The future of home entertainment has come under renewed speculation recently, with a flurry of conference reports and trade press coverage replete with hard data. Commentators point out we’re in a long period of transition as consumers move from transactions involving packaged media (DVD and Blu-ray) to the consumption of unboxed, digital product across a variety of platforms.
This is far from a straightforward transition because those punters with broadband connected devices in the home generally want video content on demand and for free.
Under prevailing business models this puts pressure on release windows and revenues, a pressure emanating from technological and social change rather than business imperative. 'We're in an accelerated period where technology and the consumer is outpacing the studios' current business model,' Mike Kelley, a partner at PricewaterhouseCoopers, told Alex Dobuzinskis writing for Reuters.
The attraction of unboxed content for studios is plain enough: Dobuzinskis cites higher margins and ‘the ability to collect and use information about customers’. The sticking point is one of scale: revenues from online video are projected to hit a $753 million in the North American market by 2013, according to figures quoted by Dobuzinskis. But that’s still only equivalent in size to 5% of the US DVD market circa 2008.
Truth is, there’s burgeoning demand for online video content but consumers are hitting the ‘free’ stuff in massive numbers rather than opting for paid-for product. David Mercer of Strategy Analytics, writing recently in DVD Intelligence, provides evidence of the popularity of ‘free’ online content services. The US-based Hulu.com, second only to YouTube in the free download sector, hosted 373 million streams in April 2009 according to Nielsen data. That compares with 260 million units of TV shows, movies and other video content sold worldwide for digital download in 2008, according to Strategy Analytics’s own data.
More recent data published in World Screen reveal the scale of YouTube’s dominance, with a staggering 10 billion video viewings in August alone according comScore data. From the same source: more than 161 million viewers watched an average of 157 videos per viewer during the month of August, and 82% of US Internet users watched online video last month, with the average viewer watching 9.7 hours online. The words voracious and appetite spring to mind.
But as Mercer goes on to make clear in DVD Intelligence, ‘successful business models for online video have still not been defined. Content owners and distributors are still experimenting with the appropriate mix of paid-for and advertising models.’ Consumer demand for ‘free’ content would seem to favour an advertising-based model, but this has yet to deliver significant enough revenues to satisfy most rights holders.
Jason Kramer, of research outfit Interpret, told delegates at last month’s Digital Media Pipeline conference in Los Angeles (laid on by the Entertainment Merchants Association) that nearly half (49%) of US consumers watched at least an hour a week of online video in the first quarter of 2009, compared with 32% who said the same during the first three months of 2008- further evidence that online video’s star is rising. But as previously noted, the majority of this viewing activity is directed at ad-supported free streaming sites (YouTube, Hulu etc.). ‘The studios are not really set up for ad-supported models,’ concludes Kramer. ‘There needs to be a new model’.
The experimentation David Mercer mentions is highly tentative at this stage. Put simply, the biggest players are fearful of cannibalising their existing business. Take the example of Warner Bros., who last month became the first major studio to release films on VoD before DVD with the home entertainment premiere of Observe and Report and Ghosts of Girlfriends Past via cable-operator Comcast, days before the titles were released as packaged media. This small but significant step was taken in an effort to ‘boost revenue on VoD (for which the studio gets a bigger cut of rental revenue than with DVD) without hurting DVD sales’, according to a piece in Video Business.
Understandably the studios wish to protect the DVD cash cow (and it’s hormone injected successor Blu-ray), or at least delay its demise until something lucrative enough is found to replace it. So the key question remains to what extent is unboxed content (whether free or paid-for) cannibalising legitimate packaged media transactions? It’s hard to say for certain on the basis of publicly available research, but Mercer reports findings from a survey of 3,500 people in the US and Europe that throws some light on the subject.
The research reveals that regular DVD users tend to be more active users of online video than the wider population of broadband internet users. For example, the number of broadband users claiming to download movies over the internet on a regular basis is relatively small (15% of the total) but the proportion of DVD users downloading movies is nearly twice the population average.
‘We can’t draw the conclusion that usage of DVDs will inevitably fall directly as a result of the growing number of alternative sources of video content,’ writes Mercer. ‘[But] we would expect that DVD usage will come under increasing pressure as the quality of online video and the range of available content continue to improve’.
As rights holders naturally wish to maximise their returns across revenue streams, what are the likely future prospects of paid-for unboxed content? Apple’s iTunes service demonstrates a market exists for pay-as-you-go movies and TV shows, but – once again- revenues remain small in comparison with the overall packaged media market.
During a Spotlight Presentation at the Digital Media Pipeline conference, Arash Amel of Screen Digest put Apple’s iTunes share of web-based VoD at 52% of the market, followed by Xbox Live on 31%. Screen Digest values the global web-based VoD market at $500 million in 2009, rising to $2 billion in 2013 (to put this in some perspective, DEG valued the US – not the global- home entertainment market, including VoD, at $9.73 billion in 2009, the lion share of which is down to DVD).
A quick digression, while we’re on the subject of iTunes. Scott Kirsner, writing this week in Variety, points out that Gary Hustwit’s 'Helvetica’ has generated a six-figure sum from its showing on iTunes (priced at $9.99 per download). Impressive stuff for a documentary about typography, but, as Kirsner laments, it remains an uncommon case: ‘The indie download business is still having problems gaining traction. The power of the Internet was supposed to level the playing field on which independent filmmakers and studios compete for audiences. So what happened?’. Check out the article, and Kirsner’s follow up on the Cinematech blog (An update on the State of Indie Film Online), for further analysis and case studies.
Returning to the Screen Digest data, Xbox Live’s market share is noteworthy because games consoles with online capabilities are well placed to bring VoD content onto TV screens in the home, arguably posing a bigger challenge to packaged media than PC-based viewing alone. Jennifer Netherby, writing in Video Business, reports the Xbox 360 console is happily ensconced in 16 million US households (the Playstation 3 is in 8 million and Nintendo Wii is in 20 million homes), ‘making gaming consoles the leading internet-connected device already hooked up to TVs’.
In closing, here’s one final angle to consider: what’s in store for the size of the home entertainment market as a whole (as opposed to the relative market shares of VoD and DVD)?
'I don't think that studios are looking at online to save the home entertainment business,' Stephen Prough, founder of Salem Partners, told Alex Dobuzinskis. '[B]ut I think they want to avoid what happened to the music business and try to come up with alternative modes of distribution before physical media goes away.'
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