Downloading For Dollars

November 28, 2005

by Edward Jay Epstein

Click image to expand.

The Hollywood Economist

The numbers behind the industry.
The Ineluctable March Towards The small Screen

Once upon a time—two generations ago—the movie business was about making movies. Nowadays, it is about creating intellectual property that can be licensed in a raft of different markets. The Hollywood studios still make movies of course, but, by 2005, only 14.2 percent of their revenue came from movie ticket sales, while 85.8 percent came licensing or selling their products for use in the home.
(Click here for the studio revenue numbers.) Up until 2005, the studio’s principal access to the home market came through Pay-TV, free television, video rentals, and DVD sales. But now, with products such as Apple’s video iPod and TiVo-type digital recorders becoming widely available, Hollywood is inching towards an even more lucrative way of exploiting the home market.

Disney’s ABC network has already made a deal with Apple that will allow iPod users to download and watch shows, such as Desperate Housewives, for $1.99 an episode. The company has also been talking to Comcast about a similar pay-per-view arrangement for Comcast’s 23 million cable subscribers. CBS, which is still controlled by Sumner Redstone, and NBC, a subsidiary of NBC Universal, have announced plans to release their programs for 99 cents a viewing, whenever a customer wants to see them, through link ups with cable and satellite providers. Meanwhile, the satellite giant DirecTV, which is controlled by Rupert Murdoch, is in the process of equipping its 12 million subscribers with TiVo-like digital video recorders that have extra storage capacity for eight hours or so of programming. Fox, which is also owned by Murdoch, can then download its shows onto an encoded section of subscribers’ hard disks, which they can then pay to view.

This downloading strategy is particularly appealing to the broadcast networks because, unlike cable networrks, broadcast networks presently get no cash compensation from cable operators. (At best, cable operators might agree to carrying their new cable networks.) But by offering their hit programs for downloading the next day, networks could get cash from the cable audience. A cost of 99 cents a pop is hardly trivial when multiplied by an audience of 23 million Comcast subscribers. The networks are assuming—and this remains to be tested—that their regular audience, which can watch the programs free, would have little incentive to wait a day and download them for a fee.

The studios stand to gain even more from a huge audience willing to pay to download movies from their libraries. Unlike DVDs, which require manufacturing, warehousing, distribution, and disposing of returns, it costs almost nothing to download a movie or cartoon. Indeed, all of the costs of transmission would be born by the cable operator (or a site like the Apple Music Store), whose cut would be less, under present arrangements, than retailers get on DVDs. So if a movie were a huge hit, such as Shrek, and millions of orders flooded in, the marginal cost of filling them would be zero. The consumer, once he bought the download, could watch it where and when he chose to just as he once watched a DVD.

The real issue for the Hollywood studios is how they can dig into this potential gold mine without undermining their existing revenue streams. Since the 1980s, the studios have managed their revenue by employing a system of ÒwindowsÓ to release their products to different markets. First, movies play in theaters, then, six months later, the video window opens, followed by the opening of the pay-TV and then free television window. But giant retailers, to spur their seasonal sales, have been demanding their DVD delivery earlier and earlier. They’ve thrown this system into turmoil.

With the possibility of costlessly providing millions of downloads to consumers of both their older and new films, the studio heads, including Disney’s Robert Iger, are openly discussing a radical revamping the window system. Obviously, if a home download of a movie were available at the same time (and price) as its DVD release, the download option might replace retail sales. To avoid that outcome, and a potentially dangerous confrontation with Wal-Mart, the studios would have to delay the download release until well after the DVD release. But while the studios may find this embarrassment of choices somewhat paralyzing at present, as more and more consumers get digital recorders or video iPods, downloading for dollars may prove irresistible—even if it means doing away with the windowing system.
Hollywood’ downloading option, by whatever device it may be realized, is just one more part of the transformation movies from a big screen to a small screen experience and from a theatrical to a home– or even mobile Ipod– product.

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