Economic and Fiscal Impacts of Texas’ Moving Media Industry
Current Trends in the Media Industry: Film Production, Television Commercials and Video Games
Over the last three years the communications and entertainment industry has grown to $885.2 billion in sales, catapulting it into the fourth-largest economic sector in the United States, according to Veronis Suhler Stevenson (VSS) research.1 Solid growth at the box office, increased spending on TV programming, in-flight entertainment and new video game rollouts have driven revenue gains.
Film industry dynamics have changed significantly over the last few decades, with studios turning into major media conglomerates focused on the financial bottom line. The industry kept pace with the 2006 hit “Pirates of the Caribbean: Dead Man’s Chest,” which grossed $423 million at the domestic box office. Seventeen other movie titles grossed more than $100 million. Total box office spending rose 6.5 percent in 2006 to $9.73 billion.
VSS research forecasts rising ticket prices will dampen movie attendance and overall box office performance from 2007 to 2011. Theater owners will try to overcome this with more digital screens and studios offering IMAX and 3-D formats.
Box office movie titans correlate to millions of dollars spent in production revenue brought into areas such as the Big Island in Hawaii. West Hawaii Today reported Steven Spielberg’s “Indiana Jones and the Kingdom of the Crystal Skull” added $17 million in production revenue – about 85 percent of the total production revenue for the island in 2007.
Home Video Spending
Home video spending, the second largest entertainment category according to VSS research, grew only 0.5 percent in 2006 to $25.7 billion. Growth was driven primarily by a 7.4 percent increase in DVD spending. Additional purchases of DVDs helped offset a staggering 68.9 percent decline in videocassette sales to $720 million.
The growth in DVD spending was propelled by the plethora of box office titles that became available in 2006, including 15 films that generated more than $100 million each at the box office. Releases included “The Chronicles of Narnia,” “Cars” and “Harry Potter and the Goblet of Fire.” These titles fueled total DVD purchases up to $17.9 billion and DVD rentals up to $7.08 billion.
According to a February 2008 article in The Economist, there is growing concern in the DVD industry that the Internet will decimate DVD sales, which in America generate about half as much revenue as feature films. Film pirating is seen as another threat to the health of the industry. Apple’s iTunes captures about 80 percent of the download-to-own market, while Xbox accounts for more than 70 percent of online rentals. Another article in BusinessWeek that same month stated the industry is trying to mitigate pirating threats by holding onto paying customers and coming out with more movies using 3-D images.
As the VHS market evaporates, with declines of $439 million in sales and $281 million in rentals in 2006, this part of the home video sector will offset some of the gains in the DVD market. Sales and rentals of VHS will probably disappear by 2009, partly because of the FCC-mandated digital television conversion.
U.S. Music, Movie and Gaming Revenue
Sources: NPD Group, ESA, MPAA,
BoxOfficeMojo.com, RIAA and IFPI.
The video game market – comprised of sell-through (units sold directly to the customer) and rental console games, PC software, and video game and Web site advertising – expanded 7.3 percent to $8.69 billion in 2006 according to VSS. In 2007, video game spending increased at an even faster clip (see Figure 2). New console releases bolstered video game software sales and rentals to $7.16 billion in 2006, reversing the drop in sales from the previous year. Meanwhile, PC software sales declined 1.3 percent in 2006 with spending dropping to $1.01 billion. With box office revenues promising only modest future growth, the rapidly expanding gaming industry is attracting interest from Hollywood big-wigs such as producer Jerry Bruckheimer, director Steven Spielberg and the television network MTV.
According to Robert W. Crandall and J. Gregory Sidak of the Brookings Institution, the video game market will not only help push entertainment software sales to $15 billion in 2009, but this market will have a ripple-effect and spread technological innovations to other industries.2
The demand for additional production inputs is also growing in the gaming industry. In the early 1990s, the average cost of developing a video game was $40,000. In 2004, the average development cost ran about $10 million. This huge increase is due to the demand for three-dimensional images, artificial intelligence and enhanced voice and sound effects. By 2011, it is estimated that development costs for a single game will range anywhere from $15 million to $25 million. Relatively new financial components to the video game industry, “in-game” advertising and product placement, will help offset some of this spiraling development cost.3 Although entirely absent from the industry only a few years ago, in-game advertising and placement revenue ballooned from $34 million in 2004 to a projected $562.5 million in 2009.4 In addition to helping publishers offset costs, this revenue stream represents a welcome new avenue for advertisers. In-game advertising and product placement enables advertisers to continue reaching the prime 18-34 year old male demographic that is steadily choosing video game play over television viewing.5 Consumer video game spending will be linked to the availability of new titles for updated console game platforms, which include enhanced online multi-player subscription components such as the Wii and Xbox 360.
VSS predicts that video game unit sales and spending from 2007 to 2011 will be attached to the availability of new titles for updated console game platforms and enhanced multi-player online subscription components. This trend may already be underway, as indicated by the phenomenal success of the recently released video game “Grand Theft Auto IV.” In its opening week, 6 million copies were sold grossing more than $500 million.6 VSS also projects that the PC software market will rebound modestly as sales increase for new computers with superior graphics.
The video game industry also represents a significant employment sector. The Entertainment Software Association notes that while direct employment grew at an annual rate of 4.4 percent between the years 2002 and 2006, the sector was responsible for more than 80,000 direct and indirect jobs in 31 states in 2006. This places the industry on track to support more than 90,000 direct and indirect jobs in America by 2009.7
Total spending on advertising in 2006 reached $209.74 billion, a growth of 5.7 percent over the previous year. Although there were many drivers of this spending increase, television advertising was a prime factor. Increased competition for consumers’ attention has prompted major brands to use integrated advertising and marketing strategies. Complementary media outlets include satellite radio, the Internet and mobile phones.
Members of The Association of Independent Commercial Producers (AICP) spent $2.64 billion on direct production in 2006, with more than 80 percent occurring in the United States.8 Major production locations for commercial shoots in 2006 were New York, Florida and Southern California with Canada being the largest foreign production area.
Radio advertising is not expected to grow significantly in the foreseeable future, due primarily to widespread consolidation in broadcast radio and the shift to digital platforms.
Spending on television programming and in-flight entertainment increased 9.1 percent in 2006 to $27.45 billion, according to VSS. In that year the television networks also benefited from the cyclical pattern of rising spending on even-numbered years due to the Olympics and election campaign coverage. But because of the glut of reality shows, the growth has been modest because of the lack of scripted, off-network programs available for syndication.
However, a reversal may be underway as viewers begin to suffer from “reality fatigue.” Spending on scripted programs is rebounding after the recent success of programs such as “Lost,” “House,” “My Name is Earl,” “Ugly Betty,” “Heroes” and “Desperate Housewives.” But while scripted programs are in high demand, the impact of the 2008 writers’ strike has left its mark. With more than 12,000 East and West Coast guild members out of work for three months, revenue losses have been estimated between $500 million and $750 million. But some of these losses may be recouped by the end of the year.
Local television stations are encountering many challenges in sustaining growth through 2011, including competition with cable and increased DVD sales of many of the programs they air in syndication. However, TV stations are expected to benefit from the FCC-required shift from analog to digital signals in February 2009 as some local affiliates may be able to sell ads on the extra spectrums they own.