Business Contracts and Copyright AKA Follow the Money

Business, Contracts and Copyright AKA: Follow the Money CMNS 230 1

Economics of the Cultural Industries Last Week l Examined changes in capitalism, and especially cultural economics over time l Explored the nature of the cultural commodity This Week l Look at the nature of the cultural production process l Especially, how to negotiate creative contracts to get money for cultural production CMNS 230 2

Learning Objectives Identify three key features of the cultural transaction l Last Week: l Key Q: what is special about the cultural industries? (Hes: pages 17 -22) - This week: Key Q: within the cultural industries, what are some key differences? How are cultural products bought and sold? CMNS 230 3

Nature of the Production Process CMNS 230 4

What is the same about Media Production as a Factory Process? l Fixed assets: – Plant and machinery l Daily Demand: – Constant supply of raw materials, continuous production l l Distribution Stimulation of Demand – Constant market research l l Advertising Similar to many forms of factory production CMNS 230 5

What is so special about the cultural industries? - Risky: Offset Risk through Concentration, Integration and co opting Publicity High Production/Low Reproduction Costs means a cultural product is intrinsically Semi Public ( use does not use up or diminish value): CMNS 230 6

Consequences of Low Marginal Costs/Semi Public Good Nature - A Need to Create Artificial Scarcity - Monopoly/Oligopoly market rationalization Development of Formats Tight control of reproduction High investment in marketing and distribution In Media which use the Spectrum, there is Actual condition of scarcity - CMNS 230 7

Key Differentiators of the Types of Processes in different cultural Industries l Degree of ephemerality – How long will the product last? Eg. News lasts half day or less; film and sound recording longer shelf lives ( eg. Reissues, builds audiences over time: classic case the Star Wars franchise, or how Disney manipulates releases of its key cartoon series. ) l Degree of technology intensiveness l l Until 1990 s, very distinct process of industrial production; different guilds Now, digital techniques are ‘deskilling’ or ‘reskilling’ modes of production As well, DVD capture means a cross over: TV series now sold/rented like films Degree of Structural Integration – Are firms controlling all parts of the production/distribution cycle? ( vertical integration) – Are firms able to buy shares/in other companies/ to aggregate market share and reduce competition? ( Oligopoly is a form of horizontal competition) CMNS 230 8

Different Processes in Different Cultural Industries Newspapers and Live Broadcasting l Continuous production and distribution necessitates steady cash flow l High fixed costs l l l High proportion of revenue from ads Wide, controlled distribution Output taken to be entertainment and information Recorded Music and Film Production l Sporadic Production; interrupted revenue flows l Each project/production has a separate budget ( lowers fixed costs) l Revenue from placement, rentals, ancillaries Global distribution Output taken as entertainment and ‘art’ l l CMNS 230 l Source: Branston and Stafford, 222. 9

Key Elements of Market Exchange between Creator and Distributor l Degree of market power: control over inputs of materials, resources or ideas – Range of celebrities, products, formats, resources l l Barriers to entry Economies of scale – When large numbers of copies of an original prototype are produced, per unit costs fall – Semi public good nature implies these are virtually infinite – In cultural industries, size advantages especially accrue in film and TV l Economies of scope – When a range of complementary prototypes create synergy: a conglomerate would be a typical ideal type – Especially implies control over distribution, technically and organizationally CMNS 230 10

Mapping the Creative Process l l l Once the creative process is ‘fixed’; seek to realize revenues from it An intellectual creation: a different kind of “property” Creator sells product by herself, or leases rights to reproduce and sell to third parties by contracts CMNS 230 11

The Importance of Contracts l l l l Creators Rewards depend upon contracts they can negotiate; First, must protect “exclusivity” to the cultural expression of their work through copyright Then, exercise control over “licensing” the use and distribution of their work Self Interest dictates leveraging a share or “royalty” in subsequent use Want to trap a share of every stage of the process after creation ( ie a share of distribution) and in some cases, create a vertically integrated firm Where per unit production costs are high in the creation of the master ( eg Film, TV) licensing or royalties are typically LOW Where unit costs are lower, royalties high: Some Music deals 50 -50; others much lower CMNS 230 12

Anatomy of a TV contract l Develop Property: – Copyright structures the pricing of a product. – Copyright is based on time and space ( 70 years; definable geographic territory; definable “window” of exhibition) l l Ie: in the creators’ interest to infinitely subdivide deal and negotiate each stage Pitch to get Investors: – Licence to Broadcasters for exhibition ( at home and abroad) – Raise money from the Bank ( personal loan) – Go to the State: if a public loan, tax incentive – Get artists to reduce their labour costs CMNS 230 13

TV Deal Continued l Factors affecting terms of trade between broadcaster and producer: – – If buyers market ( ie: if more producers than buyers) If sellers market ( scarcity of supply to buyers) If separate or bundle ancillary rights If there is a high degree of price competition l l To make De. Grassi High costs about a million to make But, the cost of an imported US show of the same youth soap type costs about $50, 000 – If there is a high degree of non price competition CMNS 230 14

Problems in Negotiating with Power Asymmetries l l l Unequal information Unequal bargaining Unequal risk CMNS 230 15

Understanding Macro Economics of the Cultural Industries CMNS 230 16

Rights Transactions l Driven from agreements based on copyright – Rights bought and sold in the following way: by national/regional or local market boundaries – By time – By format – EG: windowing: prime time first run series: reruns l l l DVD Special event /ppv ( issue: video on demand downloads / time shifting) Syndication ( threshold: usable number of library of episodes) The idea is to extract he mazimum surplus At each stage, price paid declines CMNS 230 17

Structure of Economic Transaction l l Direct: Consumer End Retail Market – Pay for a book, music cd, dvd per unit, video games basis ( discontinous) – Or, by subscription: eg. Satellite TV(continous revenue stream) – Thus, Price covers full cost plus a profit – Consumer rents or owns product Indirect: Wholesale, Intermediate Demand Sets Market – Pay by advertising – Eg: over the air radio, TV, magazines – What is sold is access to consumer: consumer does not own or rent the actual broadcast – Price to consumer is well below cost CMNS 230 18

Competition in Cultural Markets l l l Competition for audiences Competition for resources from other media ( eg. ad dollars, time spent with media) Competition for Distribution/Exhibition: – Most products require a distribution system involving certain shelf space: idea of tiers of attractive shelf space – These are based on selling exclusive access – IE: vendors vie for ‘exclusive’ rights to offer certain product lines ( eg. Stern on Sirius Satellite Radio); arrange for preferential access ( Telus: sports package) CMNS 230 19

Determinants affecting Profits l l Audience Size Cost Containment of Production Non price competition Calculation of break even points: hit to release ratio – – Drive to recover costs up front Only after break even reached do artists reap royalties It is the hits which cross subsidise the failures In most cultural industries, the failures outnumber hits or blockbusters – It is the hits that generate huge ancillary markets: t shirts, cell phone ring tones and so on – And it is the hits that go on to syndication CMNS 230 20

Changes in the Organization of Cultural Businesses l l l Most important change in transition from market professional era to complex era is the growth in firm size and scope Part of a long term trend in mergers and acquisitions after the Long Downturn, according to Hesmondalgh Two waves ( See Hesmondalgh, table 5. 1) Late 90 s boom Led to three tiers of cultural industry firms – Big six (TW, Disney, Viacom, Vivendi, Bertelsmann, News) – 42 other companies with over I B a year – Most based in North America and Europe ( several in Latin America) – And many small fish: located in sub regional clusters CMNS 230 21

l Measuring Market Concentration: the Goliath Side Market share – eg. : 6 largest film studios control 90 % pf revs, 132 of 148 films – Eg: 5 largest music firms control 87% music – In EU high levels of concentration in print and TV CMNS 230 22

Restraint on Goliath – Hesmondalgh argues that rhetorical focus on statistics of market share obscures the underlying “network” dynamic of cultural production – need to understand the continuing presence of small companies (149) l Why? – Conception stage of texts still small scale, autonomous and relatively inexpensive – mature /decline of certain industries, , new entry – Discourses of entrepreneurialism – Disintegration of existing networks ( TV) outsourcing is rising – Emphasis on marketing – Ethical and aesthetic premium on independence higher in music, growing in film ( see H, page 151) CMNS 230 23

Why David and Goliath Joint Ventures l l l To avoid competition To save money and share risks To buy a seat on a rival’s board To create a safety net To make links with foreign companies, to avoid punitive tax regulation CMNS 230 24

Independents/The Goliath Story l Use of the term independent is problematic – All productions require collaboration between creative and technical teams and an organisation – Better to think of various levels of ‘dependencies’: Branston and Stafford, page 245. – Various rationales for how producers approach such dependencies l l l The maverick The Artist The politically committed; the avant garde – Each industry approaches alliances with independents differently: l l l In global networks, film is much more highly centralized; sound recording decentralized Majors are not monoliths – Not integrated across all sectors evenly – EG Disney in music is a fringe player CMNS 230 25