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The business of film
The business of film

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2.2 Fragmentation of the value chain

There are many cooperating players required to produce a film. This inherently fragmented value chain is particularly apparent at the financing stage.

To counter this problem, some producers try to establish long-term relationships with other finance companies, sales agents, and distributors in the value chain, in order to simplify the financing and production process, either informally (ongoing relationships) or formally (joint ventures, purchases, mergers, output deals).

This ultimately leads to the strategic possibility of vertical or horizontal integration: which is when a company (or consortium) owns players at different points in the value chain. It is therefore able to also earn money at different points – rather than just one point. An example of this was when Hollywood studios in the 1920s and 1930s used vertical integration and owned the actors, the directors, the production studios, the distribution network and the cinema chains. This meant they controlled the upstream suppliers and the downstream distributors – ensuring massive profits, consistency of product, huge control over how the films were marketed and high entry barriers for potential competitors.

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Figure 2 Pieces of the puzzle

The value chain is useful for demonstrating the advantages of integration. It also enables distinguishing between vertical integration (operating in different segments along the value chain, such as owning a production company and a sales agent) and horizontal integration, where a company owns several players in the same segment of the value chain. This is often at the exploitation end of the chain, where one company can own many media outlets showing the same content; for example a DVD label, a TV channel, and a website where films can be downloaded.

However, the principle of the two types of integration is the same: the company can earn income at more than one place in the chain. This is particularly relevant in the film industry, where there are different commissions and profit shares in revenue taken by different players in the chain (more on this in a moment). The more you can access these different revenue streams, the sooner you can earn money to offset against the expense of production, and the longer you can continue to profit.