MONEY is only a profit when your revenues are more than costs and expenses and when your cash inflow is greater than cash outflow over a particular period of time. Whilst that sounds like a mad accountant, it is a necessary madness if you are to run a business in the Creative Industry.
Datuk Zang Toi was once quoted, “In the fashion business, creativity only accounts for 10% of the effort; and the remaining 90% are all business acumen”. This is from an international creative practitioner and it is not merely an academic statement. It is a proven concept as evident in Zang Toi’s success stories.
One of the more controversial money issues is the royalties for creative content. This debate has been going on for decades particularly involving TV broadcasters and production houses. The basic concept to comprehend this issue is the understanding of equity stake mechanism for Intellectual Properties (‘IP’) and the relationship between risks and rewards.
The party who puts in the investment should be the party that reaps the benefit. If any party to a deal wishes to reap the benefits of a particular IP, then that party should put their skin in the game, i.e. invest fully or partially.
Under the commissioning method, a 20-episode series can earn revenues of RM900,000 to RM1.6 million for the hired production house, but it stops there
Let us use TV production as an example. Typically, a TV production can happen under two models: Commissioning or Licensing. The former is fully invested by the broadcaster and the latter by the production house.
Under the Commissioning approach, a broadcaster puts in all the financial resources to a TV series and commissions a production house to produce it. The broadcaster owns the IP and any future economic benefits that can be derived subsequently goes to the broadcaster.
On the flip side, a production house may put in all the financial resources to produce a particular TV series and upon completion (or partial completion), sells the right for broadcasting to broadcasters under licensing deals.
Licensing deals normally have a limit to which extent a broadcaster is allowed to air the content on TV – either on a limited number of runs basis or within a particular licensing period (e.g. 2 years); or even both. The production house must make this calculation and assess their business position.
Are they in the position to earn lower licensing income and endure a longer runway to earn future income? Or, do they want to get all the money up front and not wait for any more in the future? Or, on a more balanced approach, share both revenues and costs with broadcasters.
Under the Commissioning method, the Malaysian broadcasters pay between RM45,000 to RM80,000 per episode depending on the treatment, crew, casting and storyline. So, a 20-episode series can earn revenues of RM900,000 to RM1.6 million for the hired production house, but it stops there.
Under the Licensing method, the production house incurs the production costs but each episode can only earn less than RM5,000 licensing income from the broadcasters. However, the production houses who are also the owners of the IP, can get multiple licensing deals with multiple broadcasters and on-line streaming platforms.
A sharing model cuts everything in the middle assuming a 50:50 sharing basis. In such cases, instead of the production houses incurring nil costs, the production houses incur RM22,500 to RM40,000 taking 50% of the broadcasters’ burden.
Then, whatever revenue that can be derived is split 50:50 between the broadcasters and the production houses. This means, the production houses now bear the same risks as the broadcasters, i.e. the risk of inadequate revenues to recover the production costs.
Production houses need to be aware of all possible revenue windows if they are to invest in the production of creative content for which they retain the ownership of the IP for that particular content.
Revenues from the sale of DVDs which used to be lucrative, can now be considered as extinct
What are the typical windows? For films, normally the first window would be the cinemas. When that is exhausted, they may choose to sell to Pay-TV operators such as Astro First or sell to Free-to-Air (‘FTA’) TV stations such as TV3, or both, one after the other.
The fourth window can be the on-line video streaming platforms such as Netflix, iflix, Viu, Dim Sum and many more. A decade ago, selling DVDs used to be a lucrative window. Today, that revenue stream can be considered extinct.
Whatever the windows may be, if the deal with the buyers involve prolonged exclusivity period, it can cause issues in the industry. Extreme exclusivity terms can cause a downward spiralling of the economic wellbeing of the creative industry. It practically kills the production houses’ ability to maximise revenues.
Exclusivity that goes to the extent of two years is not good. A better time frame would be six months. Of course, the price should be adjusted accordingly. Under the Astro First model, they used to be priced at a few hundreds of thousand Ringgit.
However, with the expansion of various on-line streaming services (also known as Over-the-Top (‘OTT’)), the pricing benchmark has been disrupted and to date, no standard pricing has been established yet.
What we can see is that, for the very first time in Malaysia, a local movie was bought by Netflix, i.e. ‘Pulang’ by Primeworks Studios in 2018. That deal opened the doors for more local movies to be on Netflix, namely ‘Munafik 2’, ‘Hantu Kak Limah’, ‘Paskal’ and ‘Crossroads One Two Jaga’.
The previous trend of local movies’ box office collection used to be quite gloomy. Although the cinema collections grew yearly, it is mostly fuelled by Hollywood titles. However, movies such as ‘Khurafat’ and ‘The Journey’, that had collected RM10 million and RM17 million respectively, started a new encouraging local movie box office trend.
In 2018, ‘Munafik 2’ reached RM47 million, ‘Hantu Kak Limah’ at RM36 million and ‘Paskal’ around RM20 million.
The windows of revenue would normally end with a small but recurring long tail of cash flow streams if the IP is successful. One good example would be old movies that kept on reappearing on TV even decades after its initial release.
An IP’s potential does not just stop at the content format. Some extended to earn other forms of licensing such as merchandising
To name a few, ‘Bukit Kepong’ and ‘Matinya Seorang Patriot’ have managed to reappear even after the turn of the millennium. P. Ramlee movies would probably hold the record for Malaysian films that have the longest tail of cash inflow streams over so many decades and continue to do so today – ‘Pendekar Bujang Lapok’ being the most popular one.
An IP’s potential does not just stop at the content format. Some extended to earn other forms of licensing such as merchandising. This is evident in the case of ‘Upin dan Ipin’ for which, its Stock Keeping Units (‘SKU’) spans across apparels, stationeries and even restaurants. In fact, the measure of success may even go beyond the local boundaries into other geographical regions.
Johan Ishak is managing director of Awesome TV