Parks Associates Blog

Sunday, February 10, 2008

Hollywood Writers Get Piece of $11.3 Billion Online Video Pie

Bottom Line
Hollywood writers look to approve a new contract that will end their strike against the studios. A significant change to the new contract is compensation (2% of what the producer receives) for TV shows streamed over the Internet. It also includes 1.2% for movies streamed over the Internet (this information comes from a February 11 article in The Wall Street Journal).

In dollar terms, what is the total pie (online video revenues) for which the writers will now receive compensation? Parks Associates estimates that revenues (both user-paid and ad-supported) for online video will grow from $2.8 billion in 2008 to $11.3 billion in 2012.

Roll Out the Red Carpet
Joan and Melissa Rivers can breathe a sigh of relief; it looks like they'll be able to dish all they want during the red carpet walk at the Academy Awards in a couple of weeks. The Los Angeles Times reported Sunday that the board of the Writers Guild of America has approved the contract settlement reached with the studios. The next step is a guild vote on Tuesday, which could officially put the strike to bed.

As has been widely reported, the writers wanted a bigger share of the revenues from digital distribution, including downloads to the iPod and via services such as VUDU or Apple TV. If you look at the total online video market in 2007, this is still pretty tiny, but our forecasts have it growing significantly through 2012. All online video revenues (U.S.) for 2007 were estimated by Parks Associates at around $1.7 billion. This includes advertising linked to online videos, as well as TV downloads, movie rentals/downloads, and subscription services. Out of a total video entertainment revenue bucket of more than $100 billion (including TV advertising, box office revenues, and DVD sales and rentals), this is obviously a drop in the bucket. However, we forecast that online video revenues will grow to $11.3 billion by year-end 2012.

Advertising Dollars Not Included
According to today's Journal, the writers will only be receiving the flat percentage (2% for TV shows and 1.2% for movies) of the content distributed online. Furthermore, this current contract will not include any residuals for the advertising revenues generated from online video. This is significant, as the share of revenues coming from ad-sponsored online video actually accounted for 79% of last year's revenues! Granted, this is going to shrink to 51% in 2012 as user-paid services get up-to-speed. I'd fully expect that the writers are going to demand compensation for the ads when the next contract negotations occur in 2011.

Movies Still a Small Portion of the Total Pie
The movie side of the online video market is still a very small portion. We estimate that movie sales and downloads only comprimised $95 million in revenues in 2007. At Macworld, Steve Jobs noted that even mighty Apple had failed so far to ignite online movie downloads - he said that there had been seven million movies sold through iTunes. And, the low purchaes price of Movielink by Blockbuster in 2007 ($6.6 million) plus the shuttering of Moviebeam by Movie Gallery (which had bought it earlier in 2007 for an estimated $10 million) indicate that online movie distribution has a long way to go.

A big part of the challenge of online movie rentals and viewing has obviously been the ease (or lack thereof) of renting the title and actually enjoying it. We are actually optimistic that the newly-emerging download-to-burn efforts of major retailers (kiosks will be appearing soon at Walgreen's and Wal-Mart stores) will see success. Retailers are going to like the fact that they don't have to stock physical inventory and can see good returns for kiosks set up to sell lower-cost catalogue content. We're estimating that download-to-burn movie revenues will reach more than $1 billion by 2012.

TV Shows - Where Hollywood Strikes Gold
Finally, let's not forget about TV shows. Although the model for online TV show distribution has been via the download services (where an estimated $128 million was generated in 2007), the ad-supported piece of the pie for primetime and other TV shows is going to be significant over the next five years. Consider, for example, the strategies that are probably going to serve Hollywood best as they deal with an increase in DVR penetration and increased ad-skipping taking place. You can bet that TV shows streamed over the Internet (as well as an increase in on-demand offerings, including such features as Time Warner Cable's Start Over service) will be a key strategy in boosting ad dollars throughout the forecast period. With ad-supported primetime content now supported by all of the major broadcasters, however, look for a significant jump in revenues over the next five years. Our total forecast for ad-supported online video content is growing from $1.9 billion this year to $5.7 billion in 2012.

Concluding Comments
It'll be good for the writers to get back to work. As consumers have shown, they're willing to put their money (and their attention) towards well-written stories, whether delivered on the sliver screen, the PC screen, the mobile phone screen, the iPod screen, or the flat-screen sitting in the living room. We're expecting some solid growth in the online video space over the next few years, with significant announcements expected concerning new distribution rights and platform partnerships. As they say in Hollywood, "Don't change that channel!"

Now, how quickly can NBC get Scrubs back on the air?

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