Importance of Integration In The Film Value Chain	Film Distribution

The film value chain is a stripped down depiction of the process of investment and recoupment for a film project, from beginning to end.  The further to the left you are in the chain, the earlier on you are in production, the greater the potential investment risk for a capital investor.

The risk is higher for them at this point because there is a sizeable distance in the recoupment chain, between money invested and money paid by the consumer.  The film value chain model demonstrates the complexities,  along with various issues and weaknesses that are present in the independent film model.  These issues have persisted in the film industry for a long period of time.  Issues arise due to the large number of contributing individuals and organizations, and the complexity of multi-player financing, making the project prone to setbacks when a financier drops out.

Additionally, there are the issues surrounding  the distance of the producer from the distribution and marketing component, the vacillating power of the writer and the fact that lawyers and accountants can earn money at every stage of the process, making them the most consistent and perhaps powerful players.  Additionally, all of the fragmented components in the chain need to work cohesively for an extended period of time, making the process prone to breakdown.

To counter this tenuous relationship between the producer and the entire film project, some producers try to establish long-term relationships with finance companies, sales agents and distributors on the value chain.  This can greatly simplify the financing and production process.  The relationships can be informal or formal, and may include joint ventures, purchases, mergers, or output deals.

The importance of these relationships in the film industry leads to integration in companies.  Integration is when a company, or a consortium of companies, owns players at various points in the value chain, and is thus able to make money during various stages of the filmmaking process.  There are two types of this kind of integration in the industry.  First is vertical integration, which involves owning players in several different points on the value chain.  For example, a company might own both a producer and a sales agent, making profits from both.

The second type is horizontal integration, which involves owning several different kinds of the same types of players on the value chain.  For example, a company that owns several different writers, earns money  from each of them when they go to work on a project.  Or the company might own several different media outlets to show the film content in different exploitation windows.  This might include owning a DVD label, a TV channel, or a movie downloading website.

Integration is especially relevant in the film industry, because of the complexity of the investment and recoupment process; and thus the complexity of profit-making.  The more a company can access the various streams of revenue, the faster it can offset the costs of production and the risks of investment.

Examples of Vertical and Horizontal Integration

A classic example of vertical integration in the film industry can be found in  the Hollywood Studios in the 1920s and 30s.  During this time, the studio owned almost all parts of the value chain.  They owned the actors and directors, the production studios, the distribution network and the cinema chains.

This means that they owned both the upstream suppliers ie those involved in production and the downstream suppliers; those involved in promotion and distribution.  Because they controlled all of these revenue sources, they were guaranteed massive profits.  Additionally, because they owned and dictated the composition of the production teams, they were guaranteed consistency of product.  This scenario highlights the impact of working with a consistent production team and building solid relationships with various parts of the value chain.  Hollywood Studios also had enormous control over how the films were marketed, and they were able to set up nearly impassable barriers for their competitors.

This extreme vertical integration continued until 1948, when the US Supreme Court ruled against Paramount Pictures owning and operating cinema chains.  This decision was based on the anti-competitive nature of such monolithic control over the industry.  It is quite easy to relate this ruling to other such rulings in various industries, discouraging the conglomeration of large corporations, and protecting the smaller players.  However, in the 1980s Ronald Reagan once again de-regulated the industry and studios were able to begin acquiring cinema chains once more.

PolyGram Filmed Entertainment, a European company, is an example of both successful vertical and horizontal integration.  In the 1990s, PolyGram operated in fourteen different countries, and owned (or were deeply involved in) production companies, sales agents and distribution companies in multiple key territories.  Some parts of these massive holdings involved vertical integration.  For example, they would develop and finance films that could then be sold and distributed through company channels.  Some of these holdings were horizontally integrated.

PolyGram owned multiple exploitation windows, such as PolyGram Specialist Video and Sundance TV channel (of which they had part-ownership).  In this way, PolyGram’s distribution/marketing departments could be involved in the development of film projects.  They were able to contribute to the decision of which projects would be green-lit, based on the highest potential marketable value.  Furthermore, PolyGram acquired the third largest film catalog in the world.  The catalog consisted of over 1,500 feature films and 10,000 hours of TV programming.  Thus sales agents continually had a huge stock to sell, even when the firm was busy in the production stage of multiple projects.

Risks of Integration

Both vertical and horizontal integration have downsides to them, namely complexity.  With integration comes increased company overheads, a larger workforce with larger employment costs, necessitation of a larger variety of skill sets to operate in the production and distribution sections, and managerial complexity that can be exacerbated by operation in multiple time zones.  Additionally, having distribution attached to the production company can lead to a loss of upfront, pre-sales money to the distributor.This is a problem because receiving funds upfront, can reduce financial risk when a film is in the production stage.  However, strategic and careful outsourcing can help a company to manage successful integration and the complexity that comes along with it.

Currently, the UK Film Policy Review endorses closer cooperation between producers and distributors, tentatively, on a project-by-project basis.  The Film Policy Review emphasizes that specific funding should be included to ensure greater distribution income to the producer and lower distribution costs; a good example of careful integration management.  Various UK distributors are indeed becoming more closely involved in the production process, to great success. These include Revolver Entertainment and Vertigo Films.