07 July 2019

Budgeting in the Creative Industry

By Johan Ishak

BUDGET is a word many are allergic to. Budget ensures order. People naturally prefer to avoid order. They seem to cherish disorganisation rather than organisation. This is a big mistake. Order must be established. To ensure things are unfolding within an acceptable set of parameters, plan must be in place for which, implementations are guided. Planning consists of many components such as workforce requirement, equipment requirement, technological requirement and one aspect that cuts across is money. We need money to make money. In order to plan how to make money using money, we need a tool that can establish such order mentioned earlier. That tool is Budget.

The Creative Industry is no different from other industries such as agriculture, education, oil and gas, aerospace, manufacturing, automobile and many more. All of these industries have the same objective that is to make money. All of these industries put in resources in order to generate revenues. All revenues require proper pricing planning and marketing efforts. All input of resources require procurement of goods and services. In a nutshell, Budgets are important for any businesses. In fact, even if an organisation is not a business or a profit oriented entity, Budgets are still important. A country also needs a Budget. A school needs a Budget. A mosque needs a Budget. A criminal activity, if desired to be done smoothly, requires Budget. So what makes us, the Creative Industry practitioners, exempted from doing so (Budgets)?

How then do we budget for the Creative Industry? Firstly, we must understand the difference between the Statement of Income (or commonly referred to as the Profit and Loss) and the Statement of Cash Flows (Cash Flows). Profit and Loss is a measurement method to calculate whether the business is making profits or not. As long as a position is confirmed, a transaction is recorded. For example, if you sign a contract to produce a movie for RM5 million for a producer and you complete it, then that production work has earned its revenue based on the amounts agreed in the contract. However the payments for that revenue may have not occur yet. When the cinema collection comes in, then the payment may be made. So, in your Profit and Loss, you can record a revenue of RM5 million but in your Cash Flows, it remains as Nil cash inflow until the payment is actually done (in the future).

Similarly, when doing the production work, the timing of cash payments do not coincide with the actual performance of the work. You may have to pay some monies first before some work can be done or resources are utilised. For example, when you rent equipment, the equipment owners may want cash up front before you even start the production work. In this case, your Cash Flows are already recording an out flow of rental payments but your Profit and Loss has not yet recorded the cost of using the equipment. Some directors and main casts may want an upfront payment before they can accept any job. This will have the same timing effect between Cash Flows and Profit and Loss.

The nature of the Creative Industry in so far as cash flow management is concerned is tricky and risky. Many revenue transactions are only collected later and many cost transactions require early payment. If the gap between money in and money out is too big, with money out happening earlier than money in, we are shitting faster than we are eating. What happens when we shit faster than when we are eating? Well, we might shit out our own organs rather than digested food. If we do not manage this well, the net negative growth of coffers will reduce us to bankruptcy. This has happened and it has happened a lot. It is very important to have this in mind when we are negotiating with both our customers/clients and our suppliers. Our payment terms given to customers or clients must be higher or at least, the same as the payment terms that we get from our suppliers. If we are only getting paid 6 months down the road and we have to pay our bills and invoices within 1 month, then we ought to ensure we have enough money in the bank to foot the bills. This is what we call Working Capital management.

With this understanding, we must remember again and again that Profit and Loss does not necessarily paint an accurate picture of the state of our well being. There is no point being rich when our assets are all in property or land forms. We need some of those in liquid cash forms. A business may show a healthy profit number in its Profit and Loss account but it may also show a negative Cash Flows status at the same time. Although we can make plans for extra cash to be available but essentially, we cannot be worrying about quick fixing all the time as it will become a recurring issue - a cancer in our business. We must plan our projects diligently to ensure we do not fall into the trap of Working Capital deficiency.

How do we get the buffer in Working Capital to address shortfalls? Some people have money in their own savings. Many have sacrificed savings in order to continue business operations. Some has got good credit standing with the banks that are willing to give them loans in the form of term loans, working capital loans or overdrafts. Those with many projects can plan to ensure the payments for any particular projects are timed strategically to coincide with the timing of collection from earlier projects. Now, one thing we must not forget, when we are putting the business in a debt position, such as borrowing from others, there will be an extra item in both, the Profit and Loss as well as the Cash Flows. That item is Interest Expense (also known as Finance Cost) or Service Fees if it is an Islamic loan.

Naturally, when revenues are earned, that is when you charge costs to the Profit and Loss so as to match costs to its revenues. For example, when you have paid RM400,000 for a production of a Television (TV) series, you will only charge that into the Profit and Loss when you are certain that you will earn the revenue. In the case of a TV series, when are you certain that you have earned that revenue? Rightfully, this is when you get confirmation from the broadcasters that they have cleared and accepted your work fit for transmission purposes. Say, a TV station confirms the acceptance of your work and your production company was commissioned to do it for RM500,000, then you can now record RM500,000 as the revenue and RM400,000 as the costs, leaving you a profit margin of RM100,000. A 20% margin that is healthy.

Now let us see what happens to the Cash Flows while the Profit and Loss is already showing a 20% profit margin. In the Cash Flows, that RM500,000 will only get paid later subsequent to the TV stations confirmation of acceptance. This is because they will have to go through their processes in the procurement and finance department. Meanwhile, your production house will have to pay what is due to suppliers as production work for the TV series have been completed. Not all of the RM400,000 has to be paid but surely a huge chunk has to be paid. The trick now is to find the right timing of when the sum of cash collection and cash payments result in a net positive position. If not, you will have to adjust the timing of all projects in order to have a continuous net positive cash position. This needs to also take into account cash that comes in from loans as well as cash going out to repay those loans and their corresponding interest expenses.

A more predictive and reverse engineering method is required when it comes to laying down the future financial runway. Many parties feel that they need some sort of university degree to do all this. Mind you, even a university graduate who did bachelors in finance or accounting can screw this up. All you really need is common sense as far as matching the timing of cash inflows with cash outflows. All you need is diligence. All you need is to be street smart. All you need is agility and sensitivity to the daily dynamic unfolding of events. This is what it means to be an entrepreneur, especially in the creative industry.

Let us restart the thinking process to be more lay man in the comprehension of this all. Firstly, when deciding what to produce, we must have an idea of how much revenues that can be earned. Then, work backwards where you should gauge what kind of production costs are you willing to spend. This affects decisions on genre, casting, directors, crews, location, the extent of Computer Generated Images (CGI) and many other aspects of production and marketing costs. Do not forget that at this juncture, the revenue should be in excess of the production costs giving a Gross Margin estimate. As a business, entrepreneurs must decide what kind of Gross Margin is acceptable. You will need to consider how much is needed to cover Administrative Costs, Interest Expense, Taxes and other Overheads in order to derive a final excess we call Net Profit.

As a business, it is not just about revenues, production costs and margins. We must remember to maintain our office administrative resources that keep the office running. How many permanent staff are you willing to hire is a function of how much you are willing to pay every month with or without any projects in hand. This goes the same to the rental expenses, utilities and all other overheads. Interest expense was mentioned earlier. Typically, the business needs to put aside a sum of 7% of loans drawn down to pay for interest expenses as and when they fall due. This is when you will ask the question, “Can I afford to take loans?” If the cash flow is too tight, you won’t be able to pay both the principal portion and the interest portion of the loans. This will mean that you will need to consider other sources of funds. Finally, on yearly basis, you will need to put aside cash to pay income tax. Typically, income tax is at around 25% of Net Profit. Many production houses do not pay taxes simply because they do not make profits or they do not declare enough income to attract taxes. Whether this is done dishonestly or not, the right thing to do is to pay.

For a new production house, the initial years will be loss making years because the projects on hand have not yet reached critical mass. Gross Margins are still low. Meanwhile, the company needs to continue paying for their overheads or administrative costs that primarily consists of permanent staff and office rental. Over time, when the volume of projects increases, the Gross Margins from those projects should cover the overheads leaving a profit bottom line. The critical question then is, “How long can you endure operating at a loss before the business turns into profitability?” Business must make profit. If the profit is 7%, there is no point in running the business. Why? Because any Unit Trust, such as Amanah Saham Nasional, earns at least 7% dividend per annum. Therefore, your business should target an eventual profit of more than 7%.

Production requires money and time. Pre-production and post-production activities need to be factored into the business timeline. This is because, as mentioned earlier, the cash outflow will happen predominantly up front when there are no inflow in the initial years of the project. Even when sales can be made well in advance of the completion of production, the actual cash collection comes in later unless the model involves distributor financing arrangement whereby the distributors themselves decide to invest in the project. A healthy production business should have continuous multiple projects and again, what is critical is to match the timing of the cash in and cash out of all the projects. The benefit of having multiple projects happening in overlapping tracks is that cash inflow of a project can be the funding source for the cash outflow of another project. Mismatch between cash inflow and outflow in this portfolio management method can be a big problem and can jeopardise the ability to complete those projects.

As an entrepreneur, the production house must be willing to negotiate with the TV stations to reduce the risk of cash flow mismatch. For example, negotiating the payment term where the TV stations pay half of the contract value when half of the episodes commissioned are delivered rather than when full episodes are delivered.

At the same time, the production house should also negotiate with their suppliers for the equipment, casting, directors, crews, studio owners and many more so that payment terms can be looser spreading payments to a longer time horizon rather than heavy up front. For a more developed industry such as Hollywood, they even considered revenue sharing arrangements with the key people such as directors and main casting. This allows some minimum guaranteed (MG) payment up front and a percentage of revenue payment subsequent to the completion of the project. This helps ease the cash burden during the production stage and mitigates the risk by pegging subsequent payments to the performance of the sales. If the performance of sales is not good, in total, those key people will get paid less; hence, encouraging them to perform with the utmost quality in view of revenue sharing prospect.

In the case where the cash flow mismatch is inevitable, the critical question to ask is, “How to fund the production work when revenues are not collected yet?” Many resorted to borrowing the funds. This incurs interest. Interests in Malaysia for working capital funding of a creative business can be as high as 7% per annum. With such expensive option, we will need to ensure that we do not over borrow. An optimal amount of loan needs to be determined to ensure enough cash to sustain production. Sustaining production does not only mean to pay for the production but also to pay for administrative costs, overdue taxes, interest expense and more importantly, repay the loan. This brings us to another avenue for negotiation. You will need to negotiate with the funder on the loan structure. Variables such as duration of the loan, frequency of payment, revolving the credit facility or even go for a more equity type financing such as issuing Preference Shares where the repayment is deferred to a later lump sum transaction.

The cash inflow and outflow needs critical management. You do not want to face a very thin cash balance situation where heavy accumulated production costs and other costs paid but insufficient revenues collected. Cash balance may be thickened with borrowed money and eventually paid of progressively. Ideally, cash balance at the end of an expected project time line should be free of obligations to pay bankers and suppliers representing cash profit. To reach that state, you will need to endure a long gestation period of sustained business pipeline. For those who are fortunate, cash flow stress levels can be eased when you use your own money, Government rebates or grants such as those from Filem Nasional (FINAS) and as mentioned earlier, other lucrative projects that have been completed, delivered and paid in full.

Going back to the overheads or administrative costs, we must always remember that these costs are recurring with or without projects in hand. Generally, the timing of incurrence and the timing of actual cash payments are almost the same for these items. This includes salary, rental, utilities and many more. Many production houses have resorted to only maintaining a skeletal structure. This can be as small as 2 people managing the housekeeping of records and bank accounts for the company. The rest are reclassified as “project basis” as much as possible. This is the very reason why the Creative Industry has huge pool of freelancers.

In a nutshell, there are 4 critical management points that a creative entrepreneur needs to address. Number 1, the biggest mismatch between Profit and Loss and Cash Flows are actual revenues earned versus revenues collected; and actual costs incurred versus payments of those costs. Number 2, generally, the timing of incurrence and the timing of actual cash payments are almost the same for items such as monthly administrative costs consisting of salaries, rental, utilities as well as monthly interest payments and tax payments. Number 3, the critical item in Cash Flows that is not in the Profit and Loss is the financing element whereby cash inflow from borrowings as well as cash outflow for repayment of the borrowings is very crucial when managing cash allocations. Finally, Number 4, a business needs to have decent and appropriate financial indicators such as Gross Margin, Net Profit and Net Cash Inflows over Cash Outflows. Essentially, when you have considered the 4 critical management points, you can concentrate in refining your budget for the business.

What are the typical numbers for a budget? Let us start with Revenue. A Drama Series for a Free-to-Air (FTA) TV earns RM25,000 per 30 minute episode to RM40,000 per 60 minute episode. The series are normally done in 13 or 26 episodes package although some TV stations have commissioned long ones up to 60 to over 100 episodes. Telemovies for a FTA TV earns RM100,000 to RM300,000 per movie of 90 to 120 minutes. A cinematic movie has a different revenue model as cinemas share ticket collections with producers on a 50:50 basis. The revenue quantum for cinematic movies is really a wild card. It can be anything from less than a million Ringgit to RM40 million. Astro First pays RM300,000 for licensing a movie and then pays producers 40% of the subscription revenues subsequently.

A theatre production earns revenue primarily via sponsorships and secondarily via ticket sales. Tickets are priced between RM20 to RM100 per ticket with maximum capacity of the number of seats per session that depends on the size of the theatre. Kuala Lumpur Performing Arts Centre (KLPAC) for example can accommodate up to 500 seats in a session. There can be 2 sessions daily, which is Matinee and Night. The number of days a theatre show can continue depends on the stamina of the producers in paying rental of venue as well as actors’ and crew’s fees. The take up rate (seats sold) of a theatre show is normally between 50% to 80% if benchmarked against KLPAC’s shows.

For concerts and stand up comedies, revenues are primarily ticket sales driven and secondary revenue from sponsorships. Tickets are priced between RM50 to RM500 per ticket. Maximum capacity of the number of seats per session varies depending on the venue but a good benchmark would be Stadium Melawati in Shah Alam that has 8,000 seats. Similar to theatre shows, the number of days the show can extend will depend on the financial stamina for the live production and payments for logistics. The take up rate ranges between 80% to 100% which is much better than a theatre show. This has been benchmarked to LOL Events’ comedy shows as well as concerts such as Siti Nurhaliza, Search, Wings, Jamal Abdillah and M. Nasir.

Unfortunately revenue does not increase in tandem with the inflation in cost in the market. It only increases based on the negotiation skills of the producers. It is a balance between getting paid for commission work while losing the Intellectual Property (IP) rights or, otherwise, earn revenue sharing from the IP but own part of the IP. The financial implications of the two can be very different. Earning a revenue share may be as low as Nil if there are no revenues coming in. That is essentially the risk the TV stations are taking where some TV slots may not earn any advertising revenues. If the production houses are not keen to be exposed to the volatility of advertising revenues, then they should choose the commissioning path where the TV stations pay them commissioning fees regardless of whether the title makes money or not on TV.

Enough about Revenues. What about budgeting for production? Generally, approximately 80% of the contract value commissioned by TV stations should be assigned to the project. This means 20% is the so called ‘Gross Margin’ of the contract. Hopefully that 20% can cover the production houses’ overheads assuming enough projects in hand. How do you then allocate the production budget to its respective components? Based on numerous studies done by MyCreative Ventures when doing due diligence on its various TV production clients; pre-production gets 10%, casting gets 20%, the production team gets 20%, equipment rentals get 20%, post-production gets 20% and marketing gets the remaining 10%. However, many believe that marketing should get a higher percentage as high as 30% because without marketing, nothing can be sold.

Some numbers are worth being noted down for production budgeting purposes. For example, Stadium Melawati can cost up to RM80,000 per night. Istana Budaya charges RM15,000 per night. Various production studios in town have varying fee structure depending on equipment requirement. Costs generally have an inflation rate of 3% on year-on-year basis that is pretty much the reflection of the Consumer Price Index (CPI). In the recent years from 1999 to 2019, CPI has been around 2% to 3%. It is crucial that production houses observe economic indicators such as CPI as this provides the undercurrent consciousness of their monetary sense when managing production costs over time.

A drama production needs to incur scriptwriting fees, directing fees as well as producer’s fees. The scriptwriting fee is as estimated as follows: Drama Series (13 episodes x 30 min) at RM16,000, Drama Series (13 episodes x 60 min) at RM33,000, Documentary (8 episodes x 45 min) at RM21,000, Telemovie (90 minutes) at RM7,000; and Biography at RM33,000. The Director’s fee is as estimated as follows: Drama Series (13 episodes x 30 min) at RM26,000, Drama Series (13 episodes x 60 min) at RM39,000, Documentary (8 episodes x 45 min) at RM40,000, Telemovie (90 minutes) at RM10,000; and Biography at RM60,000. The Producer’s fee is as estimated as follows: Drama Series (13 episodes x 30 min) at RM7,000, Drama Series (13 episodes x 60 min) at RM13,000, Documentary (8 episodes x 45 min) at RM10,000, Telemovie (90 minutes) at RM5,000; and Biography at RM20,000.

Let us now move on to Overheads. Salaries of permanent staff at the market rate is growing at 5% per year and incurs Employees Provident Fund (EPF) rate of 12% and workers insurance (SOCSO) rate of 1%. Other staff related costs can be as high as 30% of the basic salary that generally covers over time claims, medical, training and other staff matters. Typical, the salary scale for a medium sized company pays Non-Executives at RM1,000 to RM2,000 per month, Executives at RM2,000 to 4,000 per month, Managers at RM4,000 to RM10,000 per month and puts aside a provision of RM300 per staff for medical claims a year. This does not include bonuses. Some companies are unionised to the extent that those unions demand a contractual bonus of 2 months pay. In that scenario, bonus is no longer bonus and behaves like a 13th and 14th month salary. With all these in mind, how many staff will you employ? In the end, when you do the budgeting for permanent staff, the inflationary growth of the cost is generally at 5% per year, higher than the CPI of 3%.

What are the other typical overheads? To name a few but not limited to, here are some benchmarks of costs: Accounting fee at RM500 monthly, Auditors fee at RM5,000 yearly, Bank Charges of 1% of the bank balance, Secretarial fees at RM500 monthly, Tax agent fees at RM5,000 yearly, Rentals at RM4 per square feet, Utilities at RM1,500 monthly, telecommunication at RM2,000 monthly, Petrol and Tol charges at RM1,000 monthly, Car maintenance at RM7,000 yearly and the list goes on and on with stuff such as insurance, legal fees, printing, stationeries, licenses, entertainment and many more growing at an inflation of 3% per year.

We touched the matter of borrowing earlier when managing cash flows. Essentially there are many formats of financing. A Term Loan incurs interest at approximately 6% to 7% per year with the requirement for monthly repayment of interest, monthly repayment of principal and once paid, no more drawdowns are allowed. A Revolving Credit incurs interest at approximately 6% to 7% per year as well with the requirement for monthly repayment of interest, principal repayment by cycles and once paid, can drawdown again in accordance with the cycle with an upper limit set for maximum amounts allowed for borrowings. The more complex method is an injection of funds into the company via an issuance of a hybrid debt-equity instrument called Preference Shares incurring dividend payable of 7% to 10% per year, payable annually until the Preference Shares get redeemed by the holder at the end of its tenure that are typically 5 years.

Term loans are suitable for capital expenditure (Capex) such as buying equipment for production purposes. Apart from the interest expense, the Capex will be charged to the Profit and Loss over its useful life as depreciation expense. Revolving Credits are suitable for on-going working capital requirement such as production costs where you can reuse the facility over an over again like how credit cards work. Preference Shares are normally issued by a company when it needs to raise funds for a longer gestation period to turnaround a business. For example, animation and game companies need longer development period. At the end of a term, the investor gets back the money plus annual dividends as rewards to the investment.

An entrepreneur ought to assess the business funding requirements and choose which type of financing suits its operations best. They can even have combinations of the different types of financing depending on the hybrid intended usage of cash. There are also initiatives by the Government to help the creative industry financially. Creative business owners must grab this opportunity and look out for Government grants available in the market such as FINAS’ 30% rebate on production costs and grants from entities such as TERAJU, Cradle Fund, Malaysian Digital Economy Corporation (MDeC) as well as the various ministries.

A crucial crossroad many production houses face would be to decide on whether to rent equipment and premises or to purchase. Purchasing it would mean incurring Capex. If we incur Capex, we will need to depreciate the costs over the useful lives of the assets bought. This depreciation gets charged to the Profit and Loss and hence, reduces the profits. An equipment is typically depreciated over 5 years but as technology gets updated in a more dynamic manner, we may have to accelerate depreciation to a shorter period of 3 years and below.

The decision to incur Capex rather than rental would mean: 1. Saved from incurring rental expense but ending up bearing the depreciation charge, 2. Saved from having to pay cash for rental but instead having to pay lump sum up front to buy the equipment; and 3. Increasing the risk of having negative cash balance early warranting a drawdown of loans that incurs interests or injecting your own money depriving passive income from unit trusts or money market deposits.

Indeed, managing a creative production house is not that easy. There are numerous more matters to deal with. What else? Well, consider looking at the entire business operations to identify other items for budgeting. For example, creative writing of programme description in multiple languages, pre-sales and post-sales support, services to programme buyers, managing programme and film rights, organising exhibition booths, preparing sales materials, film editing, music composing, soundtracks, sound effects, Dolby Digital Surround System fees, music IP rights fees, media advertising planning, on-ground road shows, radio interviews, TV appearances, photo shoots, social media shouts, distributors’ service (eg. airline, video-on-demand, Pay-TV, mobile, internet, home video, FTA TV and any other avenues that may require modifications to the content to suit their platforms), production consultancy for content that requires experts (eg. Historical or scientific researches), talent management (i.e. tours, endorsements, jobs scheduling, fee negotiations, etc), and many more.

To end this pain, in short, we can summarise all these as, “We need money to make money. In order to plan how to make money using money, we need a tool that can establish such order. That tool is Budget. Creative entrepreneurs must do their business budgeting. Period”.

28 May 2019

Digest Facts of the Malaysian Creative Industry

By Johan Ishak

RESEARCH is an important element of any business. Research provides a clear vision of the industry that helps us strategise what we need to do now, or in the future, in response to, or in anticipation of, the current state of affairs, or some projected future possible scenario, for a given business venture, within the limitations of our scarce resources, regulatory landscape as well as technological disruptions. Notice how many commas are there in that sentence? This demonstrates how important research is as a component to the overall mechanism of a business venture. As how the Malays would put it, “Pergi merisik dulu sebelum melamar!” which means, “Recce first before proceeding”.

What sort of facts do we pursue to uncover from our research efforts? There are many aspects really. The professors in the universities have put it quite correctly when they preach about S.W.O.T Analysis, BCG Matrix, Maslow’s Hierarchy and 5 Forces Model. All these models are not merely academic. They are quite practical actually. We should research to find out what our strengths are, our inherent weaknesses, the opportunities in the market as well as emerging threats. We should know which products are with high growth requiring intense capital and which ones are already steadily generating cash with low capital requirements. We should know the needs of our audiences and what excites them. We should coordinate the relationships of the various inputs and outputs coming from or going to suppliers, customers, employees, regulators and competitors. These are all critical aspects. These are the bases of what governs our “gut feel” and not simply plugging ideas.

In the recent years we have seen so many industries meeting their death prematurely because they lack research that could have provided them with facts that are relevant for them to make critical business decisions. Kodak is a perfect example. Nobody could have imagined the death of the camera film industry in 2000, but yet, it eventually hit us when the digital camera spread across the world. In fact, Kodak was the inventor of the digital camera. They used Kodak to snap the first photograph of the planet Earth from the moon. Despite being the inventor of digital camera, they remained focused in their film business that had provided them 95% of their revenues. In the end, Kodak failed to realise consumers’ preference and their propensity to adapt new technologies. Kodak then had to file for bankruptcy.

Let us analyse a particular industry globally. Let us take filming as a start. The global box office for all films released in each country around the world reached USD36.4 billion in 2014, up 1% over 2013’s total. The growth was driven primarily by the Asia Pacific region (+12%). Chinese box office (USD4.8 billion) alone had increased by 34% in 2014, becoming the first international market to exceed USD4 billion in box office. Cinema screens increased by 6% worldwide in 2014 to over 142,000, due in large part to continued double digit growth in the Asia Pacific region (+15%). Over 90% of the world’s cinema screens are now digital. However, admissions, or tickets sold was at 1.27 billion with average tickets sold per person per screen of 3.7 which meant, a decline of 6% from 2013. This was compensated by increase in the average cinema ticket price by 4 cents that is less than the rate of inflation in the Asian economy. What does this suggest from the pure Demand and Supply explanation? Are we experiencing a glut?

PricewaterhouseCoopers’ Global Entertainment and Media Outlook research paper suggests that new multiplexes are driving admissions particularly in China. In China, it is expected that there will be 60,000 screens by 2020,more than 6 times the 2012 total, which will then drive box office spending in China by more than 20% compounded annually from2012 to 2020. Global box office spending is projected to grow at a 6.3% compound annual rate, while home video will be relatively flat, averaging only 0.5% growth compounded annually. Overall spending on film entertainment will rise at a 3.1% compound annual rate to USD100 billion by 2020 from USD85 billion in 2012.

In the past years, prior to the excellent performances of titles such as Polis Evo (1 and 2), The Journey, Khurafat, Munafik (1 and 2), Paskal and the Hantu Kak Limah series (together referred to as the “Malaysian Box Office Game Changer”), the Malaysian film industry did see an increase in cinema admissions from 50 million to 70 million garnering an increased gross collection from RM500 million to RM700 million per annum. This is on the back of the increase in cinemas from 100 to 140 giving an increase in screens from 600 to 800. The numbers of seats had also increase from 100,000 to 150,000. When analysed from local content supply perspective, the number of local films had increased from 50 titles a year to 80 titles a year with an increased average production cost from RM70 million per year to RM100 million per year.

Despite the increase in the number of titles, the number of admission for local films had decreased from 13 million to 6 million per annum resulting in the reduction in gross takings from RM120 million to RM70 million. This means the overall increase in admissions and collections were due to foreign titles such as those from Hollywood. The local film industry essentially consists of the Malay film industry that produces largely for the local Malay market. In recent years, however, a more Malaysian outlook has evolved with the emergence of a group of independent film makers whose low-budget productions are targeted at a wider international audience. Hence, the production of local movies has doubled whilst a noticeable decline in the average production costs by about 5.5% from RM1.3 million to RM1.2 million.

Local films face stiff competition from imported films. Hollywood films continues to dominate the local cinema industry holding a market share of over 66% every year. Tamil and Chinese movies also saw some growth during this period. In 2014, a basic survey was done on the profile of Hollywood movies. The top five grossing films in 2014 was used as a test case, namely, Guardians Of The Galaxy, Captain America: The Winter Solider, The Lego Movie, Transformers: Age of Extinction and The Hunger Games: Mockingjay Part 1. The first 4 movies attracted majority male audiences. The Hunger Games: Mockingjay Part 1 showed the strongest female attendance of the top 5 films, with 57% of box office revenue coming from women. Transformers Age of Extinction drew the most ethnically diverse audience: 38% are Caucasian; 22% are African-American; 26% are Hispanic; and 14% are Asian and other ethnicity. Similar studies should be done in Malaysia in order to gauge the market’s taste.

The local film industry also faces competition from the advent of home videos and Video onDemand (VOD) on the internet or illegal pirated android boxes. In addition, as mentioned earlier, box office collection from local movies had declined despite the gradual increase in the number of local Malay films produced and released in the market. Of course these were all before the so called “Malaysian Box Office Game Changer”. Our hope is that more of these “Malaysian Box Office Game Changer” titles can and will be produced in the future shifting the viewers’ attention from Hollywood to Malaysian titles.

In one of Malaysia’s growth regions, Iskandar Malaysia in Johor (adjacent to Singapore), Khazanah Nasional Berhad (the Government of Malaysia's strategic investment fund) and Pinewood Shepperton PLC have opened a USD120 million studio complex boosting its regional status as an international film production hub. The creative sector surrounding Pinewood Iskandar Malaysia Studios is expected to lead to spin-off investments of USD323 million and create 8,000 jobs over the years to come, as well as boost the local film entertainment market. Has this effort bear any fruits yet? So far, other than the famous Marco Polo television series, we have not yet heard any further success stories. Presumably such investment will require other incentives to help boost its usefulness. Amongst others is the Film in Malaysia Incentive (‘FIMI’) by Film Nasional (‘FINAS’). If FIMI is not enhanced to attract both local and foreign producers to use Pinewood Iskandar Malaysia Studios, then we may be facing another white elephant potential. The Malaysian Government must, without delay, create proper mandate and affirmative actions for the industry to kick start its engine vis-a-vis huge investments that have been made in the past.

To be fair, the Malaysian Government, via its Ministry of Communication and Multimedia, has developed many incentives for content development specifically for film, television and other projects. It is anticipated that these incentives will encourage production activities and increase local skill sets to match those of international standards throughout the creative content industry. FIMI is expected to give up to 30% cash rebate on all Qualifying Malaysian Production Expenditure (‘QMPE’) incurred by both local and foreign producers. The scheme kicked off on 1 February 2013 and includes both production and post-production activities. It is good that Malaysia has started this, but like any efforts, the output needs to be measured against the input and a conclusion derived on its effectiveness and efficiency, particularly when it uses the tax payers’ money.

Let us look at the global home video trend. According to a research done by PricewaterhouseCoopers LLP and Wilkofsky Gruen Associates, in 2007, physical home video (i.e. VHS or DVD) used to garner USD50 billion revenues as opposed to less than a billion USD for digital home video. Now, with the growing demand for on-line streaming services, the position has switched. Digital home video platforms are garnering billions of revenues now with the physical method plunging 6 feet under with a tombstone on it. Obsolescence is the new disease now. Along with most of the rest of the region, the Malaysian home video market has seen a decline too.

With piracy as a concern for the region, much content makes its way onto the internet less than 24 hours after release. Thus, piracy remains one of videos biggest competitors, albeit its illegitimacy. Retail piracy in kiosks and malls, including pirated movies claiming to be in Blu-ray format, has notably cut into potential home video revenues. In fact, Blu-ray format has probably been sent 6 feet under as well. A team of Intellectual Property officers from Media Prima Berhad recently took a proactive (or rather reactive) action in pulling down hundreds of pirated on-line sites with the help of the Malaysian Ministry of Communication and Multimedia as well as the Malaysian Ministry of Domestic Trade and Consumerism. The sites that were pulled down are believed to have garnered up to 40 million to 60 million on-line views per month. This is a huge number equivalent to 50% of the views reached by the number 1 YouTube account in Malaysia, i.e. TV3Malaysia.

Let us move on to television (‘TV’) now since the physical home video method has now reside in the graveyard. There are currently 8 national, Free-to-Air (‘FTA’) terrestrial TV channels in Malaysia and two national pay subscription TV services. In addition, a 24-hour TV was introduced in Malaysia in 1989 (‘TV1’). Currently, analogue is the most widespread TV delivery standard in Malaysia. Analogue terrestrial transmissions have been scheduled to be switched off in phases as part of a digital switchover, expected to be completed in quarter 3 or 4 of 2019. The frequency of these digital switchovers has mostly been delayed to avoid signal jamming with TV stations in Thailand as well as Indonesia. In any case, we will not go too detail into the digital TV platform now as that will require a fresh train of thoughts. Let us concentrate on the traditional TV first.

With reference to Oxford Economics, it is estimated that the TV industry directly contributes an estimated RM1.64 billion to the Malaysian economy in Gross Domestic Product (GDP) in 2013. In the process, they directly supported approximately 4,548 jobs. Moreover, TV programming and broadcasting consist of 55% of the total film and TV industry. Today in 2019, huge portion of that RM1.64 billion, to be exact 50%, has migrated to Facebook and Google. I repeat, gone to the giants, Facebook and Google. The 2020 digital revenue forecast is expected to be flat but Facebook and Google are expected to record positive growth. With that much revenue lost (migrated from FTA TV), one might wonder how much longer can the 4,548 jobs be sustained. As it is, a few broadcasters have already embarked on efforts to right size their human resources structure by the hundreds of headcount.

The export market of film and TV exports is minor at present. Data from MSC Malaysia (Malaysia’s national ICT initiative) indicated that the creative multimedia industry as a whole (i.e. including animation, film, TV and video effects, as well as games, mobile and new media) accounted for only RM490 million in exports in the year 2012. The value of exports accounted for by film and TV would therefore be expected to be a sub-set of this figure. Exports from Malaysia typically find their way to Singapore, Brunei and Indonesia, although the Philippines, South Korea and South Africa broadcasters have also been recipients of Malaysian film and TV products.

Media Prima Berhad is the dominant FTA broadcaster, operating channels TV3, ntv7, 8TV and TV9. Its channels account for 38% of the TV viewing in Malaysia. The advertising market used to be resilient with Advertisement Expenditure (ADEX) growth of 1.5 times the GDP growth and up to 54% of the overall advertisement revenues goes to TV. Today, that connection has been broken. Not only 50% of the TV revenues have gone to digital platforms, the correlation to GDP growth is haywired. The economy can move in whatever direction but the TV industry continues to face digital disruptions. The holy multiplier of 1.5 times of GDP has disappeared. Media Prima Berhad has seen a gradual decline in its audience share over the past 2 decades as satellite Pay-TV services increase their bouquet of channels. It is a dilution game. A very damaging game to the industry as it offers downward spiralling of economic values. Facebook and Google’s entrance into the market further compounds the effect to the extent even Astro is seeing dents in its revenue.

FTA public broadcaster, RTM, is leading the transition from analogue transmission to digital terrestrial TV (‘DTT’) transmission. RTM conducted a “DVB - T2” trial transmission and started DTT services in early 2013. With such tests, the Government has finally announced that the Analogue Switch-Off (“ASO’) is set for quarter 3 or 4 in 2019. The platform began offering 15 channels from 2013, many of which airs High Definition (‘HD’) programming. It was deliberated that the local RTM channels should have the name RTM and the state name, for example “RTM Penang” in Penang. Each channel per state was to have its own schedule and broadcasting hours, and some channels relay programming from the national RTM1 and RTM2 (usually news programmes and Government programmes). Today, that has not yet happened. In the future, when the DTT platform has been fully implemented, we might see such variety in content offerings.

A Pay-TV satellite service provider, Astro, launched a free satellite TV service, NJOI, in February 2012. The service currently provides 18 TV channels and 19 radio stations, that include RTM's TV1 and TV2, TV3, TV9. ntv7, 8TV, TVi, CCTV-4, Bernama TV, Astro Prima, Astro Oasis, Astro Awani, Astro AEC, Astro Xiao Tai Yang, JiaYu, Astro Vaanavil, MakkalTV and all AMP Radio channels including hitz.fm, ERA and MY FM. An existing Astro customer can receive this service through a separate account. The set-up consists of a set-top box, out-door unit (‘ODU’) satellite dish, smartcard and a remote control unit, all available at RM288. As NJOI gains its market acceptance, the Pay-TV subscribers have been gradually migrating to it with the view of enjoying free of charge TV content like that of FTA. This means Astro is metamorphosising its Pay-TV business (or parts of it) to a FTA Satellite TV.

Astro dominates Malaysia’s Pay-TVmarket via Direct-to-Home (DTH) platform. Its more than 5 million subscribers represent almost the entire local Pay-TV sector. However, as mentioned earlier, many have reverted to Astro’s free platform, NJOI. To date, it is believed that many of that 5 million subscribers have unsubscribed their Pay-TV account. Opportunities for rival Pay-TV companies are limited because Astro controls most of the popular content. It used to hold exclusive rights from the Malaysian Government to offer satellite TV broadcasting services in the country up until 2017. Although that exclusivity is no longer enforced, the barrier to entry (for competitors of Pay-TV) is still virtually in existence given their significant first mover advantage that was untouched for 2 decades or so.

Astro is more likely to show independent TV programmes and independent feature films given its less reliance on advertising revenue. TV3 and RTM is less likely to show such niche programmes as its advertisement revenue reliance model would mean that they prefer mass market content. While many of the networks do have in-house production arms, they still receive a notable amount of content from outside partners. In-house production typically produces non-drama and non-movie programming. For example, many channels will create their own reality shows along with licensing finished products (e.g. Idol, X-Factor, Project Runway, etc.) from foreign countries particularly Hollywood.

Malaysia’s primary language is Bahasa Malaysia with English Language as its secondary language. The country also features the second largest Chinese population after the mainland itself. Therefore, the country features many Chinese FTA channels as well as Pay-TV Chinese channels. The content on these channels typically does not come from Chinese companies only but also features programming from local Malaysia companies. Most of the product is sub-titled, though many in Malaysia are literate in both Mandarin and Cantonese.

Internet Protocol Television (IPTV) is the most likely challenger to Astro. Telekom Malaysia has conducted lengthy IPTV trials and launched its HyppTV service commercially in March 2010. It has since been rebranded into UnifiTV. There are several other IPTV platforms that aim at more niche markets such as the country’s Indian or Chinese populations but many did not survive. In Malaysia, the adoption of IPTV, mobile TV and Video on Demand (VOD) has been slow in the beginning. The first Over-the-Top (‘OTT’) or on-line video streaming to start its operation in Malaysia in 2009 was tonton.com.my ('Tonton'). Tonton operated on 2 levels, first being the simulcast of FTA TV live on-line and, second, VOD menu of a library of content.

It took quite a while for the other players to enter the market. It only started to show any growth over the past few years when Iflix and Netflix started their operations in Malaysia in 2016. Now we have VIU and Dim Sum joining the bandwagon. Whilst OTT services grew in the recent years, continued growth is expected in digital delivery through IPTV and Pay-TV operators such as Unifi TV and Astro. Astro had also launched its Astro First and Astro Best services that offer Hollywood and Asian movies as early as three months post any theatrical release and in HD where available. Titles are available for RM10 (USD2.50) each and are made available for 48 hours from the purchase point. Astro continues to work with international studios like The Walt Disney Company, Lionsgate, Sundance Channel, Animax, Fortune Star, CJ Media and Unitel Classica.

Astro has lower risks associated with the economic conditions (or at least less risky than FTA TV). The risk of impaired revenue earning capacity is somewhat mitigated as revenue from Pay-TV is predominant derived from subscription charges rather than from advertising money. Pay-TV and Government backed FTA TV would still have strong appetite to purchase content especially from overseas since these channels do not depend heavily on advertising revenue. Hence, RTM and Astro would still continue to purchase latest films despite any contractionary advertising industry during an economic crisis.

Let us move on to theatres rather quickly. Istana Budaya was built in 1995 with a cost of RM210 million on a 5.44 hectare land giving a built up floor area of 21,000 square metres. It is the first theatre in Asia that has sophisticated stage mechanism for theatre performance. Istana Budaya charges approximately RM15,000 per day. It attracts on average 150,000 attendees a year who buys tickets from an average of 25 local shows and 5 international shows a year garnering RM10 million revenue a year. This sub-industry provides jobs to a dozen of companies that employs about 100 to 200 workers per show at an average salary of RM5,000 to RM10,000. For a year, Istana Budaya alone can provide jobs on project basis to more than 4,000 people in total. Production costs for a show will depend on the creative treatment and can range from as cheap as RM500,000 to RM1 million inclusive of advertising and promotion budget of about RM200,000 for each show.

Creative content production companies should, therefore, consider theatre as a potential revenue stream. When an Intellectual Property (‘IP’) is created successfully, it should be pivoted from TV, to cinemas and finally the theatres. A good example would be Puteri Gunung Ledang where its success in the filming scene had led to multiple rounds of musical theatre productions at Istana Budaya.

One other fact that is quite delightful to the celebrities vis-a-vis their appearance on the screen would be the source of income from their involvement in advertising. This is a good opportunity not to be ignored. Some good examples are: Nora Danish (UniQlo, Mamee), Shaheizy Sam (Digi, Nescafe, Petronas, WeChat), Farid Kamil (Cleanpro, Cadbury, Downy), Mira Filzah (100 Plus), Nabilah Razalli (Samsung) and many more. Creative production houses should also diversify their roles to include talent management. After all, we do live in an era of 360 degrees diversification. If we do not arrest opportunities, then that ignorance will be the very reason for our demise as a creative production house. How would you make yourself aware of the opportunities to capitalise? Well, go back to the first word in the first paragraph of this article. I rest my case.