Eric TinocoStrategic ManagementApple Case Questions

Assignment Questions

1. What are the chief elements of Apple’s overall competitive strategy? How well do the pieces the strategy evolving?

Apple’s overall competitive strategy involves positioning itself to dominate the markets for smartphones via the iPhone, media players via the iPod, tablet computers via the iPad, and personal computers via the Mac and MacBook Pro. Apple’s strategy within the personal computer market is to differentiate its PCs from other PCs via its proprietary operating system and strong graphics-handling capabilities. Overall, Apple creates simple, sleek, well-designed products known for their ease of use.

2. What are the key elements of Apple’s strategy in computers, personal media players, and smartphones? Have its strategies in its core businesses yielded success? Explain.

Although Macs and MacBook Pros are priced at a premium and involve a longer learning curve for users, Apple computers have developed and maintained a strong cultish following while appealing to more customers through the popularity of its non-PC products. Although Apple did not create the first digital music player, its iPod held a 73% market share in 2010 and the name “iPod” has become a generic name to describe all digital media players. The first version of Apple’s iPhone was released in 2007. It’s highly desired features and functionality prompted Time magazine to designate it “Invention of the Year” for 2007. Apple’s iPad was introduced in 2010 and sold more than 3 million units within the first 90 days. Overall, Apple’s nonPC products accounts for a majority and ever-growing percentage of its profits.

3. What does a competitive strength assessment reveal about Apple’s computer business, as compared to the leaders in the personal computer industry? Use the methodology in Table 4.2 on page 97 in your textbook to support your answer.

In addition to its tangible resources, Apple has strengthened its position by differentiating itself by cultivating a unique brand image. Its iPod has become so successful that the name “iPod” itself has become synonymous with digital media players. Its Mac PCs enjoy strong “buyer loyalty” via its cult-like following. It has also fostered a company culture based on unique design and ease of use of its products. It is interesting to note that the iPod, iPhone, iPad, and Mac were not the first of their kinds. However, through unique design they were able to differentiate themselves from all other similar products on the market. This is the reason why Apple has been able to command a premium price for their products.

4. Does it appear that the company’s competitive positions in personal media players and smartphones or stronger or weaker than its position in computers?

The iPod’s dominant market position remains, as seen in its level of sales as compared to Microsoft’s Zune, Archos’s Vision models, and Sony media players. However, through 2012 and 2013 Samsung Galaxy’s Android series has come to dominate the market for smartphones. Collectively, Apple’s non-PC products such as the iPad, iPhone, and iPod account for more sales revenue than does its Mac PCs.

5. Does it make good strategic sense for Apple to be a competitor in the computer, personal media player, smartphone, and tablet computer industries? Are the value chain activities that Apple performs in computers, personal media players, tablet computers and smartphones very similar and “compatible” or are there very important differences from product to product? Which of the four products lines---computers, tablet computers, personal media players, or smartphones---do you think is most important to Apple’s future growth?

Yes, it makes sense for Apple to compete in the computer, personal media player, smartphone, and tablet PC industries. All of its products involve dynamic applications, media players, and wireless connectivity. Overall, tablet computers are rapidly gaining market share over desktop and lap top computers. I believe that this is a key area of future growth at Apple.

6. What is your assessment of Apple Computer’s ratios? Use Table 4.1 on pages 94-96 of the text as a guide. Compare the performance during the timeframe of the case to the recent performance.

Apple’s performance has somewhat leveled off. It currently keeps large amounts of cash on the balance sheets of overseas subsidiaries. This cash must be put to use through innovative initiatives. However, Apple is concerned about U.S. corporate taxes.

7. What recommendations would you make to allow Apple to strengthen its position in its most important markets? What steps should it take to ensure that the iPad becomes a success in the marketplace and a major contributor to the company’s overall performance?

The first recommendation I would make is that Apple repatriate the significant amount of cash currently held overseas. It must show that these funds are being put to use in innovative projects. Also, I applaud Apple’s recent deal with a Chinese company to gain market share in the Chinese market. To ensure that the iPad remains a success in the marketplace, I would recommend adding wireless functionality and adding the ability to run more applications that currently only run on desktop and laptops.

Eric Tinoco

Strategic Management

Industry Table

Industry definition This industry comprises establishments that primarily produce and distribute motion pictures. Distributors work with theatrical and home media entertainment products, including digital and physical versions. Movie producers also hold movie libraries that receive revenue from cable and network TV; however, companies that primarily broadcast and produce TV content are excluded from this industry.

Market size and growth rate

Market Share ConcentrationConcentration in this industry is low

In the Global Movie Production and Distribution industry, the top four companies are estimated to account for about 28.4% of revenue. This indicates that the industry has a low industry concentration level, which is expected to continue through 2018.

The average number of industry employees per establishment is estimated to be 15 in 2013. Specialized and boutique companies are normally dependent on a core group of employees with managerial and creative control. They often concentrate on niche products or media, and can often be dependent on one or two large accounts.

Small companies offset larger corporations, which are more successful in this industry because they are better able to mitigate the risks involved in movie production. For example, revenue from popular movies often balances out losses from less successful productions, giving large studios with a diversified movie portfolio an advantage over smaller, specialized production studios that lack the resources to produce and release a wide variety of movies each year. However, newly developed technologies that cut production and distribution costs will helping mitigate the aforementioned risks to smaller studios in the future. As these costs continue to decrease, movies that have a relatively small marketing budget are increasingly accessible to the general public, leading to more, small movie-production companies.

Revenue GrowthYear Revenue $ billion Growth %1999 67.2 0.02000 71.6 6.52001 72.2 0.82002 75.0 3.92003 83.4 11.22004 100.4 20.42005 94.6 -5.82006 93.5 -1.22007 91.0 -2.72008 88.6 -2.62009 89.2 0.72010 89.8 0.72011 87.3 -2.82012 88.2 1.02013 89.5 1.5

Key rivals & market share

News Corporation Market Share: 8.4%

Time Warner Inc.Market Share: 7.1%

The Walt Disney CompanyMarket Share: 6.8%

NBCUniversal Inc.Market Share: 6.5%

Viacom Inc.

Estimated market share: 4.2%

Ramoji Film City

Estimated market share: Less than 1.0%

Scope of competitive rivalry

Basis of CompetitionCompetition in this industry is high and the trend is increasing

Movie producers compete against movies produced by other studios and production companies. Prior to production, competition occurs between studios for the rights to a film (artistic properties), the talent and facilities used, exhibition outlets and public interest. The number of movies released in any given period may cause oversupply in the market and make it more difficult for a movie to succeed. In addition, TV networks produce programs internally, which may reduce consumer demand for movies and network demand for movie products. Other forms of external competition include sporting events, theme parks, theaters and other entertainment providers.

Production

Competition focuses on gaining the rights to an original or innovative script or story (artistic properties), or the right to use a "known" character that is integral to the movie, such as Superman. Production companies generally win these rights based on fees paid to the IP owners. However, in some cases production companies that offer an IP owner some artistic control, or meet the artistic expectations of the IP owner, will succeed in winning the rights.

It is important that the movie is properly cast; in most cases, movies produced by Hollywood studios will have notable actors that draw higher US and worldwide box office and DVD returns. Casting reflects an actor's domestic and international profile and suitability or talent for the role.

Winning financing to produce the film is another major element of competition; for the majority of releases, funding is extremely difficult to access and is dependent on self-financing, government grants, or private investment/loans. At the upper end of the industry, financing is internally generated, meaning fewer funding issues and a higher per production budget for major theatrical releases.

Location can be integral to the success of a film; however, a sense of location can also be recreated in any landscape, or by using digital technology in the studio. A movie producer must find the cheapest location, taking into account labor costs and tax incentives and rebates. Financial incentives are one way in which countries

compete against each other to host the production of a film. Most countries offer generous incentive schemes depending on a movie's budget and if local labor is used.

Postproduction

The employment of skilled postproduction staff will improve the look and sound of a movie. The success of production talent is generally dependent on the equipment used and the technical capacity of studio facilities, such as the use of computer-generated imagery (CGI).

A distribution company, which is often vertically integrated with the production studio, must ensure the film is seen on as many cinema screens around the world as possible, thereby increasing audience potential, and that home media and TV distribution is timely. Distribution relies on personal and professional networks. Distribution companies can differentiate themselves from one another by experience, quality and price.

Companies seek to differentiate their product by advertising often three to six months in advance of a film's release, including advertisements targeted directly at the key audience demographic and product tie-ins, such as cinema ticket or merchandise giveaways with food and drinks. Generally, the larger the advertising expenditure, the greater is audience and exhibitor awareness. Release dates are determined by several factors, including release dates by competing studios and the timing of holiday periods.

Concentration vs. fragmentation

Major MarketsHome media products

The majority of industry revenue is derived from the sale of home media products such as DVDs and Blu-ray. Returns from DVD sales reflect a movies' popularity at the box office, film reviews, a producers' or studios' advertising of the product and the extra features added to a DVD, such as deleted scenes, outtakes, commentary and interviews.

The capacity of home media products, their versatility and the increasing penetration rate of DVD and Blu-ray players and recorders into households in advanced economies have significantly increased returns from this medium. The popularity of home media products has helped hasten the decline of box office revenue as a proportion of total industry revenue. A downside to digital media is the increasing prevalence of movie piracy, which reduces the total value of industry revenue.

Cinema and theaters

The cinema is the first point of market entry for a movie and films are shown on cinema screens around the world for a limited time. Movies shown on this medium are generally the larger budget productions from major studios with a well-known cast. However, there is a range of cinemas that specialize in exhibiting independent and low-budget productions.

Production companies spend a large amount on advertising a cinema movie to consumers. Advertising has been shown to increase audience numbers, but also affects exhibitors' behavior and persuade them to show a film. This is a very important factor outside the United States, where there are fewer movie screens on a per capita basis and competition for exhibition space is much higher. Studios also meet significant costs involved with providing exhibitors with film, while the more screens on which a movie plays, the greater the more distribution costs.

Over the past five years, worldwide box office returns and audiences have generally increased as a result to growth in Asia, Latin America China, India and Russia. This trend is expected to continue through 2018.

Pay- and free-to-air TV

Producers distribute movies to subscription pay television, pay-per-view and video-on-demand services in the first instance and later to free-to-air TV networks. The license agreements generally provide for a specified number of exhibitions of the movie during a fixed term in exchange for a license fee. The higher the potential viewing audience for the TV broadcast, the higher the license fee for the film. Given that US cable/satellite audience growth has been robust in the United States and Europe, license fees are likely to have increased substantially over the past five years. The license

agreements reflecting the pay-per-view and video-on-demand service arrangements generally provide for a license fee based on a percentage of the licensee's gross receipts from the exhibition of the program, and in some cases, a guaranteed minimum fee.

Moreover, revenue from network TV has been healthy. This is largely due to the fact that studios do not have to pay any advertising or marketing costs out of the license receipts as they had to prior to cinema release and even home media release. As such, the TV license fee and sales from film libraries is almost total profit.

This industry has also benefited from the vertically integrated nature of the entertainment industry, especially in the major US market. For instance, the major movie producers and distributors (Fox, Time Warner, Sony, Universal, Paramount and Disney) and the American broadcast networks (CBS, NBC, ABC, FOX and WB) have the same parent companies.

Demand determinants Demand DeterminantsStudios and independent production companies make and distribute movies to meet consumer demand. The movie product appears as one of many genres or styles and production companies generally understand that genres' audience demographics and how best to market to that demographic. Often movies fulfill more than an entertainment function and are demanded by governments to buoy domestic artistic creativity, and as a means to boost domestic film production skills.

Higher levels of disposable income increase the likelihood of people spending on entertainment, such as cinema attendance and DVD and Blu-ray purchases. Changes in disposable income are affected by changes in interest and tax rates and labor market growth. Attending a cinema is also often in competition with buying a DVD or Blu-ray, or attending other entertainment and performing arts activities.

Demand for movies is greater when publicity has been widespread or reviews have been good. Production companies can generally control the level of publicity a film generates. However, reviews of the movie are based on artistic merit and the opinion of the reviewer and are therefore less easy to judge or control.

Certain films appeal to a specific demographic (age, gender, education, income and marital status being the most important). If the number of people in a certain demographic group increases, then the potential size of the audience for the product increases.

The more time that people have to dedicate to leisure or discretionary time, the greater the possibility that they will purchase the movie product or be exposed to movies on TV or on the Internet (broadband internet connections and access to cable/satellite TV is also an important direct mode of industry advertising and boosting demand for the product by providing old films for viewing consumption.

The greater level of digital media and technology adoption by the population in general, the greater will be the potential size of the audience. This is particularly true for DVD and Blu-ray purchases. Over the current performance period, the household penetration rate of DVD players has increased rapidly, while the number of film titles on DVD has also increased.

Degree of product differentiation

Genre generally refers to shared similarities in the narrative elements from which films are constructed. Film genre is typically derived from the director's use of setting or location; mood, or a film's emotional delivery; and format, which is a more technical characteristic that can be achieved by the use of certain equipment, or because the film is presented in a certain manner. Examples of setting include war, a particular city or country, or a focus on sports or science fiction. Examples of mood include action, comedy or horror, while format includes categories such as animation, musical or documentary.

Genres have discernible audience demographics and complementary publications, such as magazines or websites, to support them and reach the desired demographic. Film genres are therefore extremely useful tools for marketing efforts and as

categories for critics and consumers to help determine their ideas about the product. The following breakdown is sourced from data in the Internet Movie Database, for films released and to-to-be released in 2013, compared with 2008.

Short

The Academy of Motion Picture Arts and Sciences, a professional organization of filmmakers, defines a short film as "an original motion picture that has a running time of 40 minutes or less, including all credits." In 2013, the proportion of shorts to full-length feature films is expected to be 21.7%. This is less than the 29.6% of movies that were shorts in 2008 because technological advances have sped up the content creation process, making it easier for even low-budget productions to make a full-length film.

Drama

Dramas tell a story, usually involving conflicts and emotions. About 19.3% of movies that are released in 2013 are expected to be in the drama genre, compared to just 16.5% in 2008. Drama has gained popularity during the past five years with the success of blockbuster franchises including the Harry Potter series and the Twilight Saga.

Comedy

Comedy is composed of dramas that are specifically intended to make an audience laugh. It has also become a more popular genre during the past five years; about 11.5% of films released in 2013 are expected to be comedies while only 10.7% of movies were comedies in 2008. The popularity of the genre fluctuated from year to year, however, with a low of 10.5% in 2008 and a high in 2012.

Documentary

Defined as a nonfictional motion picture intended to document some aspect of reality, primarily for the purposes of instruction or maintaining a historical record, the documentary has decreased in popularity since 2008, when 13.4% of movies were categorized in this genre. About 8.5% of films released in 2013 will be documentaries. The steady decline in popularity for documentaries through the past five years may be due to increasing international communication facilitated by online applications like Twitter,

which enable locals and reporters to provide real-time coverage of world events.

Thriller

The number of thriller movies spiked to 5.6% of movies released in 2013, after hovering at about 3.4% throughout the past five years. Similarly to the drama genre, franchise films like Transformers and The Expendables have also popularized thrillers. Indeed, the blockbuster Dark Knight series borders the two genres and could be categorized as either.

Other

Other genres include horror, action, romance, family, crime, fantasy, sci-fi, biography, adventure, mystery, animation and western. From year-to-year, the variety of movies has stayed relatively constant across genres. However, the category has expanded as a share of movies produced from about 26.4% in 2008 to 33.4% in 2013.

Key success factors Key Success FactorsIBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:

Control of distribution arrangements: The ability to negotiate contracts with movie producers and library holders regarding movie distribution rights with a variety of end users (i.e. theaters, home media, internet, mobile devices), both domestically and internationally, is critical.

Ability to quickly adopt new technology: Adopting new technology and using that technology appropriately can improve the visual and artistic outcome of movie production and can limit labor costs.

Having marketing expertise: Advertising is an important indicator

of the number of screens on which a movie shows and the box-office revenue it generates. Advertising drives the behavior of audiences and exhibitors.

Effective cost controls: Movie productions often run over budget, severely undermining the likely profitability of the venture. Delivering a product on budget will increase the chances of a film being a financial success.

Prompt delivery to market: Movies that tap into current issues or follow social trends will be popular. Prompt delivery of movies to exhibitors around the world ensures good box office returns, while a home media release will meet demand from consumers and minimize piracy.

Supply/demand conditions

The Global Movie Production and Distribution industry creates and disseminates motion pictures to audiences across the world, so it relies directly on discretionary spending. The industry suffered when disposable income dipped and stayed low due to the Great Recession, especially in developed regions. About 39.0% of industry revenue is generated from North American audiences, while another 23.5% of revenue comes from Europe. However, the disposable income levels of consumers from rapidly developing, newly industrialized nations like Brazil, Russia, India and China (BRIC nations) are rising quickly and expected to support industry revenue expansion of 1.5% in 2013. Consequently, revenue is expected to grow at a five-year annualized rate of 0.2% to $89.5 billion.

A world audience that can increasingly afford to pay for movie content and new communication technologies that have diminished distribution costs are supporting industry profit expansion by boosting demand. Technology change is also supporting new revenue streams for movie producers and distributors who rely on paid and ad-supported viewership across a variety of exhibition methods, from traditional cinema to video streaming on mobile devices. As a result, industry profit is estimated to increase from a low of 4.0% of revenue in 2009 to about 4.2% in 2013. Nonetheless, profit remains below the 2008 average margin of 4.3%.

In the next five years, more audiences in BRIC and in emerging

nations are anticipated to consume movie content on a regular basis. Disposable income is expected to rebound from Great Recession lows, and newly developed revenue streams will be better understood by the industry. Revenue is forecast to rise during the next five years at a 2.0% annualized rate to $98.9 billion. Major firms, which are mainly headquartered in the United States, are expected to increasingly invest in developing markets in order to capitalize on audience growth in these countries. Six production studios in the United States dominate the production and distribution of movies: Fox, Time Warner, Sony, Universal, Paramount and Disney. There are few entities outside the United States that have similar production capabilities in terms of infrastructure, production financing, marketing and distribution reach. Nonetheless, industries in other regions, particularly Northern Asia and India, are anticipated to expand rapidly during the next five years.

Analysis of stage in life cycle

Industry Life CycleThis industry is mature

The products offered by industry operators are a fundamental part of the entertainment media. However, the highly competitive nature of this geographically concentrated, studio-dominated and high production cost industry will continue to place pressure on small-scale participants to close operations or merge with larger entities to maintain profitability. During the 10 years to 2018, the Global Movie Production and Distribution industry is expected to contribute to a diminishing share of the world economy due to much faster growth in less-established industries. As measured by industry value added (IVA), the industry's contribution to the economy over the 10 years to 2018 is estimated to rise at a 0.9% annualized rate, while global GDP is projected to rise at a 5.4% average rate per year.

The sophistication and application of postproduction and special-effects technology has increased significantly over the past five years. The resulting faster processing times and more automation have helped cut costs for studios. Such systems and processes are expected to continue to rapidly evolve during the next five years, encouraging new businesses to enter into the industry. IBISWorld

estimates that the number of enterprises will grow at a 1.8% annualized 10-year rate to 884,900 in 2018.

The adoption of technology is facilitating and enhancing the distribution and exhibition of movies, which is rapidly altering the landscape of the industry. Consumers continue to embrace a range of home media products such as Blu-ray discs; cable, satellite and video-on-demand TV; and downloadable and streaming videos. Movies are also increasingly disseminated in digital formats that are compatible with personal entertainment equipment, such as smartphones, tablets and gaming consoles. Such technological adoption is increasing the consumption of videos. High-definition TVs, digital movie screens and 3-D technologies are also enhancing the viewing experience for consumers, justifying higher pricing for select products.

Life Cycle Reasons

Advances in recording and editing technology are cutting labor costs, speeding up the production process and improving product quality

Mobile and in-home devices with internet or satellite connections are facilitating public access to industry products

Digital distribution is helping industry operators cut costs by drastically reducing shipping time and costs

Pace of technological change

Technology & SystemsThe level of technology change is high

Production

Advances in video equipment and storage are allowing for increasingly high-resolution movies to be produced, even with a low budget. Video cameras have more automatic settings, decreasing the need to re-shoot scenes. Also, digital production and editing software have cut costs and time in post-production.

Distribution and exhibition

As cinemas adapt to digital distribution methods, the distribution process will also be less costly for producers. The number of digital movie screens has increased rapidly over the current performance period. However, the number is still very small compared with those that operate using film. The benefits of digital distribution appear to be lower costs for producers/distributors, which must presently pay $1,000 to $1,500 per film print for new releases. Moreover, sound quality is generally better, as the audio files have not been compressed. Visual quality has yet to surpass film to the extent that exhibitors are willing to purchase, maintain and more frequently replace digital equipment. In countries that are currently under-screened, which is most of the world outside the United States, digital cinema numbers are likely to increase rapidly if cost factors can be overcome. The most obvious candidates are in Asia, including China and India, due to the quickly rising disposable income amongst large population groups in those countries.

To increase revenue flow, it is important to harness new digital media like the internet to allow paid-for downloads and free movie trailers. Over the long-term, improvements in digital format should boost viewing quality and facilitate electronic efforts to stem movie piracy.

Special effects

Special effects are visual elements used to simulate reality on film. The desired effect is often impossible or impractical to produce first hand, such as a spaceship in space, an earthquake or a particularly large crowd scene. The growing use of computer animation and computer-generated imagery (CGI) has produced increasingly realistic visual effects and there is a correlation between movie budget and box-office success. The largest movie studios usually have their own special effects department. However, private companies, such as George Lucas's Industrial Light and Magic, do provide outsourced services.

A full-time special effects department for small and medium-sized producers would not be economically viable, given that special effects are not always required or can be achieved by industry-standard technology in post-production. Many films are low-budget and do not feature cutting-edge technology. Such films differentiate themselves by the quality of their script and acting, as well as

directorial creativity. However, the majority of major theatrical releases (i.e. those generally produced in the US studio system and of the disaster, science-fiction or horror genres) rely on special effects as a mode of competition.

Barriers to entry Barriers to EntryBarriers to entry in this industry are low and are steady

 Barriers to Entry checklist

 Level/Impact

Industry Competition HighIndustry Concentration LowLife Cycle Stage MatureCapital Intensity MediumTechnology Change HighRegulation and Policy MediumIndustry Assistance Medium

The major deterrent to new companies considering entry into this industry is the powerhouse of major US studios. Those studios (see Major Companies section) form a barrier because they spend significant financial resources on marketing that draw the major crowds away from films with smaller budgets. Also, they are highly vertically integrated and have global distribution arms that often provide pre-finance for a film, thereby mitigating the problems of finding up-front finance, as the lag time between a movie's

conception and commercialization is a major barrier.

Further, major studios, as the primary suppliers to exhibitors, have significant sway over cinema owners. This ensures that studio releases get screen priority and long run times. They may also have relationships with major cast names that prevent talent working on films for other studios and independent productions.

A movie of good visual and artistic quality can be produced with a minimal budget given the right level of skill and talent. However, the ability to rent expensive technical equipment, location and premises and other inputs could prove difficult for new companies. There is also a high level of skills outsourcing by the major players for niche aspects of industry production work and a need for a large number of ready-made performance venues, such as cinemas, that show major releases, independent films and others. Regulation in some regions restricts artistic freedom and could also inhibit some companies from entering the industry.

Regulation/deregulation

Regulation & PolicyThe level of regulation is medium and the trend is steady

Most countries protect the right of all artists and producers to create works freely and in them express political or social and cultural views contrary to government policy and other widely held societal norms.

A motion picture rating system categorizes films with regard to suitability for children and/or adults in relation to portrayals of sex, violence and profanity. In some countries (e.g. Australia), an official government body decides on ratings (i.e. a de jure system); in other countries (e.g. the United States), it is done by industry bodies with no official government status (i.e. de facto). Certification normally involves classifications that show a film is suitable for all ages, where parental guidance is recommended, and when films are suitable for those aged 15 years and above and 18 years and above.

In most countries, movies that are considered morally offensive and beyond the certification system have been, and can be, banned.

Banning a film occurs much less frequently than in previous decades as morality considerations change and digital piracy makes a ban very difficult to police. Most Western countries, such as the United States, rarely ban films unless there are legal or civil violations, or if the film is a threat to national security.

The industry has to comply with copyright laws in terms of receiving written approval for the use of images, music and scripts used in the production process, and royalty payments may have to be made to copyright owners. Once a product has been made, it becomes subject to protection from unauthorized copy. Due to the relative ease of copying content, the industry is extremely susceptible to piracy. Piracy is especially prevalent in Asia, where movies are commonly illegally copied and sold.

Globalization Industry GlobalizationGlobalization in this industry is high and the trend is increasing

Several entertainment conglomerates, including the four major companies, have production and distribution networks worldwide - and financial interests in a number of independent companies that produce or distribute content domestically. The production and distribution of movies is dominated by six production studios in the United States, namely Fox, Time Warner, Sony, Universal, Paramount and Disney. There are few entities outside the United States that have similar production capabilities, in terms of infrastructure, production financing, and marketing and distribution reach. Major feature films produced in the United States tend to have a higher production budget than elsewhere, and are supported by a significant level of marketing by distributors.

Market share for domestically produced movies in countries outside of the United States, some of which have well-established film industries, is very low. Apart from the United States, India also harbors a strong local movie industry and culture that dominates the local market. The remaining countries around the world primarily enjoy foreign movies. This is further facilitated by digital distribution, which has enabled consumers and distributors to more easily share motion picture content.

Trends Industry OutlookIn the five years to 2018, higher GDP and employment growth are anticipated to spur gains in household disposable income and consumer sentiment, leading to increased spending on entertainment. Along with the international 3-D movie revolution, these positive trends will stimulate movie production revenue. As a result, IBISWorld estimates that the Global Movie Production and Distribution industry's revenue will rise at an annualized 2.0% as movie output increases at a moderate rate, and as broadcasting and consumer demand rise steadily through 2018.

Revenue is expected to grow by 3.2% in 2014, due to a forecast recovery in global economic conditions. The general availability of risk capital and finance will improve dramatically as the worst of the global recession and associated credit squeeze fades. By 2018, industry revenue is forecast to total $98.9 billion.

Gradual expansion

The industry is anticipated to garner slightly less revenue from the cinema segment during the next five years, reflecting generally sluggish growth in cinema attendance across most advanced economies. Attendance has been negatively affected by the convenience and privacy afforded by home media products like DVDs and Blu-ray, and the rise in digital piracy associated with broadband internet connection. Moreover, the increasing penetration rate of pay cable and satellite TV has made accessing movies more convenient. The vertically integrated nature of the movie and entertainment sector is likely to result in pay-TV siphoning off theatrical releases shortly after cinema and DVD or Blu-ray release, as a means of attracting larger license fees.

Slow growth in industry employment, largely in developed countries, is also anticipated during the next five years. This growth will occur despite rising competition, as global economic growth increases and boosts profit. In emerging markets, the industry remains skewed toward the cinema segment. During the next five years in particular, cinema chains are expected to build new multiscreen facilities that are digitally enabled to attract expanding middle-class audiences. For example, Bollywood, as the Indian

movie production industry is known, produces a vast number of movies in many languages and dialects. Movies tend to have low production value and, due to the large number produced, are rotated quickly, unlike major US theatrical releases, which are limited as a means of retaining consumer demand. IBISWorld estimates that the Indian market is not yet saturated because there are about 86,000 people per screen, compared with about 7,500 people per screen in the United States. This suggests that the country will expand its exhibition capacity during the next five years, especially because disposable income in India is projected to grow quickly during this time. With this expansion, cinemas would have to compete harder to win consumers.

Movie technology and trends

Movie distribution costs may continue to decline with the increase in digital distribution, including to cinemas. Some of the cost savings may have to be shared with cinema operators as they undertake significant upgrades in audio and visual technology to screen digital products, particularly for 3-D movies. Industry employment is expected to increase at an annualized 0.6% over the five years to 2018 to about 884,900 workers. This increase will result from significant expansion of emerging market presence in movie production.

Home media, particularly cable and satellite TV with digital product and movie access enhancements, will be important revenue streams during the next five years as consumer access to these services expands globally. Also important will be the increasing demand from new technology and products, including streaming movies on smartphones and tablets. Easier dissemination of movies will also support industry enterprise growth, especially as investor uncertainty drops during the next five years. IBISWorld estimates that the number of businesses will rise at a 2.0% five-year annualized rate to 54,900 firms in 2018.

Piracy concerns

The piracy of movies has become easier due to the introduction of digital format products and the increasing household penetration of broadband internet access that enables illegal downloading. In its broadest form, piracy relates to the manufacturing, selling or distributing of a motion picture without the consent of the copyright owner, such as the producer or distributor. The increasing

availability of movies for at-home audiences while the films are still in theaters is a concern for the industry because it may facilitate the piracy of high-quality motion picture content.

Efforts to fend off internet piracy have proven mixed due to the increasing penetration rate of broadband internet into homes in most advanced economies. Internet piracy does not yet cost the major producers as much as hard-goods piracy, and internet piracy is generally committed by individuals. The major studios have sought to meet internet demand for movies by introducing their own legal download websites: Disney, Sony, MGM and NBC Universal offer movies and TV shows that can be burned and used on other devices through CinemaNow. Meanwhile, Movielink offers movies to download from Fox, Warner Bros., Sony, MGM, Paramount and NBCUniversal.

Revenue OutlookYear Revenue $ billion Growth %2014 92.4 3.22015 94.9 2.72016 96.7 1.92017 97.5 0.82018 98.9 1.42019 99.9 1.0