The film distribution industry (S.I.C. 7822 Motion Picture and Video Tape Distribution) in Canada is a mature one. Sandwiched between the production companies, which produce the film properties, and the exhibitors or exhibition outlets, which buy the film product, is the distributor. Canadian film distributors face many challenges, most formidably from the foreign-owned 'majors' who dominate the market with an 83% share of theatrical distribution revenues and 47.6% of home video distribution revenues. While growth in the theatrical segment of this industry has been flat, with only marginal increases in distribution revenues over the past decade, there has been an explosion of alternative outlets in which film distributors can sell their product. This boon is fueled by the growth of cable television, pay television, and home video.
This report will focus on describing the environment of the film distribution industry in Canada and the marketing strategies utilized by the major Canadian-owned film distributors in order to cope with the dominance of the foreign-owned majors.
The film distributor is not merely a middle-man between the production company and the exhibitor, limited only to buying and selling the product. Essentially, film distribution is the marketing activity for films. In addition to formulating and implementing promotional and advertising strategies, the distributor will liaise with the media, produce all necessary promotional materials (publicity shots, stills, artwork, press kits), provide advice on all aspects of production (enhancing the marketability of the film, casting, etc.), and provide financing for productions through advances and buying of rights. Some distributors have even backward-integrated into production to ensure a continuous stream of marketable product. For more detailed information on the product flow from producer to exhibitor, click here.
The channels of distribution are many. The channel that most often comes to mind is theatrical, which has generally been in decline over the last decade. Although dollar values have remained stable in box office sales, analysis indicates that this has been due to ticket price increases and a few 'blockbusters' skewing the numbers. In terms of attendance, the numbers are generally on the decline, except for the 35-and-over age demographic category.
The area of growth and most opportunity for Canadian distributors has been the home entertainment market, which encompasses home video, pay television, and conventional television.
1990-91 1991-92 1992-93 1993-94 Theatrical 193.4 184.6 170.8 196.4 Home Video 74.9 92.7 132.8 121.5 Pay TV 33.5 34.3 35.1 54.8 Conventional TV 329.5 308.9 275.9 375.5 Sub-total, Home Entertainment 437.8 435.9 443.7 551.9 Non-theatrical 24.3 22.7 21.9 22.2 Unspecified 0 0 13.6 13.6 Total 655.5 643.3 650.0 784.0
Although the growth of alternative entertainment choices has contributed to the decline in demand for theatrical film productions it has also provided niches for Canadian distributors to thrive in, and has in fact provided opportunity for non-major distributors to become prominent. For example, Alliance, a major Canadian distributor, has found the distribution of television series and made-for-TV movies very lucrative. It is in these alternative markets where Canadian distributors are finding viable niches to thrive despite the dominance of the theatrical market by the majors. As it will be illustrated later on, this niching not only avoids industry-fragmenting out-and-out direct competition between the various Canadian distributors, but it also ensures that each distributor has a constant stream of product to distribute without excessively bidding up the price of such product.
The types of agreements made between the producer, distributor, and exhibitor, as well as the share of revenue allocated to the distributor will vary, depending on the channel of distribution (click here for a description of the various types of agreements). Below is a simplified business system for the typical film value chain, illustrating how a fictional $100 spent by the consumer is divided up between the various players in the theatrical market,
Producer-----Distributor-----Exhibitor-----Consumer $25 $65 $10 $100
and home-video market for films:
Producer-Distributor-Duplicator-Wholesaler-Retailer-Consumer $10 $20 $25 $25 $25 $100
The reality of the Canadian feature film market is that it is very small. Assuming that the average Canadian feature film costs around $3.5 million (1984 dollars), it is estimated that the film must generate a box office of approximately $16 million (film rental of approximately $5.6 million) in order to recover its negative costs plus the costs of printing and advertising. At an acceptable film rental (for Canada) of around $800,000, it is obvious that the Canadian market is insufficiently large for a film distributor to recoup such costs. Even if access to related domestic markets is taken into consideration (film rentals for television and pay-television averaged $500,000 and the home video cassette market averaged $300,000), servicing the U.S. and foreign markets are essential for profit. A firm's difficulty with the small market size is further exacerbated by the fact that the Canadian film-market is fragmented into the markets for French-language and English-language Canadian productions, which have largely remained quite separate (few French-language films produced in Quebec are shown in other provinces, while English-language films made in other parts of Canada seldom reach the Quebec market-- the few that do are generally limited to viewing in Montreal movie theatres). Furthermore, there are barriers to entry in the French-language market in the form of laws stipulating that distributors interested in distributing films in Quebec must be based in the province. Simply put, the Canadian film market is too small to support many players, and coupled with the dominance of the majors, it is a very hostile market.
The major Canadian film distribution companies include Alliance Releasing, Norstar Releasing, Malofilm Communications, and Astral Communications. However, these companies dwarf in comparison to the 'majors'-- Canadian subsidiaries of conglomerate American film production companies, such as Twentieth-Century Fox or Paramount.
The majors have many advantages vis à vis their Canadian competitors. With access to markets in the United States and internationally, the majors enjoy economies of scale in marketing and promotion. When a distributor acquires distribution rights to a property, resources are committed to the creation of an optimal promotional program, such as funding for test marketing and media advertising production. It is advantageous for the distributor to spread these sunk costs over as many markets as possible. With the Canadian film market equal to 6-8% of the U.S. market and many similarities in language and media between the two markets, promotional programs designed for the U.S. market are easily transplanted to the Canadian market (or spill-over inadvertently due to the proliferation of American media in Canada). In fact, the U.S.-based majors consider Canada to be part of their domestic territory and use the leverage of a 260-million person market to persuade producers or sales agents sell the Canadian rights to them.
The marketing and promotion of films is an expensive endeavour (the cost of marketing and promotion alone for a film requires a minimum of $2 million in the United States), often requiring sources of external financing. With more stable earnings and a lower incidence of default, the majors are considered a lower risk and would have access to more favourable borrowing rates and debt covenants-- thus enjoying an economy of scale in access to financing capital.
Because of their sheer size and access to financial capital, the majors are also able to reduce their risk by maintaining a portfolio of diversified film properties. In general, the majority of films released theatrically are not profitable-- a variation of the 20/80 rule where 20% of the films released by the distributor generate 80% of the profits, and as such, the importance of maintaining such portfolios.
Although there is not 'branding' per se in the film industry, the reputation of a distributor serves as a competitive advantage. Since film producers are interested in maximizing returns, they would seek to allocate distribution rights to a distributor with past performance or reputation for successful promotion, since the producer's revenues are contingent on the distributor's performance. Furthermore, some producers may be willing to accept less favourable terms (i.e. a lower percentage of the box office gross) from an established distributor for the possibility of higher aggregate revenues. This 'reputation' also serves as a competitive advantage on the exhibitor side. Since exhibitors want to fill seats, and bookings for theatres are usually made in advance of completing production (especially during the busier summer and holiday seasons), exhibitors will rely on a distributor's reputation and presumed ability to market the film in such a way to maximize the box office draw. Likewise, an exhibitor may give more favourable terms to an established distributor with the expectation of higher aggregate earnings.
Again, because of their size and portfolio of film offerings, the majors dominate the majority of screens in the country, leaving only a handful of screens available at any given time for the Canadian distributors to exhibit their product. According to Tony Cianciotta of Alliance, while there are over 800 screens available in Canada, there are only 18 to 20 theatres (or 2 to 2.5%) which will actually play Canadian films.
To assist the efforts of Canadian distributors, the government provides subsidies to qualifying distributors. Advances from distributors to producers, ranging from $50,000 to $500,000 per film (depending on the expected revenue potential in the Canadian market), are indirectly subsidized by the Telefilm Canada Film Distribution Fund. Once the distributor has a marketing plan approved by Telefilm, they are given a reserve equal to half of their projected marketing costs, from which they can draw to finance their advances to producers. This subsidy also addresses the issue of undercapitalization in the Canadian film distribution industry, which has historically made it difficult for Canadian distributors to effectively bid for film properties. In addition, Telefilm also provides some professional consultation services to distributors.
On the supply side, there are numerous production companies in the highly fragmented market. As such, no one firm carries a significant share over another, so there is no structural basis for supplier power. However, because of the high demand for film properties by distributors, prices are bid up resulting in Canadian companies paying more than the marketplace is worth.
On the buyer side, the various channels of distribution exhibit varying degrees of market power. The exhibitors in the theatrical market are concentrated, with two companies, Famous Players and Cineplex-Odeon, owning two-thirds of all theatres (one-half of all screens) in the country. Another factor that contributes to the market power of the exhibitors is the trend of increasing box office drop-off. It is now common to see box office sales of a new film drop by 40% between the first and second week of opening, indicating that the bulk of sales are being made within the first couple of weeks of opening. With a glut of film properties in the theatrical market (Canada currently sees an average of 200 releases per year, or four for every week of the year) and a generally declining audience, the exhibitor is inclined to 'turnover' films quickly.
In the television market, most of the made-for-TV productions completely bypass the distribution stage, with direct contracting between the Canadian networks (CBC, CTV, and Global) and producers. However, sales made to the U.S. television network and cable markets do involve distributors.
The home video market is the closest model of perfect competition in the distribution industry with a plethora of buyers.
Becoming a domestic player in the film distribution industry in Canada requires a firm to form alliances with foreign producers/distributors in order to guarantee a steady stream of product to sell, sufficient financial resources to build a diversified portfolio of film properties, and the procuring of a niche in which to operate in order to avoid head-on competition with existing firms. These three factors serve as barriers to entry.
In the case of foreign competitors, the Federal government enacted Bill 109, in 1987, a protectionist legislation restricting new entry by foreign firms. This legislation aims to impede new foreign distributors from selling non proprietary films in Canada (with the exception of the 'grandfathered' U.S.-based majors who were already in business at the time). For a film to be considered proprietary, a Canadian company must own world distribution rights or have funded at least 50% of the production budget. This year (1996), PolyGram Filmed Entertainment (PFE), based in the Netherlands, has been lobbying hard for Ottawa to exempt it from such a policy-- PFE argues that it may put up less than half of the budget but will spend more than the budget in promotion and worldwide distribution. In return for an exemption, PFE is offering to invest at least one-fifth of its Canadian distribution revenue in the first five years in the production and international promotion of independent Canadians films, arguing that the Canadian production is currently ineffective. The threat here is that once in the Canadian system, PFE would perpetuate the American practice of including Canadian rights with American ones under all-inclusive North American rights, effectively barring Canadian distributors who would not be able to afford to operate in that large a territory.
To survive in the Canadian film distribution industry, a firm must possess three things: a steady stream of product to sell to exhibitors, a diverse portfolio of film properties in order to reduce risk, and an ability to market their film properties with minimal expenditures.
A firm must have a critical mass in terms of financing and access to product which would allow it to acquire a diverse portfolio of film properties-- a sufficiently large portfolio will ensure that it has enough of the few 'hits' that will generate revenues to sustain the company. However the small size of the Canadian mainstream film market is an obstacle for the co-existence of more than one or two major players. As a result, the Canadian distributors have resorted to 'niching'-- seeking out market niches in which to thrive and avoiding head-on competition for film properties. For example, Norstar concentrates mostly on international home video and television sales, Alliance concentrates on both television and theatrical distribution, and Paragon has traditionally concentrated on television. Many distributors, in an attempt to ensure an ample supply of product, have backward integrated into production.
In contrast to the majors, Canadian distributors do not have the capital to mount expensive media-saturation campaigns to promote their releases and reserve the lavish promotional campaigns for the wide-release commercial films which are expected to bring in more than $1 million to the box office. Promotional spending is often minimal and more focused. Promotional efforts usually centre on contract deals with sponsors for logo placement, ticket giveaway contests, and grassroots, word-of-mouth initiatives (click here for a full description of various marketing tools used in the promotion of film).
Another obstacle for Canadian distributors is the low-priority status given the smaller films that they distribute. Often, they will have very short lead-times to mount a promotional campaign, since the exhibitors may not confirm screen bookings until a few weeks ahead of opening (so-called contingency bookings, where any screens not occupied by product from the majors are available).
In the last two to three years, there has been an increasing consumer demand for what is called the 'upscale specialty/arthouse film'. As Tony Cianciotta, VP of Alliance Releasing said in an interview in Playback, 'whereby five years ago, a film like Howards End would have grossed $2 million in the U.S., today it can gross much, much more'. This is partially due to the 'greying of the population', the increase in the theatre-going base of the 40-plus crowd from 15% in 1986 to 36% in 1994, which represents an audience that would seek the upscale specialty film over the mainstream offerings of the majors. This trend is advantageous to the Canadian distribution industry for two reasons. First, these types of films are promoted more on a word-of-mouth basis than through expensive advertising and marketing campaigns which Canadian distributors clearly cannot afford. Second, these are the films that the typical independent distributor would handle and have the most experience in marketing. The downside of this trend is that the increased demand for upscale films has also bid up the acquisition costs for such film properties. Furthermore, there is a lack of specialty theatres in major markets which would exhibit these kinds of films. The ability to generate a profit from even a solid release is limited by the number of screens across the country to handle it. Cianciotta has proposed that given enough exhibition outlets and a consistent releasing schedule, the market for upscale films could grow even faster. Andy Myers of Norstar has also confirmed the need for more exhibition arenas, and has suggested that there is room for another major exhibitor in the marketplace. Norstar is currently investigating alliance opportunities in this regard.
As mentioned earlier, the area of greatest growth and opportunity for Canadian distributors has been the home entertainment market, which encompasses home video, pay television, and conventional television. In the television market, there is increased demand for made-for-TV movies and syndicated programs, especially for cable and pay-television (which require programming to fill up their broadcasting hours) in both Canada (with an emphasis on Canadian product because of CRTC regulations) and the United States. Finally, with penetration of VCRs into Canadian homes in excess of 80%, the demand for home video will be insatiable and guarantee growth in this segment in the near future.
There has also been a trend towards internationalization by Canadian distributors, both by buying of non-Canadian films and the selling of film properties to international markets, which is a natural evolution given the small size of the Canadian market. This move has been spurred by the rapid growth of foreign theatrical business, wherein the foreign box office grosses are the same or an even greater amount than that derived from domestic exhibition (in fact, Alliance has learned that foreign sales are the most important factor in a film's commercial life-- they are not viable without them). On the supply side, Alliance and Norstar have formed partnerships with U.S. distributors/producers to ensure a steady flow of product, CF/P has set up an office in New York to build a niche in the U.S. distribution market, and Astral moved into international feature distribution with the acquisition of world rights for two French-Canadian films. Paragon films backward-integrated into production through the purchase of U.K.-based producer Handmade Films.
Alliance Communications Corporation is a fully integrated global supplier of filmed entertainment. Founded in 1985, Alliance expanded in 1987 into the Canadian theatrical distribution market with the establishment of Alliance Releasing. The division distributes primarily three types of films: (1) specialty "auteur" films such as Exotica, (2) action/adventure movies such as Within the Rock, and (3) upscale commercial movies such as Crash and Johnny Mnemonic. Today the division generates $80 million in revenues and holds a 13% share of the national box office. This share exceeds that of all Canadian competitors combined and surpasses that of some of the U.S. Studios.
Alliance aims to garner as much market share as possible while retaining control of the product, generating revenues, and building a library for future use. Tony Cianciotta indicated that the company attempts to get as many exclusive Canadian deals as possible. The exclusive deals ensure that the company has a constant revenue stream, and the quantity is important because most films do not make any money (as mentioned earlier). Tony finds that approximately 50-60 film properties per year are required to assure an adequate number of 'hits' to sustain the company; and in fiscal 1996, Alliance distributed a total of 75 motion pictures in Canada. Through these large number of films, Alliance becomes profitable enough to support its less mainstream pictures, the ones that are viewed as a "labour of love." Discovering which films will be 'hits' is a tricky process. The director, producers and the talent carry some weight, however, the distributor often relies on 'gut feel' in order to determine whether to bid for a film and then where and how to feature it.
Alliance perceives its competitors as the six majors only; it does not compete directly against any other Canadian independent distributors. The company has a number of key success factors. First, Alliance understands the Canadian customer better than do their American counterparts and can more easily anticipate the films that will succeed in the marketplace. Alliance has higher returns on average because of a greater caution in selecting, for example, the appropriate mix of advertising, the timing of release, and the place of showing (click here specific examples of marketing programs that Alliance has implemented in the past). Second, their sheer size in comparison to other Canadian companies allows them to have a large enough portfolio of films to sustain the company. Finally, Alliance has skilled people, who intimately understand the buying and marketing of films, managing the departments. Furthermore, Tony specifically mentioned the complementary abilities of Robert Lantos, Chairman and CEO, and Victor Loewy, Vice Chairman Alliance Communications Corporation and President, Alliance Motion Picture Distribution, which drive the company forward.
In concert with the more upscale and patient Canadian audience, recent successful releases include: Il Postino, Crash and Trainspotting. These films are meeting the demand of the growing 35+ age group who are coming back to the theatres after a long relapse. Alliance believes that it can develop this market segment by providing a more consistent and frequent releasing schedule to increase repeat business. Given its reputation, strong growth, and superb personnel, Alliance is well positioned to take advantage of this new emerging trend.
Norstar Releasing is the largest, privately-owned producer and distributor of films in Canada. Its success within the Canadian market thus far is best attributed to its lean, responsive and non-bureaucratic structure, its reputation as an industry forerunner, its worldwide relations, its competitively priced services and its niche offerings of alternative films. Although Norstar's primary focus is on production, where financial risks are lower and returns are higher than in distribution, they continue to play a significant role in the Canadian film distribution market. Norstar pursues large, deregulated international markets such as, the U.S., Germany, Brazil, Korea and Japan for theatrical and video distribution. These markets are in demand of film properties and as such provide a great opportunity for Norstar's offerings. Alternatively, in its domestic operations, Norstar places a heavy emphasis on video and cable television, as opposed to theatres, because the former represent a growing channel and because the films it distributes are better suited these channels.
Norstar's strategy is to pursue a niche in the alternative, non-mainstream film market, most often subscribed to by the art community. Because of the immense carrying costs for marketing a film, Norstar seeks out the highest quality product (be it a finished film-- 70% of its purchases, or a pre-bought film-- 30% of its purchases) at the lowest price. In this way it attempts to minimize its financial risk, while at the same time, bolster the greatest returns from the film as possible.
With such non-mainstream films such as Lonestar and Cold Comfort, Norstar virtually avoids direct competition, as the niche for such films is too small for multiple competitors. Moreover, when asked, Andy Myers of Norstar identified every Canadian distributor as its competitor in general, but perceived none as a major competitive threat, since none of them competed directly within their niche. Unfortunately, the niche strategy effectively limits the number of screens that an exhibitor will reserve for its films, and in order to circumvent this, Norstar has been required to build and maintain a strong business relationship with Famous Players.
The challenges that Norstar currently faces in the marketplace are numerous. A particular challenge is the cutback in government subsidies. This is one of the main sources that a distributor such as Norstar relies on, and its absence places a greater fiscal strain on the firm. To combat this, Norstar has relied on funds from its production ventures in order to subsidize its distribution projects. A second challenge facing Norstar is its difficulty in accessing the major distribution channels (theatres and video stores). It is often out-muscled by the major players who have bigger budgets to market films, and also have greater clout with the channels through economies of scale. To circumvent this threat, Norstar relies on its international and domestic business relationships with the channels to ensure that its products reach the audience. Last, Norstar is threatened by foreign entrants, like Polygram, who are attempting to take advantage of their size in order to dominate the Canadian market. Currently, Canadian distributors such as Norstar, are protected by Bill 109, which prevents firms like Polygram from entering.
Looking towards the future, Norstar expects to take advantage of strategic alliances with international companies in order to bolster its worldwide business orientation. Furthermore, it is investigating partnership opportunities to forward-integrate into exhibition. In these ways, Norstar is leveraging its domestic distributions with diversification in order to continue to make a name for itself in the Canadian and international film market.
Malofilm Communications Inc., like Norstar and Alliance, has chosen to pursue niches and take advantage of the growth in home video. Though Malofilm is a vertically-integrated company involved in the production, distribution, and international sales of theatrical, video, television, and multimedia programming, the company is known primarily as the leading independent distributor of home video. In fact, Malofilm derives its greatest revenues in the home video (47% from rentals and 15% from sell-through) and international distribution markets (14% of revenues).
In order to ensure a steady stream of product, Malofilm has secured distribution contracts with U.S. producers (Trimark Pictures, the Samuel Goldwyn Company, Republic Entertainment), exclusive distribution agreements for non-theatrical properties (Saban International, Hallmark Home Entertainment, Time-Life Home Video), and entered into a strategic alliance with Norstar Releasing. Furthermore, they are also focusing on a new market niche: documentaries.
To reduce the financial risks of the distribution business, pre-sales to foreign and U.S. distributors are sought early on and the maximum use of any government subsidies and tax credits are used to pre-finance production and distribution costs.
Astral Communications is primarily known for its dominance of the pay- and specialty television distribution channel. Like Malofilm, it is a vertically integrated company in a diverse range of media, from television broadcasting to multi-media to film distribution. Not surprisingly, Astral has established a diversified portfolio of suppliers and sought niching as a strategy, with distribution agreements for theatrical and home video products with The Walt Disney Company, Turner Home Entertainment, Twentieth Century Fox and the Lyons Group (an exclusive agreement to distribute Barney home videos). Astral also has a strong position in the French-language video distribution market, with rights to distribute properties of TF1, Europe Images library, and France's most popular dramatic series.
By forward integrating into the videocassette wholesaling business, Astral's Home Entertainment division has become Canada's largest wholesaler of videocassettes and was recently voted Canada's number one distributor by Canadian video retailers.
The Chinese word for 'crisis' is the combination of two other words: 'danger' and 'opportunity'. The film distribution industry in Canada is a hostile one. Distributors find themselves sandwiched between the market dominance of the majors and falling attendance figures in the theatrical market. The industry is also risky, requiring extensive financing capital to acquire and market film properties, with the majority of theatrical releases performing poorly at the box office.
However, there are many opportunities available to the Canadian distributors, with the changes that are occurring within the industry. The growth in international demand for films and the home entertainment segment-- particularly home video, television, and pay-TV, are providing niches in which to thrive and overcome the dominance of the U.S.-based majors. The changes in audience demographics and tastes is growing the demand for the upscale arthouse film-- the type of film requiring only modest investments in marketing expenditures. Canadian distributors have a good understanding of the tastes of the Canadian filmgoing audience and will be best suited to market these kinds of films.
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13. Iezzi, T. "Creativity vital to low-budget promotion", Playback, pp. 19-24, May 6, 1996
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We would also like to acknowledge both Tony Cianciotta of Alliance Releasing and Andy Myers of Norstar Releasing for taking the time to speak to us.