Hollywood Profit Case

Source: http://www.economist.com/node/18386456

A major Hollywood film studio has seen their profits down in US market in the recent 5 years, they want to know why and how to tackle with it strategically.

So we start with the industry analysis. Does the industry profit fall as much as our client does? The answer is yes. The industry profit has been declining at the same rate as our client. So it’s not a company problem, we need to analyze the whole industry.

Now we start a Profit & Loss framework. We start from Cost, and we learned that the cost has been steady for the recent 5 years.  We know that the profit drop as been a revenue problem.

Then we ask why does the revenue drop? We start with segmenting the revenue source of the industry. The revenue stream of the films studios comes from 3 sources: 1, Theater box office. 2, after 6 months, DVD/Blue Ray/Video on demand sales.  3, after 1-2 years, sell the movie to TV channels. Looking at the trends, we found that the theater box office revenue and TV channel sales revenue has been steady for recent years, but DVD sales has been dropped drastically in recent 5 years.

We identified the source of the revenue problem to be dropping DVD sales. What caused this problem? Three possibilities: 1, piracy. 2, home DVD rentals. 3, heavy competition leads to dropping prices. A careful analysis of the market reveals that: the number of total films rented in US has grown 10% each year since 2007, and coincidently, the number of DVD bought in US has drastically declined. Piracy is a major problem in China and Russia, but not in US, and DVD market hasn’t seen a surge in competition and drop in price. Thus, the rise of home DVD rental companies (Netflix and Redbox) in the US market has been the dominating factor.

Now, what are the possible strategies to reverse this trend? The response can be grouped in these categories:

1, Boost revenue in emerging markets (China, India) by:

• fighting Piracy
• increase marketing
• release films faster in those regions
• invest in films that talks about stories in local cultural

2, Boost DVD sales in US:

• Deal with Netflix and Redbox for a window of DVD sales (ask them to start rent later)
• Release DVD sooner after the movie is in theater. (May cannibalize box office revenue)
• Increase DVD prices (not likely to be effective)
• Invest in more “blockbuster” movies and reduce funding in small budget movies (People are more likely to buy DVDs of Avatar than other films)

3, Boost other revenue sources in US

• Disney enjoys big revenues from toys/theme parks that comes from movies.
• Increase video-on-demand sales, which is by far the most high margin business for film studios.