Cablers Ask Film Studios for Parity

Aug 11, 2003  •  Post A Comment

Give us a chance.
That’s the plea cable operators are making to the movie studios, implicitly promising that video-on-demand will drive tremendous revenue, perhaps more so than the hallowed video store.
Cable operators currently receive movies about 45 to 52 days after the video store begins peddling them. Multiple system operators believe an earlier release window, and ultimately day and date parity with the video store, will pay off handsomely for them and the studios producing the flicks.
But since VOD is still in its early days, cablers need to prove through aggressive marketing that such a risk will be worthwhile for the studios, said experts.
In the next 18 months movie studios and on-demand providers will experiment with VOD release windows. For instance, the upcoming “Cradle 2 The Grave” film will debut on VOD and pay-per-view 17 days after Warner Home Video releases it Aug. 12 to video stores. The movie, which stars Jet Li and DMX, premiered in theaters Feb. 28.
That’s one of the earliest windows ever for VOD, and cablers are eager to flex their marketing muscle given such opportunities. After all, 20th Century Fox’s “Shallow Hal,” a modest box-office success with $71 million in revenues, was the most successful PPV/VOD movie of 2002 for iN Demand, cable’s leading VOD provider, which delivers VOD content to cable systems serving more than 7 million digital cable homes and should reach 10 million by year-end. The movie premiered with a 30-day window.
Since about 85 percent of movie rentals occur within the first 30 to 45 days of a film’s rental release, an earlier window represents an enormous opportunity to capture some viewers who haven’t yet rented the movie but are interested in it, said Steve Brenner, iN Demand’s president and CEO. “If [studios] want another source of revenue and hopefully incrementally more revenue per buy, it would make sense to experiment with earlier windows,” he said.
Studios ultimately stand to make more per movie through on-demand since the revenue split for studios with VOD is about 60 percent, compared with the 45 percent to 50 percent they receive with the video store.
Warner Bros. is willing to test earlier release windows, though the studio declined to comment for this story. Universal and Sony also may be open to trials of earlier release windows.
Buy rates for movies are about 2 to 2.5 per month, a number that needs to grow for the release window to change, said Adi Kishore, analyst with the Yankee Group. Windows won’t change much over the next 18 to 24 months, but if operators can grow buy rates, they will likely see better windows in a few years, he said. “Cable operators need to do more on marketing the service,” he said.
While movies are without question the killer application for VOD, the cable industry has seen a correlation between the amount of content offered and overall buy or take rates for on-demand. Comcast offers more than 1,000 hours of on-demand content in Philadelphia. About 50 percent of Comcast digital cable customers use VOD over any given 90 days.
VOD is available to about 10 million homes, but only 20 percent of those use the service, Mr. Kishore said. By contrast, about 95 percent of homes have a DVD player or a VCR. “Consumers spend in excess of $30 in movie rentals per month,” he said. “VOD is a fraction of that. VOD is available to fewer, and still fewer are using it. From that perspective, it doesn’t make sense to cannibalize that.”
Studios don’t want to bite the hand that feeds them, said Bob Davis, managing director at Dove Consulting in Boston, who led the formation of the Cable and Telecommunications Association for Marketing’s On-Demand Consortium. In 2002 theatrical releases generated $8.4 billion in revenue, home video captured $20 billion and PPV/VOD snagged $2 billion, he said. “If you look at TV’s share of the $30 billion business, it’s pretty anemic,” he said. That will change if the movies on-demand are more current with the video store, he said.
If MSOs show they are serious about the business and market aggressively, the studios will play ball with shorter release windows, Mr. Davis said. “Studios want this to work,” he said. As cable operators generate more buys per month, studios will shorten the window, he said.
While there may be a fear of cannibalizing the video store revenue stream, history doesn’t bear that out. New distribution platforms have always increased the size of the pie for the industry rather than shrunk it, he said.
Mr. Davis predicted that within three years, about 50 percent of movies will be released on VOD concurrently with the video store.
Another way to improve buy rates and grow VOD is to offer different pricing options, such as marketing movies or SVOD services in packages, said Jimmy Schaeffler, analyst with the Carmel Group.
Late fees are about 11 percent of the revenue for video stores, according to the Video Software Dealers Association. Late fees also contribute significantly to the margins at video stores, which are about 6 percent, said Bruce Leichtman, analyst with the Yankee Group. Even though VOD offers a more attractive revenue split, studios are unlikely to rock the boat with the dominant revenue generator. Operators need to prove they can sell movies given the current window before they can expect a shorter one, he said.
Cox’s Kevin Hill wants to prove the potential of the service through a blockbuster. The director of marketing for video services at Cox believes that if operators are given the chance to promote a hit film with a concurrent window, cable will deliver a good if not better revenue stream than the video store. After all, on-demand customers buy nearly twice as much content as PPV customers, said Mr. Hill. “We have to be able to market it like any other distribution channel gets to market. We have to market it like we would a blockbuster, just like they do for DVD sales and rentals,” he said.