High profile film festivals and markets are typically accompanied by trade editorials surveying the state of the industry, press releases of positive performance figures, and critical analysis of enduring business frailties.

EFM and Sundance provide some interesting evidence from such sources for the UK, EU and international perspective. The notion of problems in perception, and confusion over the allocation of risk and reward within the industry are running themes.

The increased Box Office proportion achieved by UK independent film in 2015 has been widely reported, often in conjunction with results of inward investment from studio production contributing to the UK economy. Yet, misleadingly, these characteristics have been summarised to mean that the UK independent film business is in good health. In response, commentaries sometimes concerning one of the UK’s flagship film brands, Pinewood, illustrate that misperception by explaining that, whilst production services benefit from inward investment motivated by tax incentives, profits (even from UK originated IP) are appropriated by (mainly) US companies. This state of affairs for high budget films is commonly understood, but it should be reiterated that the UK companies producing the smaller independent films obtaining a slightly larger piece of Box Office pie, typically suffer significantly disadvantageous terms of trade and will struggle to see meaningful revenues due to the imperatives of structuring financing for projects serving unknown / unpredictable demand.

The point here is not to gripe at the celebration of success – of course it is better that proportionately more tickets ares sold for UK films than a trend in the other direction. But it is more important to highlight what the most important issues are, and direct attention and resources to pursuing analysis in service of solutions to such problems.

A problem of perception (created by a glossing over of the complexities of where income ultimately ends up – be it from incoming production work, or from the UK Box Office), is an issue also noted in Screen’s current  commentary of streaming services’ impact on international sales.

Films that have US theatrical releases and are quickly available digitally are perceived as of lower quality than traditionally released films (this is the view international buyers think is held by audiences, and which they, and arguably US sellers have themselves).

Similarly, the perception that there is an either / or choice between traditional release and a new digitally enabled or oriented one, ignores attempts to combine the two, or at least mitigate the conflicts between them. Indeed MPA Europe point out that the ability to pursue the most advantageous business model on a per film basis is crucial to the entire industry’s performance.

Attempts to reconcile multiple actors interests involve dealing with many recurring tensions, not least the conflict between business models based on revenue streams generated by consumer demand for a particular product (e.g. DVD purchase income accruing to territorial distributor) and those that, though benefiting from the appeal of a given title at a point in time, have alternative revenue streams (e.g. exhibitors and concessions at one end, Amazon and online shopping at the other).

There are imbalances in the alignment of incentives and risks between the multiple entities partnering in the life of individual films. This has historically been the case (producer / distributor) but increases with the recent scale and territorial spread of digital services. For example, Amazon or Netflix can afford for film acquisitions not to generate a particular level of views. Press coverage of dealmaking can lead to sign-ups, prevent user-churn, and in Amazon or Alibaba’s case consumer data and non-film consumer purchases. Whilst distributors adopt portfolio diversification and cross-collatoralisation of windows to mitigate losses per film, they operate at a much lower volume of content, with more direct, though uncertain revenue streams, from customers about whom they know far less.

As I mentioned in a related post, more focussed on UK exhibition here, the ability of practitioners to, as far as possible, remove exposure to consumer demand from their business model, plays a large part in determining financial performance. For instance, in the most stringent adoption of this process debt providers secure their provision against tax credits.  Many strategies involve exposure to derived demand – i.e. anticipation of intermediaries’ perception of what ultimate consumer demand may be. So film financiers look to cover their investment with pre-sales (or multiples of low sales estimates depending on the climate) to distributors, so that the exposure to consumer demand uncertainty is passed on to those distributors putting up MGs. These investors aim to recoup before a film has even been released.

The ability to gauge consumer demand, and thus the views of market intermediaries is changing. As traditional ancillary rights lose value, and VOD services expand into multiple territories obtaining privileged viewing data, the balance of power in terms of trade moves further away from specialised territorial distributors. The potential to pre-sell films to such market actors and thereby complete a finance plan for an independent film thus diminishes.

The regulatory environment that has an overwhelming impact on this organisational structure of business transactions is currently being debated – by EU representatives and US bodies and in the coming weeks it is this that should be the focus of industry analysis – in particular are there developments on how portability of content can be adequately managed technologically to protect territorial licenses.