Parks Associates Blog

Thursday, March 27, 2008

Odd VoD

We're currently engaging with a bunch of interesting companies in the broadband video space as we're completing work on Internet Video: Direct-to-Consumer Services (Second Edition). If I were to sum up the results of our discussions with the companies involved in the space, it might go something like this:

1. User-generated video drives lots of eyeballs to a PC screen, but there are lots of questions about its inherent value (ad-monetization) overall;
2. TV shows on the Web have been a resounding success, because there is an ad model that seems to be working, there is little evidence that the programs are cannibalizing primetime TV, and sites like Hulu and AOL video can help resurrect catalog content (like the Airwolf citing I made in yesterday's blog) that would otherwise not be monetized.
3. Movies delivered over the Internet have underwhelmed all expectations.

The movies issue is an interesting one to me, because monetizing movies in a VoD or broadband video environment has been a consistent struggle, no matter the distribution path (first with cable and now with the Internet). Our own findings with traditional cable VoD services bears out the fact that while Comcast and Time Warner Cable are both reporting huge VoD numbers (for example, Comcast reporting on March 19 that they've topped 7 billion views and 1 billion hours worth of VoD since 2003), only a tiny portion of this is pay-per-view movie content. One industry statistic I've heard recently is that the average use of premium pay-per-view is 0.8 times per month per cable subscriber. Our own data indicates that only 28% of digital cable households surveyed use premium pay-per-view on a monthly basis (from our Global Digital Living II study). And, a recent interview with CinemaNow's CEO Curt Mavis, he told us:
"I would be less than truthful if I told you that the growth of CinemaNow and the industry was what we had expected. We started the company eight years ago. In worst nightmarish predictions, nobody would have predicted that digital distribution wouldn’t be a mainstream business. It still remains a very small piece of the overall home video entertainment pie."

The challenge to both a cable operator and the CinemaNows and the rest of the purveyors of online movie rental services comes down to licensing. And, it's a very convoluted and confusing area to understand. Steve Swasey at Netflix described the situation this way:
There is no one set rule that applies to when movies can be available for electronic rental. Each movie’s window of availability is individual, so one cannot make blanket assumptions about when a title might be available.
Also, one one of the biggest variables is the broadcast rights that each studio makes for each film. Television networks generally have the right to air a movie on their channels about two years after the movie appears in a theater. If a movie has broadcast rights associated with it, then it is not available for electronic rental. Even older films such as James Bond or Patton are not available for electronic distribution, because a TV network has the right to air them exclusively.
Then, there's something that the industry calls the "HBO Hole." Content may be available for electronic distribution on an Internet site (or via standard VoD), but once HBO, Cinemax, Showtime, Starz, etc. get hold of it, it can no longer be rented via Internet sites. Now, it could come back to the electronic distribution channel, but there's no standard - all titles are different. Finally, there is guarantee for clearance of content that was released prior to 2000. Getting the rights to this content requires separate agreements with many of the players involved in the production of the film - from the producer to the director, and including the guy who wrote the musical score. In many cases, content aggregators are dealing with the estates of the key players.

The cry that we're hearing from the Internet video services that are pushing movies is for Hollywood to relax its strict windowing and allow greater freedom and flexiblity to distribute titles earlier. The argument that they make is that - in the end - it will boost Hollywood's bottom line by promoting increased sales of DVDs. And they cite the early day-and-date experiments such as Warner's distribution of certain titles via Comcast and Time Warner. The results - where VoD availability occurs at the same time a subscriber chooses to buy the DVD - have shown that sales of the DVDs do increase, while rentals are slighlty suppressed.

In the end, the studios are only going to release their tight grip on the strict windows when it can be proven consistently that earlier releases will help to boost their revenues. That's going to be a tough row to hoe, as the studios are not only must justify such moves internally and to their investors, but they must contend with their distribution partners such as the movie studios and large retails, both of whom have enough clout to derail any large move away from the traditional distribution models.

My prediction is that we'll continue to see window shrinking occur in an incremental and often piecemeal fashion, with the cable operators being the bigger winners, given their scale and ability to apply different payment models to their content. I was told by one company that an increase of 1-2% in VoD uptake is enough to cause a service provider to do backflips. Boy, the bar has been set pretty low for VoD success, hasn't it?


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