Hello, freedom fighter and member of the pirate party. Welcome to my blog. Let’s team together and make a movie. Better yet: let’s make a great movie and make a lot of profit out of it. This will be a world hit. Let’s say, we call it “Harry Potter and the Order of the Phoenix” and base on the corresponding Volume of Harry Potter saga. Yeah, this should surely work. I mean, there are 400 Million fans out there, and if they have attended to the previous four movies, they will also attend to the fifth.

We will be rich and famous!

So we quickly check with Ms. Rowling, check with the director of previous movies (who was that guy? I dunno), check with each of the actors, and make a 100% correct estimation of movie costs, which happens to be $315 mln. This sounds way too much for us. I mean, hello, that’s $40000 per movie second! But we take it easy at first. Let be good and allow those cool guys to profit from our movie too.

But we don’t have this money.

So we go to bank and ask for a credit. I mean, this surely will be a world hit, can’t it be? But the bank laughs and tells us they need something as security. Way too many movies flop out there.

So we have to decide on financing. We try to follow the typical Silicon Valley way and pitch the idea to investors. Unfortunately, we don’t have any talents in our founder team as all the real talents (including the writer and the actors) are somehow not really willing to be co-founders, but rather want to be paid, and paid much. We also can’t show any mockup or dummy version of our movie. You see, when you create a new app by touching your iPod sitting in Starbucks, with very little investment of your time you can create the important parts, like UX, and mock unimportant parts, like any backend logic. With movies it is not the same, as they don’t have any backend logic, and there is no difference between mocking their experience and create a 80%-ready movie.

Well, we have to be creative now. What if we put this title on Amazon and allow fans to pre-order it? Let’s say, each will pay $20 in advance. After 10-15 mln pre-orders we can already start filming… But after some consideration, we reject this idea. First, it is unrealistic to attract this number of pre-orders without any huge publicity, and it needs money that we don’t have. Second, relying only on word-of-mouth propaganda and Harry Potter fan forums, we might get only 10000 or maybe 100000 pre-orders. Besides, even if we were phenomenally successful in our viral campagne, all those people will have to wait several years until we have 10 mln pre-orders, and then yet another year or two for filming and post-production. That’s very unlikely. Third, we immediately get a lot of mail from our potential investors telling that they are ready to pay $10 in advance, but under the promise that we will release the movie in public domain, i.e. without the DRM and under a CC license. Thusly we realize that we cannot rely on any after-release sales whatsoever and have to gather all the money (including our profit. Remember, we wanted to get rich?) up-front, before starting to film. This increases the required number of pre-orders to 20 mln or so. Fourth, what if we ultimately won’t be able to make a movie? We would need to return all the money collected so far, and that’s huge cost (just sitting in our office and wiring the money back using PayPal will take 40 man-years per mln of pre-orders).

Well, what if we cut our costs? We don’t need the plot from Rowling, because there is a lot of open-source fanfiction in the Internet. We can use students of our local actor academy as actors, and replace special effects with some painted paper and glue. But then we make a quick market research and understand that by factoring out the key success factors of the movie, we will also lose most of our paying customers. Basically, around 5000 fans will watch our movie, and fourty of them will even pay for it. $10 each, with a CC and no-DRM clause.

Okay. So, what else possibilities do we have. We can register our company in some country giving tax reductions for movie production and then sell those reductions for hard cash. But this also would require some guarantees that our movie will eventually be made. We can go to a ministry of culture and ask for a sponsorship. Perhaps, they will even pay us twenty bucks or so. We can try product placement, but that’s unlikely that we can gather so much money out of it that we’ll cover $315 mln. Besides, all those sponsors will also surely require some guarantees or securities.

And at last we realize what is our Denkfehler, what is our failure to reason properly. All these previous five paragraphs, we were trying to sell idea. But ideas cost nothing! Well, except for patent trolls, but that’s another sad story. It is not possible to earn money having an idea of movie (or idea of a software, for that matter). It isn’t ever possible to gather enough money to start making the movie, having just an idea of it. If at all, our revenues have to be extracted from a made and released movie. Only by selling movie we can make enough money to refinance its production and also to earn some profit.

To borrow money for the movie, we need a guarantee that we can sell it, and sell it well. So we go to a distributor, like, Warner Brothers, Inc. They have contracts in place with several thousands of movie theaters all around the world and can handle a window for our movie so that all theaters will show it simultaneously. “Coincidentally” (of course not), they also have output deals with Pay-TV, which will ensure that the notorious non-movie-goers can still pay and watch our movie. Besides, when all the money will be extracted from movie theaters and Pay-TV, the distributor will also continue earning us money on the DVD market and by licensing the movie to free TV.

Let’s see how it went with the real “Harry Potter and the Order of the Phoenix” according to the leaked distribution report.

First, the expenses.
Movie production costs (called Negative costs): $315 mln
Interest (supposedly on the borrowed money):  $57   mln
Guild, Union, Trade accociations:                         $14   mln
Preprint, Dubbing, Subtitles, Editing:                  $5,6  mln
Prints:                                                                          $29   mln
Advertising and Publicity:                                       $131  mln

The latter two items are most interesting. It seems that over there in US they still use the analog technology so that they need to actually print the movie on a film roll and to ship it to the theater physically. Second, they spend $131 mln on advertisement. But, in both cases, I believe the distributor knows what they are doing, as they pay for those expenses out of their pocket. The grand total of all expenses was $564 mln.

Now, the revenue.
From all movie theaters together:                         $460 mln
Pay TV:                                                                        $42   mln
Video:                                                                          $87   mln
Free TV:                                                                      $2     mln

Including other minor revenue sources, and deducting $211 mln of distribution fees, we’ll finally get (only) $398 mln, so that the movie was in red in September 2009. On the other hand, the so-called back-end (the time window where revenue is mostly collected from non-theatrical sources) has just started back there (in total, $131 mln was earned from TV and video). According to Edward Jay Epstein, the upcoming revenues from TV and video markets are to grow significantly. To bring the movie out of red, and considering the distribution fees, the combined non-theatrical revenues should be at least $160 mln. This include Pay and free TV, DVD market, and, well, Video on Demand streaming in the Internet.

Let’s talk now about the freedom of information and about DRM, shall we?

A free unprotected video file downloadable in Internet doesn’t earn any money. Yeah there are some people who are ready to donate their $100 for the movie just watched, even if they aren’t forced to do so. But even collecting money from all four of them costs more than the resulting $400. Moreover, if we want our movie business to be at least profitable (and ideally get rich, you remember?), we have to extract more money, much more money than can be done with free will donations.

Besides, the more there are such things as media centers, XBOXes, Smart TVs, DivX players and stuff, the easier it is for the lay people to play a pirated content instead of buying or renting a DVD. They will also have less motivation to watch the movie on free TV, where its user experience is often almost destroyed with annoying advertisements. And Pay-TV subscriptions might also be threatened, albeit in a lesser extent, because the Pay-TV channels have some unique value propositions (compromise-less full HD quality as well as live sport event coverage) and can bundle all the stuff into one subscription plan.

Yes, I know the reasoning along the lines “those who watch a pirated movie would never pay for it”. This might be true. But, as you can see from the distribution report above, there are millions of consumers who have as a matter of fact generated $131 mln (and counting) of revenue for just one movie by buying or rending DVDs, paying for their TV or enduring it on the free TV. And these consumers also have access to all those Smart TVs devices and illegal content, and they can stop paying for the content. Likewise, free TV can stop licensing movies if their market research would show that their audience would rather watch some self-produced talk shows instead of movies, which they have already watched as pirated content.

So, relying only on movie theaters would either prevent such movies as “Harry Potter and the Order of the Phoenix” from happening, or seriously shift the movie experience – for example, the movies will be made even more shallow so that they will attract even wider audience to the movie theaters.

I think we’re in agreement now that we have to sell our movie, we can not afford to just give it away for free. Now, do we absolutely need to protect it with technical means (DRM)? Well, what will happen if we would sell a movie without DRM? The first person buying it will be a good fellow, so they will just watch it themselves, and, maybe, lend it to their close family and friends. Nothing tragic. So will be also the second person. And the third one.

But, let’s agree that every one person from a 1000 has enough criminal energy and the urge of cheap fame required to upload this movie to Dropbox or some other free file exchange service. Up from this point, our sales will rapidly decline. It is hard to predict how rapidly. Let’s just use the Pareto principle and say we will earn 80% of total sales before the point of publishing the movie for free. This means, on average we will sell 1250 copies of movie. If we want to earn just $30 mln on the video on demand market, we have to sell movies for $24000 per copy. First, it is hardly possible to find anybody willing to pay this price tag for “Harry Potter and the Order of the Phoenix”. Second, this would mean that a tiny group of 1250 people would pay for movie, even though hundreds of millions would watch it. Which is unfair, as simple as that.

OK, so let’s apply DRM, but utilize it in a sell-through fashion, that is, once paying for the movie, you can watch and use it unlimited number of times and unlimited time period, on any device compatible with this DRM technology. This is not unheard of. For example, in Germany you can buy and download sell-through movies from the MediaMarkt web site. The only three things you won’t be able to do is to make screen shots of the movie, to re-cut or transcode it yourself, and to play it on “just any” cheap piece of junk – you devices have to be compatible with the DRM.

Now, this mode is completely appropriate for the Harry Potter fans, who indeed will be watching enjoying the movie several times. But what about the mere mortals? Do I always need to pay $25 for a movie, even if I apriory know most probably I won’t watch it second time? Is it fair to have me pay the same amount as the Harry Potter fans? Well, why, no, DRM can also support a more fair price. I can rent a movie from the mentioned web site or from maxdome for just a fraction of this price, and have 24 hours to watch it, which is more than enough in most circumstances. And if against expectations I will want to watch it again, I still can rent it again from maxdome (for that bargain price, I don’t really care). Or download it from MediaMarkt. Or buy it as premium DVD box together with Potter’s magic wand.

We pay for movies to enable creation of high-budget high-impact films. The more we pay for movies, the deeper they will be, because studios will not be required to make them as shallow as possible to get as much profit as possible from the male teenage movie-goers. If we support DRM, we will support selling movies in Internet, and thus we support Internet services, which are way cheaper and more comfortable than Pay-TV and DVDs. If we support DRM, we will allow for fairer prices, involving everybody to pay at least something to watch the movie, and taxing heavy movie watcher with a higher price tag.

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