By Adrian Pennington
Hollywood majors are embracing digital to a greater degree than ever before, moving towards an on-demand world to allow streaming, day and date released with a DVD release across a host of devices from PC, tablets and smart TVs, to game consoles.
Unfortunately for studios, the revenue from VoD has not yet offset the resulting drop in DVD sale revenue, which has been their top earner for over a decade.
SNL Kagan tracked 415 titles released on DVD in 2010, and found that wholesale revenue dropped 43.9% from $7.97 billion in 2009 to $4.47 billion in 2010. Over the past five years, average wholesale revenue posted a negative 13.7% CAGR.
Fighting piracy with release windows
The VoD window has compressed even further into a window that opens right into the theatrical run. Premium VoD is available up to 60 days following theatrical release for a fee of around $25-30. Adriana Whiteley, managing partner at Farncombe Consulting, suggests that compressing windows is imperative to combat piracy.
…in 2010 and that the top five TV shows like US imports Glee and House were pirated 1.24 million times – up 33% from 2006.
“- however, the internet is a catalyst for and cannibalises viewership from impatient viewers that would otherwise happily pay for content,”
“the underlying logic for format windows does not look set to change any time soon, as the more you can tailor windows and extract money from different distribution rights in each of them, the longer you will preserve that revenue stream. The key question is whether the rental window disappears, to be replaced by premium subscription and FTA TV,”
In the US, Warner Brothers, Sony, Universal and Fox have joined together to offer customers a chance to see movies two months after cinema release, a month shorter than normal. “While exhibitors understandably feel threatened, studios have to find ways of getting people to pay more for digital,”
Danish cable operator YouSee teamed up with film distribution company Scanbox Entertainment Denmark to develop an early release OTT VoD portal in the country, saying that this alternative first-release window would generate interest in films that otherwise would struggle to secure distribution. “With regards to movies, we have the ambition to be the Netflix of Denmark,” says Anders Blauenfeldt, product development at YouSee. It’s been a success if you consider that last year YouSee’s parent TDC grew its revenue by 17% with the number of movie rentals through its VoD services growing by 217%. More than 420,000 films were rented by customers in 2010, five times more than in 2009.
Warner is pioneering another route by offering streaming rental via Facebook. It released five movies for rent using Facebook Credits (a standard digital transaction in which the social network takes a revenue share). Titles include Harry Potter and the Sorcerer’s Stone, Yogi Bear and Inception in addition to the launch film, The Dark Knight.
Facebook says its Facebook Platform and Credits “are open to all developers, and we’re intrigued and enthusiastic about companies like Warner Bros building social experiences that help people connect through entertainment content.”
Indeed, it is the ability for developers to offer social experiences around social design of their apps which may be key to unlocking this route to market. Unless there is a significant change in the way more people consume movies, sitting back on a sofa at home, Duffy cannot see how YouTube or Facebook will be able to gain significant traction, unless they mimic services such as Netflix.
“No matter what the genre, the movie business is an area consumers pay for quality, with films like Blair Witch Project being the exception that proves the rule,” he says. “Therefore, a low bit rate, PC-based viewing experience is currently not direct competition for quality movie services.”
While studios are turning their attention to VoD, many of them are also backers of the DECE consortia and its Ultraviolet (UV) initiative, which is based on promoting digital downloads. Ultraviolet is intended to make it easier for consumers to buy rights to premium content digitally, with the keys held in a personal digital locker, and able to be unlocked on a range of device platforms.
“UV removes one of the drawbacks to download to own which is a consumer’s question mark about keeping digital content in perpetuity on local hard drives which are prone to crash and loss but if it is going to encourage people to buy rather than rent in the digital world there has to be a programme of communication of the benefits of cloud storage to customers,” says Casey.
Although it has no content carriage deals with studios, Apple’s recently announced iCloud would help it deliver a Netflix-like streaming subscription service for films. “iCloud plays into the TV everywhere strategy that payTV operators have been following,” argues Ben Reneker, senior analyst at SNL Kagan. “The idea is to sync purchases of content across devices seamlessly and gives Apple one of the last building blocks for a TV everywhere ecosystem.”
The Netflix model
Netflix dominates US broadband downloads, accounting for 28.7% of peak downstream traffic in the country, according to research from Sandvine. The survey found that real-time entertainment applications will represent 55-60% of peak aggregate traffic by the end of 2011 and that the engine for that growth is Netflix.
Just two years ago, Netflix was a US-only, DVD mail order service with ten million subscribers. It has since more than doubled its subscriber base and increased revenue from $493.7m to $718.6m 2010-11 by moving into online streaming with its sights on Europe.
Netflix VP of business development Bill Holmes has acknowledged that the company is seen as a threat to existing VoD services because of its availability on a wide variety of connected devices.
Eager to find distribution partners to take advantage of new revenues arising from digital syndication, Paramount Pictures, MGM, Lions Gate Entertainment, CBS, Warner Bros and Miramax have all signed to stream content over Netflix.
If Netflix can’t do it, then what hope for smaller competitors such as digital-only Blinkbox which has amassed two million users a month and was recently acquired by Tesco? Or Amazon-owned LoveFilm, which has a similar mail to digital streaming movie business?
“We question whether any company can develop the same kind of gravity as Netflix in the digital space alone given that all digital movie services have struggled to date,” notes Reneker. “There is a long term potential for entities like LoveFilm to bring feature film libraries OTT but we question if there’s a real economy for it there or if those services are going to be used as sweeteners for other business models – as an adjunct to packaged media sales.”
PayTV holds the cards
Far from being undercut by OTT movie services, payTV cable and satellite operators who currently own the value chain would seem to be in the strongest position to control its future.
“PayTV operators are in the strongest position to take studio content into a multi-screen environment,” observes Reneker. “They control relationships with the key networks and they are responding to the threat of cord-cutting, by rolling out ‘TV Everywhere’-type services and fulfilling consumers’ increasing demands for multi-platform access.”
Without the benefit of a connected TV, in terms of ease of use it is still a far superior experience to access VoD content through a Sky+ or Virgin Media box, or simply putting a Blu-Ray in the player, says Mediasmith’s Duffy.
“Until the process for VoD access through services such as a PS3 or Xbox 360 console is made as simple and fast to get to the content you want, then they will continue to play second fiddle to the integrated offerings.”
Farncombe’s (http://www.farncombe.com/) Whiteley suggests that broadband (internet) based pay services don’t have a system completely under their control until the point of content reception and delivery.
Farncombe believes that pay-TV operators are reacting in two ways: on the one hand, players have invested hugely in premium content and now have to make sure they make the most out of their rights; many of them are using the internet as a complementary distribution channel and becoming increasingly platform agnostic (http://www.techopedia.com/definition/23666/platform-agnostic).
On the other side, payTV operators who have focused their investments on developing and expanding infrastructure have to fill these pipes with content, and are looking for ways to access as much third-party content as possible – developing App stores, betting on free catch-up or incorporating third party VoD providers.
Pay TV Operators have split into two categories:
Constant changes within emerging, global Pay TV markets mean that operators are more concerned than ever with keeping pace to grow their customer base and increase overall market share. Often a billing system can restrain operations from reaching business goals due to inflexibilty and lack of interoperability with other back-end processes and systems.