The film conundrum

It has become much more expensive to make films and television series. At the same time, we are paying less to see them. How do we solve this conundrum?

The digitalisation of our film and television consumption has made it cheaper for us to see increasingly more, and more expensive, films and television series at home in our living room or in our cabins. This has made cinemas a more important source of income for producers. And producers earn the most money by limiting our access to their films and series.

Adjunct Associate Professor Terje Gaustad from BI Norwegian Business School, together with researchers at BI’s Centre for Creative Industries, Menon Economics and Professor Ole-Andreas Rognstad at the University of Oslo, have followed the cash flows for films and series all the way from those who make the films at one end, to the audience at the other end. Gaustad is an industry expert on film and series production at the Department of Communication and Culture at BI.

In the study, the researchers have identified challenges and possibilities in the wake of this digitalisation, for both the industry and the authorities who support and regulate it.

Terje Gaustad points out three of the most important challenges: 1. It is cheaper to watch, but more expensive to produce films, 2. Streaming services make cinemas more important and 3. Producers earn the most by limiting access to films and series.

1. Cheaper to watch, more expensive to produce films

For each film and series we watched in 2016, we paid on average just over half (57 per cent) of what we did in 2010, according to the study.

This is partly due to the fact that much of the consumption has moved from “pay-per-view” platforms such as dvds/Blu-ray and digital purchase and rental services, where you pay for each film or series you buy or rent, to “pay-per-month”, or subscription services, where you gain unlimited access to a catalogue during the period that you pay for.

At the same time, production costs have increased. In 2016, the average cost of producing a Norwegian drama series was twice as much as in 2010. For Norwegian feature films, the cost increase was 35 per cent during the same period.

The combination of declining payments from viewers and growth in production costs is a reason for pause, when the changes going both ways are so significant, according to Gaustad.

Reduced distribution costs and increased economies of scale are among the reasons why the industry is able to survive at all with this development. For example, Netflix can divide its film and series costs among 110 million subscribers worldwide. Some of the players have made strategic investments where they accept short-term losses to build up market shares that they can exploit in the long-term.
“Still, the development with lower prices and higher costs put increased pressure on the profitability of the entire industry,” says the BI researcher.

2. Streaming services make cinemas more important

Paradoxically, the rapid development in the at-home video market has made cinemas more important for film producers. In a period characterised by dwindling user payments in the at-home video market, the cinemas have been able to increase their prices, well above the general price increase, without any resulting decline in visits.

“Thus, cinemas have become an even more important cash cow for Norwegian film producers, who now earn about two-thirds of their market revenues from the cinema market,” says Terje Gaustad.

It also entails that the Norwegian film industry has become more vulnerable to the development in the cinema market. The Norwegian Culture Barometer from Statistics Norway shows that younger people, who make up the core cinema audience, are seeing fewer movies in the cinema than before.

So far, more frequent visits from older groups have made up for the decline in cinema visits among younger audiences. If there is a reduction in cinema visits, like many other countries have experienced, this could have major consequences for the financial situation for Norwegian film producers.

3. Earn most by limiting access

The Ministry of Cultural Affairs is concerned with ensuring both future earnings and financing of Norwegian films and television series, and making sure that audiences have good access to Norwegian content.

“It then becomes a dilemma that the producers earn the most by limiting access to the films and series that they make,” says the film researcher.

A TV channel or streaming service pays more for a series or a film if they can have it exclusively, and can thus use it to differentiate their service from the competitors. However, such exclusive licences make it more difficult (and more expensive) for the audience to find and see everything they want to see.

In facing this dilemma, the politicians may be forced to prioritise better earnings for Norwegian films and series over availability – or the opposite.

Gaustad, Terje; Theie, Marcus Gjems; Eidsvold-Tøien, Irina; Torp, Øyvind; Gran, Anne-Britt; Espelien, Anne. 2018. Utredning av pengestrømmene i verdikjeden for norske filmer og serier. Oslo: Menon Economics and BI Centre for Creative Industries. The study was carried out on behalf of the Ministry of Cultural Affairs.

Link to the report: https://www.bi.no/globalassets/forskning/centre-for-creative-industries/publications/utredning-av-pengestrommene-i-verdikjeden-for-norske-filmer-og-serier.pdf

Published 2. May 2018

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