December 9, 2008 | Authoring
The new gold rush: digital delivery
Online delivery has long been touted as a massive new money-spinner for the entertainment industry. There is no doubt that the demand is there, but questions remain about the revenue. Sam Andrews reports.
According to Screen Digest Chief Analyst Ben Keen, speaking at the research firm’s The Future of Online Media Distribution conference last month, there are two main groups making money out of online delivery.
First are the Hollywood studios, the content owners that have licensed their productions to the new platforms via minimum guarantees. Second are the technology companies, which make those movies accessible on screens worldwide and make the shovels in this potential gold rush.
The issue facing all the other players in the entertainment business is how to harness the public’s growing interest in online delivery and make money from it. Arash Amel, Head of Broadband Media, says the industry is “starting to see a real hunger, a consumer acceptance of online as a very distinct and serious form of distributed content”.
The problem is that consumers, to date, have not paid for online content. They watch endless hours of User Generated Content on YouTube and free stuff on the likes of iPlayer, and they download pirated movies and TV series from peer-to-peer sites.
The online video world is still largely a YouTube UGC dominated affair with movies a tiny fraction of what is being consumed, according to Amel.
Screen Digest forecasts suggest that despite the large audiences online TV in the UK will represent less than 2% of total TV revenues by 2012.
Some 85% of all video streams in the UK are accessed via YouTube with another 4% via bbc.co.uk.
“This effectively means that 89% of the video consumed in the UK right now is extremely difficult to monetise or in the BBC’s case, is not monetisable. So what we are really addressing is the remaining 11%,” says Amel.
At present, there are two main solutions to this — to offer free content in exchange for watching advertising or to offer an iTunesstyle model where users pay to own or rent. Both have worked in the US but Amel argues that in the UK the revenue opportunity from television content is not being maximised.
“There are really three key factors here,” he says. “The first has been the limited reach of the online services, which aren’t maximising the disaggregated and fragmented nature of audiences online. They are still stuck on issues of DRM, which are content related. The ad sales strategies in the UK remain underdeveloped. And finally, they are still hobbled by the somewhat prohibitive costs of television content distribution online.” The result, he says, is that the current economic model for adsupported online video distribution in the UK is not working. “Commercial UK ad-supported online video platforms are generally lossmaking, or providing very low profit margins, because of a failure to sell advertising effectively or syndicate their platforms,” he says.
But ad supported online video can work provided you have scale, argues Ariff Sidi, Director of Product & Technology, Digital Media at Disney’s ABC Digital Media.
“Obviously, Disney has massive buying power. So when it comes to a cut rate for bandwidth, it’s abc.com, ESPN, disney.com etc, and we’ve got some pretty good negotiators as well.” ABC took the decision three years ago to make its content available online rather than hand it over to pirates. The site makes money on every view as a result of a wealth of experience built up in the sector, Sidi says.
But he warns that no one has worked out if Disney’s sales revenue from the cable networks in the US will take a hit from the emerging technology that enables online services to go directly to the main TV in the household. “We have to walk a fine line as the technology develops,” he says.
NBC Universal Senior Vice President of Digital Assets Kevin Obi proposes that channel websites “not only serve the purpose of making money, they also have intangible benefits that we sometimes underestimate”.
In addition to fostering brand awareness, Obi says that they have a positive impact on customer experience and customer loyalty.
“ABC has released some stats that say customers who watch their programmes over the internet actually boost the average viewing of any series, which is a huge benefit,” he states.
Obi also contends that they have an impact on piracy. “All content owners are fanatical about protecting their content and the fact that we have it available over our own channels means that there isn’t an opportunity for pirates to make money by stealing our content,” he adds.
Jonathan Lewis, Head of Digital Media at Channel Five, says that broadcasters see online video as “a cost of doing business now” but it’s crucial to obtain more knowledge about the way in which it shapes the advertising market. “I think fundamentally the UK market needs to change and adapt to understand how to buy video advertising space online. I don’t think we’ve cracked it yet,” he says. “We talk about all this volume in the market but we are all struggling to monetise the advertising space we’ve found.” Sony Computer Entertainment’s VP, New Platform Planning & Development Nainan Shah is an advocate of the subscription approach. “While individual pieces of content are not commodities, the flow of content to the consumer is very easily commoditized and I think that is what we are seeing,” he says.
To keep PlayStation consumers buying, he adds, there is a need to offer them something better, bigger and more interesting. “One of the ways you do that is the way you package content and content propositions,” he says, pointing to the link up with Sky where packages of content are on offer.
“So we are marketing a product, rather than trying to market individual pieces of content, which is a job of the studios,” he adds. “It is not our job to market individual titles and that is very familiar to us because in the games world — while we will market our own games, we develop many of our own games — it is the job of individual games creators to market their products and a we market a package of various games experiences.” “The reality is that there is not just one type of consumption — there is a subscription market that we think is going to be very important because we think it allows differentiation from value and something that we can be involved in marketing.
“Certainly on the transactional side, rental to a device and sellthrough to a device is a proven business model that Apple is exploiting and we certainly are, and will exploit that, but there are going to be so many different types of video service.
“There will be the direct to the device services, the plural services where the relationship is not through the device but through an MSL operator and I think they will all coexist reasonably easily as will rental and sell through and subscription.” Parry also wonders whether people’s concept of ownership is developing. “Whereas before they might have thought of themselves as owning a DVD, they might now think of themselves as owning a film and with that have the expectation that they are able to watch it wherever they want,” he says.
Myers agrees that consumers may now want to shop for content and not shop for media. “We obviously have a vested interest in the continuing marketplace for DVD. I think we are one of the best-placed organisations in the country to market physical DVD products, he says. “But we also note that we have to meet changing customer behaviour, which is why we are expanding our online proposition and going to investing more heavily in not just the digital delivery of movies and TV shows but also in physical.
“We are going to try to make a fantastic customer experience that allows people to shop for content and not shop for media. If I find a movie, I want to find out right there and then that I can EST it, or download to own it, VOD it, buy the DVD.” That flexibility to consume how you want is vital, suggests Paramount Pictures’ VP & GM Digital Distribution EMEA John Robson. “As an industry we need to understand that movies in the digital space is not just one solution fits all.
There are 14 year-old boys who want to consume their films in a different way, couples too. There is a Saturday afternoon experience, there’s a Monday evening experience etc and each of those provides us with opportunities,” Robson says.
“Our challenge is to realise, while there is no really big prize, how we make the most of each of those and be fleet of foot enough to know that in the future when something does happen we can make the most of it.” Here, he argues, studios need to listen to their consumer-facing customers such as Tesco and Lovefilm. “Traditionally, as studios, we don’t know how different demographics are consuming film, and companies that are very good at understanding customers can help us with that,” he says.
Digital delivery is not about to kill off the DVD, he adds. “I understand the drama of ‘Will it kill off DVD?’ But I think the question you’ve got to ask is if people’s consumption of movies is changing. The answer is yes it is. Will it be in 10 years’ time very different from what it is now? The answer is yes but what it will be would take a brave man to foresee.” Warner Bros. EVP International, Digital Distribution Marc Gareton argues that while digital delivery is developing faster than the studios thought it would, it is too early to call it a win.
“I think what we have seen in the last few months is a level of paidfor consumption that is significantly higher than what we thought it would be. The better news is that consumption has not been impacting the existing businesses,” he says.
Gareton believes there is a fundamental change at work in the way content is being exploited.
The closed environment of cinema to home video to pay-TV to free- TV that has operated, in modified form, over 85 years or so has been breached by new technology, he says.
“The biggest issue we have today is that, over the last five years, the price of DVD has gone down significantly and piracy is everywhere. The fundamental assumption that content has value because it is in a closed environment — scarcity has driven value for 85 years — is being challenged. Today, scarcity drives piracy,” Gareton says.
Rights owners all along the exploitation chain naturally want protection but the fact is that protection against piracy may well be impossible.
“Content is out in the world anyway and no one is benefiting from it. I don’t know what is the endgame, but I do know that if we try to make it more complicated, more expensive and lower quality for the consumer, I exactly know where the consumer is going to go and no one is going to win,” he says.
“We need to find a way to put out quality content as broadly as we can and find a fair price for that content.
We cannot destroy the earlier value chains — the pay-TV operators and the DVD retailers or the exhibitors -- but we need to find a way where there is a fair balance between the existing businesses and satisfying consumer demand. Everyday they are telling us they want to access our content online. They want to watch it on a small screen, a medium screen and a bigger screen. If we don’t do it, they will do it and no one wins.” There is no underestimating the challenge of converting a generation to paying for content, Gareton says.
“If we can build a generation of 15 year-olds that are happy to spend £1.89 to download an episode of a TV show instead of getting it on BitTorrent, I think we will have done a fantastic job.” He admits that the learning curve has been steep in the last 12 months but also that it has been impressive.
“We’ve seen absolutely no impact on DVD sales. We have seen a positive impact on TV ratings when the show is available online through the broadcaster website.
You go back to DVD in 1997/98, or VHS sell through, every time more people spend more time and money telling consumers the content is here and now, the more people actually spend money on that content,” says Gareton.
When all is said and done, and despite the popularity of online movies, Screen Digest still forecasts that the digital spend will represent a small proportion of the market, accounting for only five per cent of home movie spending by 2012.
“We have a very strong belief that DVD will be around for a long time,” concludes Myers. “It is not quite as simple as on the music side where it is easy to break up the album into tracks and to transfer over a digital broadband service.
“It is not so simple with film, movies are a lot more cumbersome, they are a lot harder to transfer and people will be a lot less inclined to deal with that than with DVD which is a simple comfortable solution.”