Creative Economy: A Feasible Development Option

Box 3.6Commercial practices and business models particular to the audiovisual and music industriesThe “window” distribution system, which enables the sequential release of films, videos and television programmes in a staged process (windows) sothat the product can be resold to different markets over time at little additional cost. It facilitates price discrimination and the exploitation of secondarymarkets.3Price discrimination. Unequal competition in secondary markets for audiovisual services has sometimes been likened to dumping because the initialcosts of production have largely been recovered in the home market and the price (or licence fee) charged in secondary markets bears little relation toactual production costs. The majors have been accused of greed and some see increased levels of piracy as a direct result of their pricing policies.Parallel import restrictions on films, videos and television programmes intended to enforce distribution windows, which also underpins the financingstructures of most television and film projects and the valuation of distribution rights.Minimum exhibition period: requirements by distributors of minimum exhibition periods for films that may force smaller exhibitors to forego particulartitles and thereby diminish their commercial viability.Blind bidding, whereby a distributor requires an operator to order a film without prior viewing.Block booking or bundling of films and television programmes by international distributors, whereby less popular products are tied to those that aresought after; serves as a barrier to the screening of competitors’ content.Analysing the creative economy“No share” periods imposed by major distributors that prevent a cinema from showing different titles at different times of the day and/or week that areparticularly onerous for small independent exhibitors and, if excessive, make it more difficult for independent distributors to compete.Joint purchasing arrangements by cinema operators seeking to strengthen their bargaining power with distributors by pooling their demand forfeature films.Refusals to supply and exclusivity clauses in film contracts, whereby a distributor may refuse to supply first-run prints for potential blockbuster films totwo competing cinemas unless the additional audience generated is sufficient to outweigh both the loss of rentals through shared receipts and theadditional cost of the print. In such cases, independent distributors often lose out because, by the time they hire the film for exhibition, demand mayhave waned.Payola, whereby record companies funnel promotional money (or ticket giveaways, concert promotions, vacation trips and other perks) to radio stationsthrough independent promoters in exchange for airplay consideration, which excludes the majority of artists except the most heavily financed, servingto raise the costs of doing business for smaller distributors. This has a secondary effect on artists’ income from royalties collected by collectionsocieties on the basis of the number of times the work is aired.Vertical integration of distributors into exhibition, pay-per-view services and broadcasting.Duration and terms of contracts between artists and record companies.Source: Caves (2000).Online distribution offers viable alternatives to traditionaldistribution channels. It may favour the developmentof niche products and present a profitable outlet, especiallyfor B-list creations that are excluded from mainstream distributionchannels because the biggest firms usually aim for thehits (i.e., the A List). The example of Amazon.com, whichmakes its profit mainly through the sale of less popularbooks that are not carried by its off-line rivals, is often quotedas the typical example of the long-tail theory in practice.The long tail is believed to provide even the very smallestcompanies — and, by extension, individual creators — thenecessary leverage to compete against dominant retail firmsand distributors. 25 The recent move by many smaller musicartists as well as major players such as Prince, PaulMcCartney, Radiohead, Nine Inch Nails and Madonna toeschew the major record labels is leading some industry analyststo conclude that big-name artists have the possibility ofbeing independent. However, most music-industry analystsstress that the bids for independence make sense particularlyfor the most popular acts or those with devout fans who fillconcert seats, buy merchandise (or self-produced CDs) andseek out their favoured artist’s music.The technological revolution may yet lead to a revolutionin the types of contracts prevalent in creative industries24 Not all online retailers represent new entries (or lower prices) because many of the existing players on the market are responding to the new competition by setting up their ownonline operations. Nevertheless, there is an increase in the intensity of competition, which can also result in enhanced consumer welfare and opportunities for business.CREATIVE ECONOMY REPORT 201091