The Coming Age of Millionaire Fans!
How the face of online media distribution and discovery is about to change.
Imagine when Star Wars first released, if the earliest fans of the movie were rewarded with a micro-share for their very early support (say 0.0003% share in future profits of the movie and its derivative franchise extensions). The earliest fans who watched the movie in the first few days, (say if they paid $10 each) would have generated $43,500 in profit to date on the $10 that they spent on the ticket. That is a 4,350X return on their $10 purchase. Say there was a crazy fan who saw the movie 10 times in the first few days, he would have seen a return of close to half a million dollars for that $100 he spent on the showings. This on top of all the bragging rights associated with being one of the earliest supporters of the Star Wars franchise!
(The revenue projections are based on a conservative assumption that the Star Wars franchise has generated close to $15 Billion dollars in profits to date. The overall value of the franchise is valued at around $30 Billion dollars by some estimates, http://247wallst.com/special-report/2012/02/10/the-force-star-wars-franchise-worth-over-30-billion-and-growing/)
But wait a minute you say…
- Why would the filmmakers be incentivized to give a micro-share to the fans?
- And what kind of super accountant is going to keep track of all these micro-shares floating around amongst fans, keeping track of who owns how much. Just doling out those cheques alone is enough to make any accountant go crazy, not to mention the insane costs associated with the whole operation.
Why would this idea even make sense to a studio? After all, they spent millions of dollars on advertising costs to generate the buzz around this film, they need to recoup that cost, why would they dole out ‘micro-shares’ to fans?
You see the first Star Wars came out way back in 1977, the primary way to create ‘buzz’ back then was to advertise on tv, radio and newspaper which required huge budgets that only make sense for a studio to spend. The most that any fan could do, was to create some word of mouth buzz by telling their close friends and family when they chatted on their rotary phones! So, it didn’t make sense for the filmmakers to dole out micro-shares to fans in 1977.
But things are a little different today! We have this thing called the Internet, the social web and viral growth!
Our current generation is at the intersection of two very important global trends.
i) Rapid Mobile and Internet Adoption:
33% of the world’s population has access to the Internet, and according to the United Nations approximately 85 percent have access to a mobile phone. Based on the adoption curve of feature phones in Africa, it is possible that 40 percent of people living in Africa will have access to a smartphone within five years.
ii) Democratization of media distribution:
The democratization of the distribution channels via the various web platforms are breaking down the monopoly of the traditional distributors like the theatre chains, while at the same time growth in mobile access is opening up new untapped markets. The ability to reach a much wider global audience directly through the web opens up the possibility to target niche markets in a profitable way that was not financially feasible in the old model of distribution.
The disruption in the traditional distribution channels has been accompanied by a surge in the quantity of media that is getting created. This has put a strain on the marketing efforts of these filmmakers to reach the right audience.
With these trends in mind, let’s rephrase our earlier question, IF Star Wars was an independent film project just being released today, without a huge marketing budget, does it make sense for the filmmakers to incentivize their early fans by giving them micro-shares in the future profits of the movie when they buy a copy of it?
The answer is a resounding YES!!
This will be one of the best ways to incentivize and reward a community of early loyal followers.
How would this fit into today’s media distribution models?
Currently the most common form of online film distribution is through platforms like Netflix, Amazon and iTunes which more or less closely mimic their theatrical distribution counterparts in the sense that they are ‘pay to watch’ models .i.e. you pay to watch the movie or the piece of content and that’s it! You don’t get anything in return. The micro-share model on the other hand, is a ‘pay to participate’ model in which the early fans who buy a copy of the movie are awarded a micro-share in the future profits generated by the success of the film. The consumer gets to participate in the future success of the content he or she is consuming. Essentially blurring the line between a consumer and an investor.
Make no mistake, the majority of content consumption will still happen through ‘pay to watch’ channels. The ‘pay to participate’ phase will be a strategic new layer added before a film reaches it’s ‘pay to watch’ release window. An ideal scenario would be a film that starts out initially in the ‘pay to participate’ phase where it would gain a community of hardcore early supporters, then it would enter the ‘pay to watch’ phase where it would get distributed to the everyday consumer on platforms like Amazon, Netflix and iTunes. What the ‘pay to participate’ phase allows film projects to accomplish is to create an early community of loyal fans and influencers who get vested in its success and become the mouthpiece for the project prior to entering its ‘pay to watch’ phase. Instead of treating all the loyal fans, influencers and the consumer as one and the same thing, this model allows the filmmakers to segment their market by drawing in these hardcore fans and influencers into the ‘pay to participate’ phase and getting them vested in their project’s success. This will change the dynamics of why and how people will try to find the best content fastest and actually pay more for it.
By incentivizing an early community of supporters to be ‘micro-share’ owners in the future success of the film project, it empowers smaller productions to gain traction with minimal resources by utilizing the network effect very early on in their growth strategy.
Wont this turn into an Accounting Nightmare?
This still leaves us with one unanswered question, what about the crazy bookkeeping and transparency issues associated with such a micro-share model?
The bitcoin and blockchain technology, with its built in distributed ledger, can help us provide a viable solution to the crazy accounting problem that can make micro-share payments to fans anywhere in the world safe, secure, transparent and effortless.
This model can be implemented by using automated blockchain based smart contracts that can be setup to allow a purchaser of a digital film copy to gain a micro-share into the future lifetime revenue of the film’s overall profits. A new digital asset can be issued on the blockchain each time a copy of the movie is purchased, with the micro-share associated with that purchase tied to that specific asset. The purchaser of that copy will be the owner of that digital asset. This digital asset would live on the blockchain and can be traded securely between any two individuals, essentially creating a secondary market for these assets. The amount of micro-shares associated with each purchase can be setup to reduce over time, so the earliest supporters (purchasers) of the film get rewarded more than the later ones. Provided that all the incoming revenue can be transparently tracked on the blockchain. Payments can be distributed transparently to hundreds and/or thousands of these micro-share holders at close to no cost.
How would this work?
Now let us look at the ‘micro-share’ model in a slightly more granular detail — with regard to how it might be implemented for an independent film project.
An independent film project can choose to be initially released online under the ‘pay to participate’ model, in order to gather a community of loyal fans (while rewarding them appropriately for their early support), before it enters the ‘pay to watch’ phase which will reach a much broader audience through today’s content distribution platforms like Amazon and Netflix or traditional theatrical distribution. As the team of filmmakers strongly believe in the project, they feel that releasing their film under the ‘pay to participate’ model initially would give them a strategic advantage, as they would be able to build a strong network of loyal followers very early on in their growth cycle without a need for a large marketing budget. This would put them in a strong position to negotiate a favourable deal with the distributors during the ‘pay to watch’ phase of the movie, given the big following that the movie has generated during the ‘pay to participate’ phase.
Let us step through how a hypothetical ‘pay to participate’ arrangement would look for this independent film made at a budget of $1 Million.
The filmmakers could wrap up the film into a decentralized project that we shall refer to as, Distributed Media Cooperative (DMC), with a memorandum that lays out the terms for how this project will operate. (Think of the DMC as a cooperative living on the blockchain, where the DMC’s ‘memorandum’ clearly lays out the rights of the various participants in the cooperative, and these rights are enforced automatically through programmatic rules.) Using blockchain technology, almost all aspects of this memorandum can be implemented as smart contracts so they are fully automated and transparent, such that anyone across the world can verify every aspect of the process. This is especially important when the goal is to build a transparent system that can be a foundation for global media distribution. Each time a viewer purchases a copy of the movie during it’s ‘pay to participate’ phase, a unique digital asset tied to that purchase of the movie will be created on the blockchain. That digital assets will have certain unique rights and properties based on the terms laid out in the memorandum, essentially those rights will be tied to a waterfall that dictates who gets paid when and how much out of every dollar of profit.
A hypothetical contract for this movie might look something like this,
A) All forms of revenue generated by this film project throughout its entire lifetime will flow into this address (public Bitcoin address),
B) Each purchase of the movie will have an associated digital asset that has rights to the future revenue of the movie.
C) After the initial budget of $1,000,000 is recuperated, all the additionally revenue will be split 25/75 between the filmmakers and the micro-share holders.
Distributions will be made on the last day of every calendar year automatically on the blockchain.
D) Micro-shares will be allocated to the first 500,000 purchasers of the movie.
E) Each copy of the movie will be priced at $10.00
F) Each purchase of the movie would be entitled a micro-share ranging between 0.0003% to 0.000075% of the future profit depending on when the copy was purchased. The very first copy of the movie will get a 0.0003% revenue share while the 500,000th copy will get a revenue share of 0.000075%. Distributions will be made to the digital asset associated with the purchase.
G) The participants in this ‘Pay to Participate’ phase of the DMC would be reserved 5% of the ‘revenue after cost’ in any derivative work of spinoffs from this project.
Let’s breakdown each section of this contract in more detail.
All the revenue generated by this project would be directed into the associated address (15HCzh8AoKRnTWMtmgAsT9TKUPrQ6oh9HQ) so that the participants of the DMC can independently verify the flow of funds going into this project. This transparency can also be augmented by regulatory oversight to make sure the revenues from the various deals get recorded on the blockchain.
The initial revenue will be generated from the sale of film copies during the ‘pay to participate’ window, the projects that do well during this stage will get distribution on the ‘pay to play’ platforms like Netflix and Amazon. Some projects might even get picked up for theatrical distribution following their strong showing in the ‘pay to participate’ phase.
Each purchase of the movie in the “pay to participate” stage would generate a unique digital asset that owns the rights to receive a micro-share in the future revenue of the film project. In this case, the purchase of the first copy of the film would generate a digital asset that has the right to receive 0.0003% of the future revenue of the film. As per the memorandum, the micro-share of the revenue would automatically be distributed to the unique bitcoin address holding the digital asset at the end of each calendar year, all of which would be automated through smart contracts.
In this case the filmmakers have opted for a 25/75 revenue split after covering their production budget. It will be possible to come up with more nuanced revenue share models as well. The general theme being that the projects perceived as having a fairer revenue share model (as determined by the market forces) would attract a lot of initial interest and develop a strong support base before the project transitions into it’s ‘pay to watch’ phase.
The number of micro-shares that would be paid out for any given project determines the size of the ‘Pay to Participate’ phase of the project.
Some of the considerations on selecting the size of the ‘Pay to Participate’ phase would be,
i) what number of sales in ‘Pay to Participate’ phase would build enough momentum and support to carry over as growth in the ‘Pay to Watch’ phase of the movie.
ii) Identifying an ideal value for the revenue generated at the end of the ‘pay to participate’ phase, and then working backwards by dividing that figure by the per copy price of the movie.
Number of copies sold in ‘Pay to Participate’ phase = total ideal revenue for the project/per-copy price.
This ideal revenue number could be arrived at by tracking the past performance of similarly positioned projects.
If the film develops a fan following as projected, ideally by the end of the ‘pay to participate’ phase the filmmakers would have recuperated their costs and most of the early supporters would have already started receiving their share of the revenue. The late entrants into the ‘pay to participate’ phase would be doing so based on the widespread viewership that the film would garner based on its projected path. This would be their chance to scoop up a share in the lifetime revenue of a film that has shown remarkable momentum in the ‘pay to participate’ window and is expected to have a similar run in the wider ‘Pay to Play’ window, which could include years of royalties and other revenue streams, including licensing and merchandising that the DMC might generate.
The cost per copy would ideally be determined based on the market forces and various project specific details.
The range 0.0003% to 0.000075% micro-share per copy of the movie was determined based on the following factors,
- The filmmakers wanted to share 75% of the ‘revenue after cost’ with the purchasers of the ‘pay to participate’ phase.
- That equates to about 0.00015% of the ‘revenue after cost’ for a ‘pay to participate’ phase sized at 500,000 purchases.
- To incentivize the early purchasers a sliding scale of 0.0003% to 0.000075% is used between the first and the last purchasers. Depending on how steeply this curve is tweaked, it can help to incentivize the early purchasers at the expense of purchasers in the later stage. Hence this curve must be fine tuned carefully based on the exact size of the project and the projected growth model.
In more intricate variations of this base model, additional information from various social networks could be used to qualify purchasers, so purchasers from certain demographics and influencer circles might be awarded a larger micro-share per purchase than others, thereby incentivising influencers to purchase in the ‘pay to participate’ phase.
Depending on the project, the pool of purchasers in this round of ‘pay to participate’ might be given rights to shares in the future revenue of any spin offs or other derivative works that are created based on the IP of this project. In the case of this film project, the filmmakers have agreed to pay, the pool of purchasers 5% of the revenue from any future derivative work.
This model can lead to interesting scenarios, where a DMC could be used to make films that get remade continuously based on popular feedback from the community of supporters, in a self sustaining way, using the incoming revenue of the DMC alone.
Show me the money!
Let’s play out a hypothetical scenario, say the project managed to sell 5,000,000 copies in the first year. The first 500,000 copies of that would be part of the ‘pay to participate’ phase and the rest 4,500,000 copies would be sold as part of the ‘pay to watch’ phase, leading to a “pay to watch” revenue of $45,000,000. This $45,000,000 revenue could be imagined to be generated by selling 4,500,000 copies of the movie in the ‘pay to play’ phase or could be generated through various deals and theatrical release and other revenue. In this scenario, from the first $5,000,000 revenue generated from the ‘pay to participate’ phase, the filmmakers would recoup their initial costs and get an additional revenue of $1,000,000 and the micro-shareholders get paid between $3.5-$12 based on their micro-share percentage.
Additionally, the $45,000,000 generated in the ‘pay to watch’ phase would generate an additional revenue of $11,250,000 revenue for the filmmakers and a per share payout ranging between $30 — $120 depending on their micro-share. That’s a 3X to 12X return on investment.
An interesting point to note is that, as these digital assets associated with the purchases start to be traded on the blockchain and other exchanges. As the end of the year nears, the price of each of the digital assets will be bound on the lower end by the expected payout for that year. The upper bound will be determined by the overall future revenue potential of the movie (via the DMC) in the years to come.
What problems would this solve?
The micro-share model has some huge implications for a number of issues facing media distribution today. Lets look at a few of them,
ii) Ability to transform digital copies of films into unique digital assets that actually make sense for people to buy.
iii) A financial framework to transform fan film into financial juggernauts
Using the micro-share model, anyone watching the movie in the ‘pay to participate’ window is incentivized to purchase an ‘authentic’ copy of the movie because of the ‘financial’ incentives associated with it. Right now, a rational individual who watches a pirated copy of a movie, is not incentivised to buy the ‘authentic’ copy of the movie, even if he or she believes in the movie and really likes it. On the other hand, if the same film project is distributed under the ‘micro-share’ model similar to the above example, even after seeing a pirated copy of the film, a rational individual would be incentivized to buy an ‘authentic’ copy of the movie,
i) due to the future lifetime revenue potential associated with the purchase.
ii) the bragging rights associated with the purchase (imagine owning a micro-share of Star Wars).
Also projects released as DMCs would change the mindset about piracy and stealing from that of ‘stealing from corporations’ to stealing from yourself and from your friends/community.
Transform digital copies into unique collectible items
Currently there is no real motive to purchase a digital copy of a film. However, under the micro-share model, each purchase of a digital copy of a film becomes a unique collectible digital asset that could see significant appreciation with time, especially for those films that turn out to be classics (in addition to the direct monetary benefits associated with the purchase). This could bring back the good old days when you actually bought original copies of movies you liked! Only this time those copies would generate revenue over time!
Turning fan films into huge financial juggernauts
In the age of awesome fan films, there are really no self-sustaining financial models to help fund and distribute these films on a global scale. The crowd funding campaigns as they exist today, more closely resemble a donation drive, rather than a sustainable financial model for funding and distributing mega-budget blockbusters. More often than not, the successful projects get picked up by the studios and get folded into the studio system, taking them out of the fan’s control.
DMCs and the micro-share model can provide a financial framework to help these fan projects organically develop the much needed marketing and financial clout necessary to turn them into financial juggernauts. This would lead to a more symbiotic relationship between the traditional studio system and DMCs than the lopsided dependency that currently exists.
DMCs built around fan films, lead to interesting scenarios, where a DMC could be used to make films that get remade continuously based on popular feedback from the community of supporters, in a self sustaining way using the incoming revenue of the DMC alone, essentially a ‘living film’ that gets continuously refined, reshot and re-released by the fans!
Extending on the above example, the micro-share model and its variants can be applied to any stage in the life cycle of a project from creation to distribution. This model could be integrated into existing distribution/funding models to various extents, eliminating existing bottlenecks.
In the age of Uber and airbnb, when the billion dollar unicorns are the companies that enable the participants to earn revenue. Blockchain technology would allow this trend to be adapted to media distribution in a transparent manner.
To forge this next chapter of innovation using blockchain technology, Focus Investments is announcing the formation of a Blockchain-Media Consortium, a think tank that brings together entrepreneurs, media thought leaders, investors and blockchain experts to develop the building blocks for future innovation in media funding and distribution.
Priority Areas, include:
- Combating Piracy
- Incentivization Models to Increase Sales.
- Digital Rights Management
- Monetization Models.
Are you passionate about this concept as we are? We would love to hear from you.