Income Recognition in the Motion Picture Industry (Coursework Sample)

INCOME RECOGNITION IN THE MOTION PICTURE INDUSTRY
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Executive summary
The study gives a brief summary and key issues that center the motion picture industry. Using the Warmer Brother Production Company as a reference point, the study shall analyze marketing and income recognition of a recent movie, “Absence of Forethought,” produced by the company. In order to understand the current market structure and revenues (cash inflow and outflow) in the motion picture industry, the value chain of theatrical motion picture present a summarized outlay of the phases in the production of films. The value chain is sequential in nature and comprises of four distinct stages; production, distribution, exhibition and consumption.
The quality and uniqueness of the project in production phase, proper channel of distribution and exhibition determines the consumption of the movie. Hence, the level of consumption determines the income and revenue generated by the motion picture industry. For the purpose of analytical understanding of income recognition, the study has developed a case study of a major distributor in the motion picture industry, Warner Brothers Production Company.
“Absence of Forethought is a movie that is expected to be successfully distributed to all available markets. The movie has been produced by the Warmen Brothers Company under the four phase of production and the four stages of value chain. Due to technological advancement, several market segments have emerged such as cable network and broadcast networks. The market segments provides an important interlay in recognizing the income or revenue of the motion picture industry. Warmen Brother Production Company is one of the major distributor or studio that has been used a reference point of understanding the whole concept of income recognition.
Introduction
Based on the recent statistical and academic research, the motion picture has marked a high economic importance in the global economy. In 2004, the research shown that the industry employs over half a million people within the boundary of United States of America. During the period, its expenditure on the theatrical tickets was approximately $9billion and $11 billion in United States of America and international respectively. (PWC, 2009) The rate at which people are accessing, pay for and consume the entertainment products is increasing providing a great market platform for the revenue sourcing of the motion picture. Furthermore, the advancement of technology has shifted consumer demand to the extent of impacting financial issues from production to distribution of the entertainment products. As a result, the issue of revenue recognition becomes complex and subjective for the motion picture industry. (PWC, 2009)Despite the fact that motion picture’s sudden development and technological advancement has presented exciting opportunities in the production of the film content and product exploitation, they have posed new challenges in financial accounting relative to its revenue transaction. As such, the study tries to give a brief summary and key issues that center the motion picture industry. Using the Warmer Brother Production Company as a reference point, the study shall analyze marketing and income recognition of a recent movie, “Absence of Forethought,” produced by the company.
For the last two decades, the motion picture industry has taken over the global entertainment market. Such significant changes have been as a result of media rights reformation and technological advancement. The birth of the television industry during the 1960s has presented a wide market segment of the motion picture. Segments such as broadcast networks, cable networks and local TV stations have a major influence in the income recognition of the motion picture industry. In order to understand the current market structure and revenues (cash inflow and outflow) in the motion picture industry, the value chain of theatrical motion picture present a summarized outlay of the phases in the production of film. (Eliashberg & Elberse, 2005)The value chain is sequential in nature and comprises of four distinct stages; production, distribution, exhibition and consumption. Each stage of the value chain entails participation and involvement of difference individual and entities. Generally, the whole process of presenting the final product to the final consumer entails a competitive platform associated with the integration of difference individual, facilities and activities. Independent production companies, major studios, independent distributors, smaller regional art houses and exhibitors as well as major national exhibition chains. In summary, functions such as financing, producing, distributing and advertising are implemented by the studio in play. Therefore, for the purpose of understanding income recognition, a brief summary of the four stages of value chain is a following.
Production
The production stage is complex and sensitive area of determining market performance of the film concerned. As a matter of fact, uniqueness of the development process has been characterized by the succession of creativity and imagination based on both psychological and economic approach. The production or development process commence with the acquisition of the story rights. The issue of story right is based on the new idea, literate property or a true event that starts from a script writing to a completed screen play. During the stage, the issue of financing provides a challenging process especially when there exist no pact or deal between the producer and the studio. As such, producer is obliged to source finance from external source. In the process of sourcing funds, the issue of production budget comes into play whereby recruitment of directors, cast, costume and sets design, shooting location and cost selection, among other things are considered. The production budget during the post-production entails financing possibilities, star salaries and other post production expenses. Success of the preproduction stage gives room for the next stage known as “actual production.” The stage entails shooting of the film and it normally lasts a few months. Editing, creating special effects, dubbing and adding music are some of activities that mark the post production stage. Based on the description of the production phases, the process has been highly applied by the U.S movies (Hollywood). As a result, the Hollywood movies dominates the international theatrical markets hence more revenues compared to the domestic market.
Distribution
Once the production phase has been completed, the project or product is ready for the distribution. Distribution entails marketing activities and physical distribution of the product or prints to the individual audience or theatre. The studio concerned or distributor are responsible for every decision made in relation to the marketing and distribution activities involved. Activities such as release date and media of advertising are major concerns in the distribution stage. As mentioned earlier, the distribution stage entails integration of different individual and families. In other words, distribution stage consist of the major and independent distributors. Colombia, paramount, Twentieth century fox, Warner Bros and Buena Vista are some of the major’s distributor or studio. The mentioned major studio or distributors normally fiancé, produce and distribute their films without involving third parties. The major studio may takeover or assist distribution of the products produced by the independent studios. The metric of performance of the distributor is the United States theatrical box-office gross. It is an indicator of sales potential and performance of home video, freeing theatrical and pay television revenues. The metric provides a stronger emphasis on the reflection of revenue than profits in the motion picture industry. According to the measurement criteria of the metric, a movie that yield a revenue of over $100 million in the theatres is considered a “blockbuster”
Exhibition
The main driver of a film success in all other windows either domestic or foreign is the theatrical performance. Theatrical performance or theatrical exhibition is the critical factor used in persuading the persuading the public to see what they want. Also, exhibition determines the value of the movie in the market by presenting quality and duration of the movie. Exhibition is defined by the combination of the media attention, word of mouth communication and advertising. Due to the technological advancement, the exhibition sector has grown due to improved procure and sound presentation of the screens. The use of multiplexes and mega-plexes has given exhibitors an opportunity to effectively and efficiently utilize their real estates and offer a wide variety of movies to the final consumers.
Consumption
The quality and uniqueness of the project in production phase, proper channel of distribution and exhibition determines the consumption of the movie. Hence, the level of consumption determines the income and revenue generated by the motion picture industry. At this level, the motion picture have no internal control over its product consumption. It is only during the distribution and exhibition stage that the motion picture industry can influence the level of consumption of their movie through different market segments.
Warmen Brothers Production Company
“Absence of Forethought is a movie that ...