MAY 2007





Reasons For The Consumer To Convert To Digital Platforms

Accessibility: Easy Storage: Instantaneous Retrieval


In his annual article for The Business of Film during the Cannes Film Festival, Greg S. Bernstein looks at trend in the industry.

Greg S. Bernstein

The motion picture industry is on the verge of yet another technological revolution, but this one will not only significantly enhance net revenues to producers and distributors, it will revolutionize the way the industry functions.

 No its not HD or Blue Ray.  (I agree with Katzenburg who recently said these technologies will only be a niche business, for videophiles.  These technologies are not enough of a technicological advancement).  So what will it be? What else is there?  It is the electronic transmission of movies directly to the consumer, whether for rental or sale, for storage on personal home entertainment systems.  Think IPOD for your TV. 

 Many are not given this potential a realistic evaluation.  Given the current landscape, producers and distributors need to be thinking ahead. Many distributors are already finding that their existing contracts will not give them the distribution rights they need to exploit this new market. In fact, they may find their entire existing library of films worthless in the near future.

 Since around the turn of the millennium the industry has been talking about electronic delivery of motion pictures directly to the consumer.  Forecasts in 2000 indicated that by 2005, or 2007 by the latest, most films would be delivered electronically to the consumer.  Gone would be brick and mortar sellers or renters of videograms.  Consumers would not have to leave their homes to obtain the latest film, either for rent or purchase.

 Unfortunately, technology did not quite move as fast as everyone had hoped.   Today, VOD and electronic sell through (delivery of a full electronic copy of a movie to the consumer, where the consumer can store it on their computer and/or burn it themselves on to a DVD) are only a fraction of total revenues from the exploitation of a movie (only about 3% in 2006, growing to about 13% in the next 5 years).  The reason for this slow growth is not distaste by the consumer for this medium.   The ability to move digital information to the consumer is still relatively slow (today if you want to download a full movie to your computer or video IPod its going to take you hours), not to mention there is still no affordable, or convenient, hardware to store and access what you have bought, let alone a simple way to buy it (the recent introduction by Apple of the Apple TV is the beginning of this change).    But once technological changes occur, and they will in the coming years, electronic delivery will supplant DVD, and the video industry itself.  Unlike the advent of DVD, this change will be the creation of a new system of delivery of film to the consumer, as revolutionary as the advent of video itself. 

  The current estimated growth in electronic delivery methods is based on present technology, as well as a failure to truly recognize the potential of this technological change.  Talk to a studio, and you get the same naysay you heard when video was introduced. Talk to an indie, and you hear the same excitement and vision you heard 25 years ago when video started.  Once delivery speeds increase and greater storage and retrieval devices are marketed, at affordable prices, the exploitation of movies will be quickly move to this form of distribution. Possibly in as short as 5 years from mass introduction.   There will no longer be a need for DVD, Blockbuster or Walmart to get your movie. Bah humbug you say? Never happen? Well, it’s already started with music (music downloads accounted for only about 10% of total music revenue in the US in 2006 and is “conservatively” forecast to be 36% in 5 years). The only thing holding film back is the much larger file size, and hardware.

 History could repeat itself when we look at the mass introduction of DVD and how it changed our industry.   At the beginning of 2000, DVD’s accounted for less than 1% of the revenues for movies, as very few people had a DVD player. But 91% of the country had VCR’s.  By 2005, 76% of the country had DVD players, and videocassette went the way of the 8-track tape, with very few video distributors still manufacturing videocassettes.  That happened in only five years! The key was not the invention of the DVD. That occurred many years before (officially launched in 1995 but invented as an offshoot of CD some time earlier). What happened was the mass marketing of DVD players at under $200, as well as an affordable price point to buy DVD’s.  DVD was a significant change from videocassette. Quality, small package, easy shuttling (no more rewinding), and other benefits gave consumers a compelling reason to buy DVD’s over videocassettes, and, more importantly, convert their existing video library to DVD.  The advent of DVD resulted in a boon to the industry, and changed the dynamics, with video revenues now accounting for more than half the revenues in the life of a movie. Moreover, because the cost of delivery of a DVD was the fraction of the cost of delivery of a videocassette, profits soared despite significantly lower prices.    The key was that consumers found a product that gave them a reason to update their “library” with better quality, easier accessibility, and less storage requirements.  Once you experienced the thrill of not having to rewind a cassette, you never went back.

 So too will be the case with electronic delivery.  Accessibility, easy storage, instantaneous retrieval, will all be compelling reasons to convert.  When the consumer can replace their DVD player with a similarly sized device that will store thousands of HD quality movies, instantaneously accessible, to play on their TV (all at comparable prices) we will see the same phenomenal growth in revenues and change over that occurred with DVD.  More ominous to some will be the supplanting of DVD, and, frankly, video as we know it  (just as we are seeing in the music industry where consumers are starting to buy less and less CD’s and choosing to building their own electronic song library via I-tunes and other similar download sites.)

 Since this new technology usurps videograms, not upgrades it with another format, there will be a wholesale change in our industry. In the past 25 years every other technological change was either a format change (cassette to DVD), or the advent of a supplemental delivery method (video supplemented TV and theatrical, not replaced it).  Not only will brick and mortar sellers disappear, but so will all the video distributors, manufacturers, middlemen, retailers and other entities in the video distribution stream since electronic delivery does not entail the manufacture or shipping of physical goods. (we already have seen VOD replace PPV, and VOD is making significant in roads in replacing traditional brick and mortar rental).    

 Conversely, we will likely see expansion of the revenues and business of cable, wireless and satellite providers, who, in all likelihood, will now act as distributors AND retailers of entertainment.  First and foremost, consumers want to view movies on their TV or other home entertainment system. Second is viewing movies on portable devices (viewing a DVD on your TV is preferable to viewing it on a laptop or portable player).  When electronic delivery takes off, systems that conveniently deliver films electronically to a TV will be at an advantage.  Likely first responders will be cable and satellite, who will be at an advantage over the Internet or other delivery systems since they are already “wired” to the consumer’s TV.   Also likely new vendors are wireless systems, both to portable devices and delivery directly to set top boxes in lieu of cable or satellite. (In fact, wireless and satellite will eventually replace DSL and cable modems given the speed with which they can put upgraded wireless and satellite delivery systems in place over telecom and cable lines.)

 The problem video distributors face today is that a distributor with a library of titles more than a few years old may not have the legal right to distribute their films electronically.  Conversely, a producer may find themselves with new rights to exploit.  If delivery of films to the consumer becomes entirely electronic, will it be considered video or TV under today’s definitions?  Is “electronic-sell through” video distribution? Is it some new, undefined, area in between?

 For the past thirty years, most contractual definitions of video distribution relate to the distribution and sale of “videograms”.  This is true in the 2005 version of the IFTA standard agreement, used by most distributors and sales agents at the markets.  Videograms are universally defined (and are so in the 2005 IFTA definitions) as putting a film on some kind of physical medium, whether that be a videodisc, DVD, videocassette or some other form “yet to be devised”. However, “download to burn” or “electronic sell-through” does not fit that definition.  Both are electronically delivered. There is no physical medium on which the film is placed and then sold.  Hence, barring an adjustment in the contractual wording, video rights do not include electronic delivery.  So for most video only distributors, unless they have expanded their rights acquisitions to include electronic delivery methods, even recent acquisitions may have a short exploitation life.

 Buyers of TV rights should not rejoice either.  TV is generally defined as some form of electronic reception, but reception for viewing transitorily on television, and/or specified channels.  Most rights granting wording do not come close to any form of electronic sell through.

 Internet and wireless (handheld devices) definitions don’t always help either.  The IFTA definition for Internet is narrow, limited to “exploitation of a digital [copy] by making it available on the World Wide Web portion of the Internet in a manner that allows its transmission to a computer.”  Computer specifically excludes “set top box players or recorders and handheld devices” under the definition.    Further, most wireless/handheld device definitions are limited to playing the downloaded film on the handheld device.  While VOD may encompass a significant portion of the future marketplace, it will still not cover delivery directly to a home entertainment system for permanent storage (also breaking up handheld from other electronic delivery methods will certainly cause conflict with the desire of other distributors to sell electronic versions transportable to handheld devices).

 While many video distributors who have contemplated the future electronic delivery of movies to the consumer have added electronic sell through to their contracts, this only helps going forward. Not for films acquired 3 or 4 years ago, or more, where video distribution was limited to videograms or their equivalent.  If you, as a producer, licensed rights to films media by media, you may have new rights to license in the very near future; rights that fall through the cracks of video and TV. (Obviously if the rights granted to the distributor include all rights “now known or hereinafter devised,” that’s going to be all encompassing and there’s no question as to the right of the distributor to distribute the film via any and all electronic medium.)

 Since the industry will have new media to sell, we will likely have new distributors too.   The cable, wireless and satellite carriers will undoubtedly set up their own acquisitions departments (much like HBO has done, and Blockbuster did with DEJ) to directly acquire and exploit these new rights through their established delivery systems. But existing video distributors, at least in the beginning, will have something going for them; cash. They still have huge economic power to buy rights, albeit to resell to the television and wireless carriers. 

 And what about the Internet. Why cannot a producer set up their own distribution operation on their own web site, and avoid distributors and carriers altogether?  You don’t need a big manufacturing and distribution business or the clout to vie for shelf space when you are talking about electronic delivery.  Assuming you will be able to access the fast delivery methods, there is still the problem of making people aware that you’re product exists and differentiating that film from hundreds, if not thousands, of other films.  This means advertisement and promotion, not just for your film, but where to buy it. In other words, if you are selling a film on your internet site, you not only have to entice consumers about buying your product, but you have to entice them to go to your site in the first place.   This is not to say that producers will not be able to succeed themselves. There are certainly some well known successes today of direct sell through.  But each of those successes came from significant awareness, paid for or otherwise, of the film to attract the consumer.  This is why, as far as the internet goes, brand name electronic sites, such as MySpace, Itunes, YouTube, Amazon, and to name a few, may be the site of choice to buy electronic copies of movies. Each of these sites has recognized this potential and are trying to catch an even greater share of the public.

 As the industry gathers for another Cannes Film Festival and market what should be utmost on the minds of both producers and distributors is the’ ‘new delivery system’ and how it affects the rights you are negotiating. Because the electronic transmission of movies directly to the consumer, whether for rental or sale, for storage on personal home entertainment systems changes everything.  Think IPOD for your TV.  The ability to easily download and store hundreds, even thousands, of movies on a personal TV device (and being able to move it from one device to another) to play instantaneously on a home theater system, as well as transfer or download to   handheld devices.  The bottom line is delivery of movies electronically to the consumer will be the future, forever altering the movie business, as we know it.  Are you ready? Can you survive the revolution?  If you are a video distributor, will you still have a business? If you answered “of course”, may be not (think what would have happened if your business was limited to videocassettes when DVD’s came).         

Either way, delivery of films to consumers will change.  Giving new opportunities to producers, and a new breed of distributors and retailers.  Opening the non existent  borders of a whole new digital world to  traverse and conquer. 



Reprinted with permission by The Business of Film

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