Author | ย  KIM Yoonzi (๊น€์œค์ง€, Senior Researcher, The Export-Import Bank of Korea)

NOV. 2023

Globally, there is a high level of concern about the crisis in Over-the-Top (OTT) online video services. As competition intensifies, production costs are increasing exponentially, leading to a slowdown in market growth. Global OTT platforms are adapting in various ways to address this challenge.

Netflix is securing more hidden subscribers by introducing affordable ad pricing plans and cracking down on account sharing. Apple TV+ is attracting subscribers with sports broadcasting content. After securing the exclusive broadcasting rights for Major League Soccer (MLS) in the United States and experiencing a subscriber increase following Lionel Messi's entry into the MLS, Apple TV+ is expected to pursue the acquisition of the sports channel ESPN in the future. Amazon Prime Video is also expanding its market focus on sports, securing broadcasting rights for the National Football League (NFL) and Major League Baseball (MLB).

The response of global OTT platforms in the domestic OTT landscape is enviable. Global OTT platforms with formidable financial resources have the flexibility to find new avenues. In contrast, domestic OTT platforms, which are still primarily focused on local distribution, are facing a decline even in content production budgets. As of 2022, Tving recorded a deficit of 119.2 billion won, while Wavve reported a deficit of 121.3 billion won.

The crisis extends beyond OTT to the film industry. In the past, the South Korean film industry was vibrant, producing tens of millions of box office hits each year with active investment. However, the impact of COVID-19, coupled with a three-year period of disrupted production, investment, and exhibition, has hindered the film industry's recovery. The emergence of OTT has further delayed the industry's recovery, as a decline in the number of moviegoers has led to a decline in profits, which in turn has led to a decline in investment and a general sense of crisis in the film industry.

Korean domestic OTT services by 2023.Tving and Wavve decided to join forces.

Different Agonies

Both industries are facing challenges, but the nature of the crises in OTT and the film industry are somewhat different. While the film industry is experiencing a decline in profitability due to low attendance, OTT is facing a shortage of production budgets. Films have investors, but profitability is declining, leading to a decline in investment. In contrast, OTT is finding it difficult to attract investors at all. This difference is due to the different production and revenue structures in the two sectors.

Since the 2000s, the film industry has been steadily receiving investment from venture capitalists after the Kim Dae-jung administration provided incentives for film investment through the Video Specialized Investment Associations to support the cultural industry. Of course, it wasn't an immediate influx of investors. When large corporations that manage multiplexes and oversee distribution teamed up with producers to form the "Korean Main Investment System," the film industry was able to grow rapidly.

In the Korean Main Investment System, a strategic investor responsible for distribution leads the investment, known as the "main investor," and attracts other investors to complete film production. Smaller film production companies that are unable to secure production budgets on their own benefit from the strategic investor completing the financing structure. The strategic investor manages the investment structure, secures revenue streams through distribution, and plays a role in the distribution and sharing of profits once revenues are confirmed after screenings. Thanks to this system, external capital, such as venture capital, has been continuously injected into the Korean film industry, contributing to its growth.

On the other hand, dramas don't follow this structure. In the past, broadcast dramas mostly sourced their production budgets from broadcasting companies, and with the advent of OTT, these platforms began investing in drama production. The participation of external investors in drama production was not as common. In this situation, as competition with global OTT platforms intensifies, domestic OTT platforms face the challenge of producing dramas solely with their own capital. While covering production costs through monthly subscriptions of OTT users is the ideal scenario, currently, subscriber fees alone cannot keep up with the pace of rising production costs. There are limitations to growth within the domestic market alone.

Movies and Dramas

If we consider a solution that addresses the problems of both industries, perhaps enticing capital invested in struggling films, due to low profitability, into drama investments could be an option. This is a choice to contemplate in a reality where the boundaries between movies and dramas are fading.

The challenge lies in the differing revenue models of the two industries. In the film industry, revenue is generated through theatrical screenings, and after accounting for production costs, the remaining profits are distributed among investors. On the other hand, dramas earn revenue by selling to OTT platforms, channels, etc. OTT platforms and channels pay for dramas expecting to generate subscription fees or advertising revenue. In other words, while movies operate on a B2C (business-to-consumer) model through theatrical releases, dramas operate on a B2B (business-to-business) model, targeting OTT platforms and channels. With such distinct revenue structures, the investment structures are inevitably different.

Of course, there are instances where investors participate in dramas, similar to movies. Dramas like "The Strange Lawyer Woo Young-woo" and "The Youngest Son of the Chaebol Family" in 2022 are examples. These series were produced with the production company self-funding a portion of the production costs from external investors and then selling broadcasting rights to various domestic and international OTT platforms. By directly sourcing a significant portion of the production costs, the production company secured the intellectual property (IP) of the drama and could sell it to multiple OTT platforms and channels, rather than relying on the budget from a specific OTT platform.

The 2022 drama "The Eccentric Lawyer Woo Young-woo" secured production funding from investors. Subsequently, the production company sold broadcasting rights to various domestic and international Over-the-Top (OTT) online video services, generating revenue.

However, this approach may not be a viable alternative for everyone. To make such a model work, production companies need to have substantial financial resources or the ability to attract investors directly. The two production companies that created "The Eccentric Lawyer Woo Young-woo" and "The Youngest Son of the Chaebol Family" were both relatively large-scale companies listed on the KOSDAQ. For many production companies in Korea, especially smaller ones, it is challenging to engage in such practices directly.

In the film industry, due to this issue, an investment system has been established where distribution companies, rather than production companies, play a central role. Distribution companies attract investors on behalf of production companies while securing sales outlets, i.e., distribution networks for the film. This role is not easy, and distribution companies receive separate compensation. When settling production costs and other expenses from the film revenue, once the profit is confirmed, investors and production companies split the revenue by 60% and 40%, respectively. In this 40% of production company revenue, the investment joint production company, which is the distribution company serving as a strategic investor, again divides it 4:6. The emergence of the 'investment joint production company' is precisely the distribution company acting as a strategic investor. Due to the importance of attracting investments and securing sales outlets, they receive a separate distribution of 16% of the revenue (=40%ร—40%).

Currently, in drama production, the investment structure is not well-established, and the roles of those responsible for this function are not clear. If we view drama sales similarly to film distribution, domestic OTT platforms could take on this role. Domestic OTT platforms can sell dramas to affiliated international OTT platforms, increasing profits and potentially using this as a stepping stone for future international market expansion. Large conglomerate-owned studio companies, such as CJ Group's Studio Dragon and JTBC-affiliated SLL, could play an ideal role in this regard. These studio companies produce dramas through various production companies, then sell and supply them to various OTT platforms and channels. By attracting investors from the production and investment systems and securing diverse sales outlets, these entities could contribute to the completion of a Korean-style drama investment system.

Diversifying Sales Outlets

To achieve this, there are many challenges that need to be addressed. First, even if investors are attracted to drama production, revenue cannot be guaranteed if the content cannot be sold to various OTT platforms and channels. The continued global appeal of K-dramas and the ability to secure additional distribution outlets, such as international OTT platforms or channels, remains an ongoing challenge. Without distribution outlets, there is no need to attract external investors.

Second, to attract financial investors such as venture capitalists, more information needs to be disclosed transparently. Even when venture capitalists entered the film industry, there was much skepticism due to opaque information. Information such as the film's box office revenue, actual box office performance, and cost structure was unclear. Investors argued that they could not invest without transparent information, which led to the introduction of the Unified Box Office Computer Network in 2004 for theaters nationwide. With the introduction of this system, investment accounting issues were clearly resolved, and audience and revenue information began to be provided as fundamental data for film investment. This transparency led to an increase in film investment activity, as investors were able to expand their practical experience based on box office data.

On the other hand, the current drama industry is in a situation where information disclosure is very scarce. Digital services such as OTT have rich audience-related data such as viewing time, viewer information and viewing styles, but do not disclose this information. From an investor's point of view, it is difficult to make a reasonable price assessment without disclosing information on dramas purchased by OTT platforms or channels. If information such as drama production costs, sales outlets, sales prices, and basic audience data by sales outlet were disclosed, investors would be more likely to actively participate. Investment can expand on the basis of transparent information.

For the industry to grow, it is essential not only to create good content, but also to establish an investment structure that can support it. The film industry has been able to achieve market completion through continuous support from investors. The drama industry also has the potential for further growth, depending on how it approaches new investment systems. [END]

Author : ย KIM Yoonzi (Senior Researcher, The Export-Import Bank of Korea)