5.2% |
| United Kingdom | 114.9 | 123.8 | +7.7% |
| European Union | 652.2 | 706.2 | +7.3% |
| United States | 1 222.2 | 1 265.0 | +3.5% |
| Japan | 127.0 | 119.7 | -5.7% |
Source: EAO
| FR | DE | UK | E | I | BE | Other | |
| 1994 | 19% | 20% | 18% | 13% | 15% | 3% | 12% |
| 1996 | 19% | 19% | 18% | 14% | 7% | 3% | 20% |
Source: EAO / Le Film Français
The recovery of the cinema sector was probably triggered by the modernisation of cinemas and the spread of multiplex cinemas, which increased by 15.8% in 1996 against 1995, accounting for 17.4% of the pool in Europe. The expansion of video and pay television has also played an important part in the recovery. Although initially regarded as being in competition with cinemas, the growth of these markets, based partly on the attraction of successful films in cinemas, has contributed to the film-going culture and public interest in the cinema, stimulating demand for high quality feature films.
In 1996, in conjunction with the growth in audiences, there was a real growth in box office takings of 2.5% against 1995, bringing the total to ECU 3 750 million (USD 4 134 million),(27) in other words over one third of receipts world-wide. Data for several countries for the first six months of 1997 confirm the recovery: the increase of 15% in Germany and 10.6% in the United Kingdom are the first signs of a real turnround in the European cinema market.
Over 60% of box office takings on the five main European markets went to five companies, subsidiaries of American studios (United International Pictures, Buena Vista, Twentieth Century-Fox, Columbia-Tri Star and Warner Bros). There are, however, remarkable differences between France, Italy and Spain, where the majors' market share is between 45% and 55%, and Germany and the United Kingdom, where their share is between 70% and 80%. The largest independent on each local market obtained on average no more than 15% of box office takings.
In 1996, sales in European cinemas accounted for 23.8% of the aggregate revenue of the American majors for a total of USD 1 174 million (ECU 1 067 million). The 16.6% growth was termed spectacular by the MPAA compared with the relative standstill of cinema receipts in the United States.
Last year cinema box office takings in the United States reached their highest level since 1959, with USD 5.9 billion (ECU 5.3 billion) and 1.26 billion tickets sold. However, rising costs cut into producers' profit margins. The big budget releases in the summer of 1997 reached record amounts of around USD 100 million (ECU 91 million) for production costs, and often topped USD 40 million (ECU 36 million) for promotion: never have so many blockbusters come out in a single year.
Audiences increased by 3.5% in 1996 and receipts went up by 7.6%. The market share of American films was 96%. In total, 421 new films were distributed, including 216 by member companies of the MPAA which includes the large Hollywood studios.
In 1997, the American feature film industry will probably strike a new record with over USD 6.2 billion (ECU 5.6 billion) of box office takings following the successful release of over 10 films in the summer, which will probably make over USD 100 million (ECU 91 million) in receipts before the end of their American career. Cinema receipts in the first six months of the year are already up by 18% on the same period in 1996.(28)
The number of multiplex cinemas continued to grow in 1996. At the year-end there were 3 862 screens in multiplex cinemas, a 15.8% increase over the previous year; screens in this type of complex now represent 17.4% of the total. In a few years, two thirds of admissions in Europe will probably be in multiplex cinemas.
Multiplexes are the new generation of cinemas and have been and will continue to be the engine behind the growth in the number of cinemas. Over 2 500 screens will probably be set up by 2000 in Europe, and one may speak of a genuine strategy to secure a hold on the available space on the various markets.
Consequently, it is not surprising that many American chains are already concentrating their efforts on the expanding European market. Nevertheless, only two operators can claim to be setting up Europe-wide networks of multiplex cinemas - UCI and Warner Bros. Their strategy is naturally based on obtaining the best space for their home-grown productions.
Mainly through its joint venture with the Australian Village Roadshow and other local partners like Lusomundo and Sogecable, Warner Bros is planning to build 320 multiplex cinemas in the next three years in Europe(29).
UCI, a Paramount and Universal joint venture, is planning to invest UK£ 200 million (ECU 290 million) in expanding its pool of multiplex cinemas, mainly in Italy and Poland, and extending its existing installations in Austria, Germany, Spain and the United Kingdom. AMC has similar projects, and the recent Sony Retail Entertainment and Cineplex Odeon joint venture, which resulted in Loews Cineplex Entertainment, is also likely to have repercussions on the construction of new multiplex cinemas.
European distributors are also present in the line-up. Virgin has announced its wish to build at least 20 new multiplex cinemas before 2000, and has tripled its budget for the construction and renovation of cinemas. Mr. Branson's group also wants to extend its chain of cinemas to other European countries, in particular France.
The British firm Heron has similar projects: it plans to invest UKP 135 million (ECU 196 million) in Spain and France. In Scandinavia, the Swedish Sandrews Film and the Norwegian Schibsted have set up Sandrews Metronome Theatres to establish a multiplex chain in their respective countries. The Belgian Kinepolis group continues to expand with multiplexes in Belgium, France, Spain and the Netherlands. In France, despite more restrictive legislation limiting the growth of this type of complex, the three main players - Gaumont, Pathé and UGC - are planning to expand their ownership of cinemas. In Germany, in only the second half of 1997, 25 new multiplex cinemas should open their doors: in particular Flebbe and the UFA Theater are in competition with UPI and Warner for strategic sites.
Over-capacity is likely to develop in one or two years' time since competition will be fierce in some towns where several multiplex cinemas will be competing for a public, which although growing, is nonetheless limited.
The average budgets of feature films in Europe have been rising steadily since 1985. However, although between 1995 and 1996 aggregate production investment in Europe rose by 3.3% to USD 2.205 billion (ECU 2.004 billion), the average investment per film, estimated at USD 3 million (ECU 2.7 million), is only a little higher than in 1994, demonstrating a divergence between the strong development of the audiovisual market and the rate of investment in cinema productions. The United Kingdom, France and Germany had the largest average production budgets in Europe, all three being in excess of the European average.
The situation is different in the United States, where production investment is still rising, at four times the European levels in the case of the independents and twenty times for the Hollywood majors (including promotion costs).
Audiovisual financing is undergoing major changes world-wide, notably through the increasingly close relationship between cinema and television production and distribution. The US majors are producing as many feature films as television fiction pieces, and in Europe the broadcasters are expanding their low-budget long-film productions.
In the vast majority of EU countries production is gradually being integrated into the cinema distribution system. Distributors are more and more keenly aware of the need to invest upstream and expanding their financial involvement in production, investing in the acquisition of film rights. Producers, meanwhile, are becoming aware of the importance of an integrated production, distribution and exploitation structure for the success of a film.
There is no typical structure for the financing of a film in Europe; there are many varied sources of finance. The proportion accounted for by the television channels and by the major audiovisual groups has become crucial. The rate of subsidisation is higher for low-budget films than for more ambitious projects based on a commercial strategy and national and Community public investment accounts for less than 25% of total production investment in Europe.
Changes are also under way in the banking industry's involvement in production financing, which is traditionally confined to discounting bills or lending on a small scale. Following the example set by the EIB, which invested in cinema production for the first time in 1996 with a credit of ECU 71 million to PolyGram FE, guaranteed by ING Bank Media Finance, several banks are now considering opening up new lines of business in this risk sector which is likely to become a vital response to the need for audiovisual content as the information society flourishes.
The development of a film project is crucial to its success, as its future prospects on the international markets are heavily dependent on it. Writing the screenplay, seeking partners, devising the production financing plan and planning the marketing and distribution are the preliminary stages in running a project that culminates in the beginning of production proper.
European producers have difficulty in investing adequately at a stage traditionally regarded as secondary to the production process and one involving considerable costs and entailing heavy risks. The number of projects at the development stage in comparison to the number in production is still very low in Europe, as is the level of investment at this stage in comparison with the total cost of a film. On average one film is produced per four or five at the development stage in the EU, whereas in the United States the proportion is more like one to ten. And the portion of a film's budget devoted to development is only around 2% in Europe, as against 7%-10% in the United States.
The Media II-Development Programme, with a financial package of ECU 60 million over five years, aims to share this risk with production companies by proposing reimbursable loans. There is a threefold objective of encouraging companies to plan the development stage as fully as possible, expand investment at that stage and abandon projects that lack real commercial prospects.
At the end of the first year of operation, the programme's objectives are on the way to being attained. Loans have been given to the best performing production companies and to the least developed audiovisual industries. Interest in this type of support is 25% up in 1997, which bears witness to producers' growing awareness of the importance of investment at this stage of production.
There is a great deal of difference between Europe and the United States in terms of the amount of money ploughed into marketing films. The production and marketing budgets for an American film tend to be roughly equivalent, whereas the marketing side of things is still underdeveloped for European films. The figures show that 50% of the total budget of an American film goes towards marketing, compared to only 3% - 6% of a European film budget. In 1996, Hollywood spent the equivalent of 30% of box office receipts on promoting films in the United States, with more than a third of studios' advertising budgets being spent on television advertising. Television is becoming an important means of reaching people who may not be frequent cinema-goers but may rent or buy the videos of films and spend money in the increasingly important area of film merchandising.
The soaring costs of production and publicity and the increasingly fierce competition from summer blockbusters have reduced the profit margins of Hollywood studios, which are now at their lowest level for thirty years. In the last few years, additional sources of revenue such as film soundtracks, merchandising and partnership deals with organisations outside the film industry have been increasingly used to reduce the risks.
Film soundtracks are now important marketing instruments for both the film and music industries. They have become a means to promote films without over-inflating the marketing budget, and a much-needed source of revenue for producers.
With film merchandising, the aim is to create an identifiable commercial brand linked to the film. This improves publicity both for the film and the spin-off products. It is not uncommon for the revenue from merchandising to exceed box office profits from the film itself: for the recent film Batman and Robin, the revenue from spin-off products alone totals more than a billion USD (ECU 900 million) to date and is still rising. When 101 Dalmatians was released, licences for 17 000 different products were issued, and the American magazine "The Licensing Letter" estimated that in the United States, the derived rights from cinema and television were worth around USD 15.7 billion (ECU 14.3 billion)(30).
The Star Wars series, which had made profits of USD 3.9 billion (ECU 3.5 billion) by the end of 1996, is a perfect illustration. Less than half of that was from box office receipts (USD 1.3 billion / ECU 1.1 billion) and the sale of video cassettes (USD 500 million / ECU 454 million), the rest coming from the sale of toys, video games and CD-ROMs, clothing, books and comics(31).
The other source of supplementary revenue comes from partnership deals with organisations outside the film industry, particularly fast-food restaurant chains and games manufacturers, which jointly promote spin-off products. For example, Disney concluded a ten-year agreement with Mattel and McDonald's, Universal and Burger King joined forces for the launch of The Lost World, and Taco Bell and Warner Brothers for Batman, etc.
Nowadays, it is vital to think about long-term strategies and making the most of the profit-making potential of a film to reduce the financial risks as far as possible. Under pressure from the American example, promotion of European films is about to undergo a revolution and European producers are beginning to recognise the potential of supplementary sources of revenue. Examples are the two most recent successful German cartoons, Werner - Das mu« kesseln! and Das kleine Arschloch (audiences of 5 and 3 million respectively), themselves adaptations of comic strips, which were very successful in terms of the sale of clothing, keyrings and other novelties.
The merchandising campaign for the last Luc Besson film Le Cinquième Element is another illustration of a carefully thought out European operation: "Le Cinquième Element" menus are on sale in French outlets of a fast-food chain and toy departments in the big stores boast a wide range of spin-off products: video games, model vehicles and clothes.
At present, the banking industry's involvement in film financing is confined to lending on the basis of advance sales contracts with television channels or promised public funding, and providing "gap" financing for films. Only a very small number of specialised banks and financial organisations are active in the European audiovisual market (Cofiloisirs, Coficine, UFCA in France, BNL in Italy, Banco Exterior in Spain, ING in the Netherlands, BIL in Luxembourg, Guinness & Mahon, Coutts and Barclays in the United Kingdom etc.). In some countries, guarantee funds have been set up to minimise the risks associated with this type of investment (for example, in France (IFCIC) and in Spain).
Finally, very few banks grant "corporate" type loans to production or distribution companies, unless they are large, well-established audiovisual groups with assets in the form of catalogues of rights.
Nevertheless, encouraging banking establishments to invest in the film and audiovisual industry is one of the responses to the increasing demand for images in an audiovisual market in rapid expansion as a result of the explosion in the number of digital television channels and multimedia services.
To reduce the risks for private sector financial operators while encouraging them to invest more in audiovisual programmes, the European Commission proposes the setting up of a guarantee fund, which would benefit the production sector directly by helping to increase the funding available for making European works of fiction for cinema and television, with international appeal and profit-making potential. Such a catalyst would contribute not only to the development of original productions but also to the establishment of catalogues of licensable rights whose value would increase over time, given the lengthening of the lifecycle of films as a result of the secondary market for new services.
The Guarantee Fund is eagerly awaited not just by the audiovisual industry but also by the banking sector, whose view is that it will allow a comprehensive approach to banking rather than the current piecing together of geographically restricted funds imposed by the compartmentalisation of national financial systems.
If an initial ECU 90 million were to be allocated to the fund, it is estimated that, over a period of ten years, it would contribute to the funding of almost a thousand productions (415 films for the cinema, 215 television programmes, 60 catalogues) - around a third of European coproductions. With a multiplier coefficient of 5, the lever effect would be particularly important, since production companies would have access to financial resources many times greater than the fund's capital. While complementing the existing instruments (national aids, MEDIA programme, Eurimages), it would also play a key role in affirming European culture, developing quality European productions and building up a range of programmes to rival those from the other side of the Atlantic.
At present, following the unanimous adoption of the European Parliament's favourable report on 21 October 1996, discussions in the Council are tending towards the setting up, for an experimental period of five years, of a European Guarantee Fund of ECU 60 million.
It is difficult to obtain precise figures on the investment of European television channels in production - either as sole producers, coproducers or purchasers of distribution rights. An additional problem is the distinction between investments in television drama (films for television, series, mini-series etc.) and films for the cinema. However, the total amount is estimated at a little under ECU 15 billion, of which three-quarters comes from German, British, French and Italian broadcasters(32).
Only the United Kingdom, Italy and France oblige television channels to invest in the film industry(33). Consequently, the investment by these three countries in the film industry is substantial. Of the 77 films currently in production in the United Kingdom, 32 are part-financed by broadcasters (14 by the BBC)(34). In Italy, a new law compels public broadcasters to invest 20% of the licence fee in producing drama for television or the cinema, and private television companies to devote 30% of their total investment budget in the production or purchase of European drama. In France, 42% of total investment in the film industry comes from television channels, of which more than half (FRF 706.3 million/ECU 107 million in 1996, 23.4% of total investment) is from advance sales and productions by Canal+(35).
In many countries where there is no obligation to invest, the role played by television channels in productions for the film industryis nonetheless considerable: in Germany, about 50% of films are co-produced by television companies; the amount invested in production by the two public broadcasters, ARD and ZDF, totals more than DEM 1 billion (ECU 500 million)(36).
It is only recently that private German television companies have been investing in films for the cinema as well as television drama. Although coproductions are still quite rare, the companies have agreed to make a contribution of DEM 30 million (ECU 15 million), over two years, to national or regional support funds. In addition, CLT-UFA and Pacifica Entertainment have just set up an investment fund of more than ECU 110 million for independent German productions, in exchange for ownership of international rights to the films funded.
In Spain, the public broadcaster RTVE invested ESP 2 billion (ECU 12 million) in purchasing the distribution rights to Spanish films in 1997, and Sogecable plans to spend ESP 2.8 billion (ECU 16.9 million) on such rights between 1996 and 1998.
At the beginning of 1997 there were some 320 digital channels distributed by satellite in Europe, compared to ten one year earlier; this is set to rise to more than 400 by the end of the year.
These new services have generated an enormous demand for programmes. However, only a few of the digital channels in the new packages are film channels - most are special interest channels given over to sport or music or other subjects such as animation, history, cars, education, travel etc. An increasing number of existing unencrypted channels are also being included in the various packages of channels.
Film channels can be categorised according to genre (classics, westerns, comedies, science fiction etc.) or degree of exclusivity ("premium" films, second-tier films, stock films etc.), most of which come from existing stocks. Channels dealing in exclusive films, which often charge a higher subscription fee, are building up their stocks through advance sales agreements (output deals) or purchasing the distribution rights of recent films.
Purchase of distribution rights by television channels
The cost of distribution rights has risen notably (by an average of 20% to 25% between 1993 and 1996). This inflation is mainly due to the following:
· the introduction of several pay channels broadcasting premium films;
· lucrative output deals struck by powerful audiovisual groups to beat rivals to exclusive distribution rights;
· extensive purchasing of unencrypted channels (free TV), which will continue to play a decisive role in the television market in the next ten years(37). One of the largest operations to date - RTL's deal with Warner and MCA - is worth DEM 2.5 - 3 billion (ECU 1.25 - 1.5 billion).
Contracts for the purchase of distribution rights are not without their problems, as they involve the investment of considerable sums of money in the hope of a medium-term return on investment, even though there is a risk that digital channels may not perform as well as expected. In this regard, the opening of the Kirch group's digital platform to its old rival Bertelsmann, announced in July 1997, is significant.
It should also be emphasised that the lion's share of investment in the digital distribution rights of films has been in Hollywood films. At present, only one European producer, Polygram, has concluded a significant contract with a pay channel (digital or otherwise) for the distribution of its films (Canal+). However, the resurgence of interest in national films in the cinema gives some hope of a better future for European films in digital packages of channels.
High definition digital broadcasting
Another advantage of digital technology is that it makes high definition broadcasting possible. In the medium term, this may open up new opportunities for the distribution/exploitation of films for the cinema, which can be broadcast by satellite under conditions which almost match the quality of a cinema showing, while retaining the flexibility to provide subtitling or soundtracks in various languages.
Several European initiatives are currently experimenting with this new technology, in particular FLASH TV (Flexible and Advanced Satellite Systems for High Definition TV), CINENET, CYBER CINEMA (developed by the European Audiovisual Centre in Babelsberg) and VTHR (Vidéo Transmission à Haute Résolution - High resolution video broadcasting).
Producing films for the cinema is a very costly business which requires that full commercial advantage be taken of all forms of distribution. As the distribution methods may, at various times, compete with or complement each other, they must be applied in strict sequential order.
Media chronology ("windows") is not a legal creation but a fundamental component of the commercial strategy of rightholders. It existed before national laws were introduced to regulate it and has always been included in contracts between producers and other rightholders. With the exception of France and Portugal, legislation in European countries allows producers the freedom to manage their films' media chronology independently.
Feature films and audiovisual works are managed on a territorial basis in Europe, sometimes encompassing larger language areas, as rights are never sold at European level. These territorial divisions represent the accepted structure of the audiovisual market in Europe and the world.
Continuing the system of complete contractual freedom in relation to the territory-based management of the media chronology is vital for the profitability of films. The European feature film and television industries are overwhelmingly in favour of maintaining contractual freedom and opposed to introducing new rules in the area, for example for video or new services.
This position is in line with the criterion laid down by the "Television without frontiers" directive, Article 7 of which abolishes the minimum periods which must elapse before feature films are released on television. The only remaining constraint laid down by the directive is the obligation on Member States to ensure that agreements between broadcasters and rightholders on the timing of broadcasts are respected. Contractual freedom is therefore enshrined as a key factor in the cultural and economic development of the film industry.
At present, new audiovisual services are developed in Europe on the basis of territories or language areas, as digital decoders are managed by territory rather than on a single market basis.
Advances in digital technology and platforms offering packages strengthen the trend towards output deals - long-term exclusive arrangements on film rights. This practice, which is common in Germany, where the period covered may be from 8 to 10 years is, however, harmful to small, less profitable films, whose circulation is reduced because such contracts prohibit any other showings in the same territory. The imposition of limits on the length of such exclusive deals might help to solve this problem.
However, the new services are not yet sufficiently developed for definitive conclusions to be drawn about them. From a marketing viewpoint, distribution arrangements have not yet been defined, but with the current increased competition for new images and methods of distribution, rightholders will undoubtedly be the winners.
Where pay-per-view television, offered by digital platforms and certain cable companies, exists, it tends to come after the video and before pay television slot in the media chronology of films and can, therefore, compete with video. The films offered are usually stock films, which is due both to the very low revenue currently generated by this medium and to the difficulties experienced by operators, particularly newcomers to the market, in acquiring film rights. However, the main pay-per-view "product" in Europe remains major sporting events.
Once pay-per-view is sufficiently developed, it will probably have access to recent films. For these, PPV should occupy the same time slot as video rentals, while for older films, it could be one of the methods of exploiting the secondary market, either in the same time slot as video sales or in what could be termed a second period of pay television - after 12 months - or even after airing on unencrypted television, once all periods of exclusivity are over. This increase in the number of media time slots would become an additional source of revenue for rightholders.
As far as the chronology of off-line digital media is concerned, films on CDI or CD-ROM are brought out during the video time slot, as are productions on digital video disc (DVD). However, the rights from DVDs cannot yet be fully exploited by rightholders because of the lack of anti-pirating legislation for this medium.
On-line consumption of images via computer and the distribution of films via the Internet are other important challenges for the film industry, as analysts predict a huge boom in this new and still not sufficiently developed form of film consumption.
It is clear that the plethora of media and means of consumption offered by digital transmission will make it difficult to manage the revenue of the film industry, and that the freedom to exercise rights will be an essential weapon for conquering new markets. Only greater flexibility in managing rights will allow producers to make the best use of their catalogues and provide new productions in response to the ever-increasing demand for films and programmes.
(1)Final consumption of audiovisual products: radio and television advertising, subscriptions to basic cable, PPV services, video sales and rental, cinemas, pay TV and TV licence fees.
(2) IDATE, Analyse Sectorielle (November 1996).
(3) IDATE, Analyse Sectorielle (November 1996).
(4) Screen Digest (August 1997).
(5) European Audiovisual Observatory, Annuaire Statistique 97.
(6) Norcontel: Economic implications of new communication technologies on the audio-visual markets (March 1997).
(7) Source: Veronis, Suhler & Associates.
(8) Norcontel, Economic implications... (March 1997).
(9) Screen Digest (January 1997).
(10) Directive 97/36/EC of the European Parliament and of the Council amending Council Directive 89/552/EEC on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the pursuit of television broadcasting activities (OJ L 202, 30.7.1997).
(11) Council Decision 95/563/EC of 10 July 1995 on the implementation of a programme encouraging the development and distribution of European audiovisual works (Media II - Development and distribution) (1996- 2000) OJ L 321, 300.12.1995; Council Decision 95/564/EC of 22 December 1995 on the implementation of a training programme for professionals in the European audiovisual programme industry (Media II - Training) OJ L 321, 30.12.1995
(12) Screen Digest (May 1997)
(13) The Economist, 22.3.97 / MPAA.
(14) European Audiovisual Observatory.
(15) Goldman Sachs and MPAA.
(16) Ecran Total (April 1997).
(17) AFMA/ KPMG Peat Marwick
(18) Screen Digest (August 1997)
(19) Screen Digest (May 1997).
(20) EAO. 1997 Statistical Yearbook.
(21) IDATE.
(22) Screen Digest, SEV, IVF
(23) Adams Media Research.
(24) C. Brown, The new economics of audiovisual production, Financial Times 1997.
(25) European Audiovisual Observatory, Statistical Yearbook 1997.
(26) European Audiovisual Observatory, Statistical Yearbook 1997.
(27) Screen Digest (August 1997).
(28) Kagan Box Office Report 1997.
(29) Financial Times (17.4.1997).
(30) Libération, 12.5.97.
(31) Der Spiegel 3.7.1997.
(32) IDATE: Le marché mondial de l'audiovisuel et du cinéma. Analyse sectorielle. (November 1996)
(33) Drawn from the national provisions transposing Articles 4 and 5 of the "Television without frontiers" directive, which do not distinguish between productions for cinema and television and relate to the distribution of European works.
(34) Screen finance 10/97.
(35) CNC info 5/97.
(36) Evangelischer Pressedienst (special edition).
(37) According to Norcontel's study (Economic implications...), unencrypted channels will have a 65% share in the audiovisual market in the European Union by 2005 (compared to 85% in 1995).
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Second, revised version (21.11.97)
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This report has been released for reference and information by the services of the European Commission. It may not be considered as reflecting an official stand taken by the Commission. Reproduction is authorised - except for commercial use -, under the condition that the source is duly quoted.