Wednesday, 29 September 2010

Premium VOD--Have Studios Found the Answer?

I am about to show my age. When I was a child, the movie business was a simple matter. Studios made movies and people like my brother and I went every weekend afternoon to one of the three movie theaters in the smallish industrial town in the U.S. in which we grew up. There were no other distribution platforms for the studios to screen their products (my son tells me there is at least one movie theater in Kolkata that still fits this bill.) Indeed, I suppose that the special Saturday matinee fare was the closest to thing there was to out-in-front marketing (get the kids into the habit of periodic movie-watching and you then own them for life when they are able to pay full fare).

As for the present--au contraire! If anyone needed to be reminded of that fact, the article by Brooks Barnes, "In This War, Movie Studios are Siding with Your Couch that appeared in the September 25, 2010 edition of the New York Times here graphically demonstates this point. The focus of the article is the "explosion in the movie business" that is expected to take place in the next few months.

The catalyst was a ruling issued by the U.S. Federal Communications Commisison in May 2010 that movie studios are permitted to activate technology that has the effect of preventing the copying of films sold though video-on-demand (VOD) systems. As a result, it is expected that the studios will soon launch a so-called premium VOD service. The article describes this service as "the [movie] industry's best hope of restoring itself to health." What, pray tell, is going here?

The most pressing challenge to the studios is that the bottom has fallen out of DVD sales. It is reported that such sales have declined 30% since 2004 (although how much of the decline is due to structural factors and how much is due to the cyclical downturn is not clear.) The proposed remedy is to adopt the premium VOD service.

Under the current system, the movie theaters enjoy a 120-day exclusivity period within which to screen movies. Only after the expiry of that period are the movies made available on a VOD basis, at an approximate price of $4.99. The proposed premium VOD service will shorten the exclusivity period to 45 days. After that time, movies will be made available on a VOD basis at an approximate price of $24.99.

The studios apparently believe that there is a sufficient mass of couch potatoes prepared to shell out nearly $25 for a movie that they can watch at home reasonably soon after the initial release of the movie in the local theater. When one factors in the fact that the studios earn up to 80% of the revenues from DVD rentals, the attraction of a premium VOD is clear. On a subsidiary level, the shortened exclusivity period promises to reduce the amount of promotional and advertisement costs as well as to attract viewers more generally to the concept of VOD services.

So how do we see the various actors in the celluloid melodrama faring under an premium VOD regime? Here are some of my thoughts.

1. Studios--They see this opportunity as a way to exploit new platforms of content delivery with the hope that it will make up for the decline in the DVD market, which has been a major driver of profits in recent years.

2. Cable and satellite producers--Their interest is two-fold: (i) another revenue stream; and (ii) a potential differentiater of their services vis-à-vis content delivery competitors.

3. Retailers of DVDs--Behemoths such as Wal-Mart have owned the DVD market and they appear to be dead set against the premium DVD service, which they fear will further cut into their DVD sales.

4. Movie theaters--In a word, it is reported that they are prepared to declare "war" on the studios' plans to launch the premium DVD service. Their reasoning is simple: reducing the exclusivity period to 45 days will cut into sales of theater tickets without any compensation for these lost ticket sales. In addition, they warn that the so-called anti-copying technology will sooner or later be cracked, meaning unlawful distribution at an early stage of the movie screening time-line.

5. Symbiosis--That said, there is a form of symbiosis here beween the movie theaters and the studios because the most desired television networks--such as HBO--pay the studios in part on the basis of domestic box-office revenue. This means that, if there is less revenue at the box office, the studio will receive a lower fee from these television outlets. Moreover, it is doubtful that any other distribution channel has the (current) ability of the movie theater to provide the catalyst for viral buzz about a new movie release.

Let me venture two final comments.

First, the potential dispute over premium VOD highlights the continuing debate over the importance of the viewing experience. A good deal of the cost differential to watch a movie in a theater is connected to the total ambience of the viewer experience. Home viewing offers a totally different ambience and price structure. The studios seem to be betting that they can narrow the price differential between theater and home viewing, despite this stark difference in the two viewer experiences.

Second despite the intimation of the New York Times article, I have my doubts that premium VOD my itself will mark a strategic rebalancing within the movie industry. At the most, it will mark another tactical move that may both enhance the revenues of at least of the dramatis personae in the industry as well as create a nuanced (or not so nuanced) reshifting of relationships. At the end of the may, we may look back at this move as one more of the "thousand cuts" that the industry is experiencing as it seeks to find more appropriate business models in an era of changing content delivery platforms.

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