Digital Distribution: Is Hollywood's Traditional Business Model Dead?

Digital distribution has upended the way that Hollywood studios fund, approve and release films. The decline in DVD sales income has been driven by cost, by a confusing array of competing technologies (for those who thought supposedly efficient businesses had learned from the Betamax example...)and by internet-based options. Ease of use and pricing continue to be the factors driving behavior. Timing of release will the next element to evolve in the customer value proposition. EAM Capital explains:

"Hollywood’s historical business model is successively releasing films exclusively through designated distribution channels with pricing based upon when the content is available and the quality of the viewing experience. Consumers are rapidly embracing new digital entertainment distribution channels. The Studio’s need to adapt their business models to deliver content to their customers in their preferred method of delivery or risk the same fate as the recording industry.

Hollywood Studio’s have historically built their business models on monetizing their entertainment content by making it available through successive periods of exclusive access as defined by the timing and distribution platform in which it is available. This linear, well-contained procession of access to their content supports a lucrative business model driven by the highly profitable sale of content directly to consumers (theatrical and home entertainment) that is supplemented with a steady stream of downstream licensing revenues from Pay TV and broadcast television. The Studio’s are now faced with declining home entertainment revenues driven partially by the availability of low cost alternatives such as conveniently located kiosk rentals (Redbox) and “all you can eat” subscription services (Netflix) with their unlimited physical and growing “on demand” libraries of content available to subscribers.

The Studio’s are extremely reliant on their home entertainment revenues driven by the “sell through” of DVD’s to consumers. However, DVD sell through revenues have continued to decline from their peak in 2006 with their underlying value proposition becoming challenged by a combination of factors. In practice, industry research supports that most consumers do not watch a purchased DVD multiple times (with children’s animated titles being the exception). Based on this historical behavior, consumers are opting for renting their entertainment rather than purchasing. The industry confused and potentially alienated their customer base with the introduction of multiple high definition formats effectively freezing consumers purchases for fear of buying your favorite player and/or movie in a format that would no longer be supported. Finally, the value proposition of owning a DVD and having it available for viewing is diminished to the extent that large, content libraries are now available “on demand”. As the quality and ease of accessing this content via your high definition television or other device improves, this provides a compelling alternative to either owning your content or running out to the local video rental store (Blockbuster can attest to this).

The Studio’s dilemma is that the revenues earned from incremental rental or digital licensing fees does not compensate for the loss of revenues from DVD sell through. The Studio’s are beginning to explore new release windows for their content embracing their traditional pricing rationale where price is dependent on the timing of when the content is available and the quality of the consumer experience.

One of the first steps in exploring this value proposition to consumers was several of the Studio’s enforcing a 28 day delay in the content available on DVD to Redbox and Netflix. In exchange for concessions on pricing, the Studio’s are attempting to justify the lower price alternatives of a Redbox/Netflix through the delayed gratification of having to wait 28 days from when the product is available to purchase on DVD or rent at a higher daily rental rate from Blockbuster.

The next opportunity for the Studios is to explore changing the timing of when content is released theatrically and on DVD and Pay per View (PPV). The time elapsed between theatrical debut and DVD street date has been declining over the last decade having moved from an average of five months and 22 days in 1997 to four months and eleven days in 2009. Similarly the Studio’s have relaxed and in some instances eliminated the four-week delay from content being available on PPV systems from when it is released on DVD. Studio’s spend the majority of their advertising and promotional dollars on the theatrical release. They would like to leverage this spend by making the feature available to consumers across multiple platforms within proximate time frames of when the product is promoted to their consumers. This has largely driven the reduction in time from theatrical release to DVD release. The opportunity to introduce another entertainment product alternative to consumers that leverages these marketing dollars is an enticing concept to the Studio’s.

This concept recently became more feasible when the Studio’s trade association (MPAA) successfully gained the approval from the FCC allowing them to remotely disable the analog outputs on cable and satellite tuners while you watch video-on-demand copies of some movies. This technology, labeled selectable output control diminishes the risk of illegally copying a digital signal by only allowing you only to use plugs with copy protection on your set top box for viewing the content. This technology conceptually enables the “safe” digital distribution of feature length motion pictures via a VOD system while limiting the exposure of diminished downstream revenues enabled through the illegal copying and distribution of the digitally delivered content.

While the opportunity to safely distribute their entertainment product to customers in a premium VOD window is enticing to the Studios, there are still a number of issues and/or obstacles. Theatrical exhibition is vehemently opposed to the premium VOD product. Theatres have historically enjoyed exclusivity of content during the theatrical window that drives consumer behavior (i.e. if you want to see movie in the next four months you need to see in a theatre).

Theatrical exhibition has embarked on a massive retro fitting of their theatres with digital projection. Digital projection offers a superior technical consumer experience for viewers. Digital projection also facilitates the exhibition of 3D movies. 3D while available in the home, is still very limited, so the 3D experience is one that generally must take place in a theatre. With the increase in 3D movies being released and the superior customer experience of digital display, theatre owners have recently taken steps to successfully differentiate their product from the one available in the home. Currently theatre owners have taken a very hard line position with the Studio’s.

I have only skimmed the surface of the issues. Historically the Studio’s have found price points which have enticed consumers to pay to view their content multiple times in successive release windows. The relative value of when the content is available and what is the quality of the viewing experience will determine the pricing from a consumer perspective. From a Studio perspective, they must begin to find alternative revenue streams from their content to offset the declines in DVD sell through.