October 4, 2010 – The fruits of intense negotiations and planning among the major Hollywood studios in their search for ways to resuscitate sagging revenues are rapidly coming to light with major implications for how media will be distributed and consumed in the years ahead.
Most recently, the long-discussed idea of breaking the DVD release window with early distribution of movies to VOD at high premium prices has moved into serious negotiations involving Sony Pictures, Walt Disney Co. and Warner Bros. and VOD distributor In Demand, which is owned by Comcast, Time Warner Cable and Cox Communications. The talks, referenced in comments by In Demand CEO Bob Benya as originally reported by Bloomberg News, were the subject of discussion at the recent Media Innovations Summit in Hollywood, where sources affiliated with various suppliers of content protection technology confirmed the studios are gearing up for an early-release move in home theater service.
Other hints as to what's taking shape have been floated of late. At a Goldman Sachs Group conference in late September Time Warner CFO John Martin reportedly said Warner Bros. was going to test the service later this year with an eye toward setting prices in the $20-$30 per-view price range. Sources at Media Innovations Summit suggested the early release window under discussion ranged between 30 and 60 days after theatrical release, compared to the four-month window on DVD releases.
Such a move is just one of many steps studios are taking to generate new revenues in reaction to the fall-off in DVD sales and a surge in piracy worldwide. Studio executives at Media Innovations Summit discussed some of these activities, including the soon-to-launch UltraViolet electronic sell-through platform (see September, p. 1), but they evinced serious concerns that any of these strategies would be enough to turn the tide, especially where losses from piracy are concerned.
Kelly Summers, vice president for business development and new media distribution strategy at The Walt Disney Studios, cited research showing that only about two percent of DVD purchases in South Korea are legal transactions, compared to 93 percent in the U.S. Even in Europe there are countries like Spain and Italy where only a little over half the transactions are legal. "This is very scary for us," Summers said.
Indeed, noted Mitch Singer, CTO of Sony Pictures Entertainment and president of the Digital Entertainment Content Ecosystem (DECE), given the impact theft is having, "even if we were to rent movies day and date [with DVD release] in high definition and make them available on the Internet, we would lose. This is a very, very dangerous trend."
But the possibility of driving purchases through the convenience of electronic sell through (EST), as enabled by DECE's UltraViolet platform, could, over time, begin to recover revenues lost from DVD sales, which some have estimated will aggregate to $7 billion over the ten years from the end of the peak sales year, 2005. "The industry will be quite a bit different if electronic sell through is not successful," said Keith Nissen, a principal analyst at In-Stat.
A key question, Singer acknowledged, is whether studios can charge the price they think is fair versus the price research shows consumers consider to be fair. So far, he noted, EST has not been a winner for studios, who don't want to risk undermining hard disc sales in DVD and Blu-ray formats by cutting prices to the $11-$12 levels that consumers consider fair for download-to-own titles.
With studios pricing such titles at $18-$20 "the only people buying are a small part of the Bell curve," Singer said. "We can either lower prices to meet the bubble of the Bell curve with negative impact on DVD and Blu-ray sales or we can increase the perceived value with the convenience of a successful EST model."
UltraViolet, which a new promotional video shown at Media Innovations Summit bills as a "revolution in media," provides consumers a single account through which they can access all the UltraViolet-compatible content they buy over whatever electronic medium they are connected to. In other words, the consumer would own the content and access it for viewing wherever it can be found for distribution in a format compatible with whatever device they're using without actually possessing it physically. At the same time the system would add value to Blu-ray disc and DVD purchases by allowing consumers to access purchased content when they don't have access to the physical medium or player.
Noting that UltraViolet-based services will be able to "turn a smartphone into a mobile viewing platform," the video promises "freedom of entertainment is coming soon." But how soon depends on what the 60 companies who are members of DECE do with the platform once technical specifications are completed by year's end. "Launch dates are up to individual providers," Singer said.
While Disney has developed a separate authentication platform known as KeyChest that can be used in EST, Summers offered no specifics on Disney's plans other than to say that when it comes to selling branded content "triple screen is now the expectation." UltraViolet is one option, she noted. "At the applications level KeyChest and other technologies operating in the background will also facilitate this goal," she said.
While Disney is not a member of DECE, "I applaud the branding achieved with UltraViolet," Summers said. "How you communicate something is available digitally is very important."
Summers made clear that Disney sees multiple outlets as the way to go, including EST and distribution through outlets such as Disney Movies Online and Apple's iTunes. She also noted the company is "looking at" the video protection service offered by Vobile as a means for protecting and monetizing content delivered in social media environments.
Vobile's VideoDNA technology, used in conjunction with its VideoTracker service, is designed to identify and track online video and audio content to enable a variety of monetization options and prevent copyright infringement. The company claims its digital fingerprinting technology has produced millions of takedown notices demanding that Web sites remove pirated material with nearly 100 percent compliance with takedown requests.
One of the strong suits for EST is research, confirmed by both Singer and Summers, that shows people in the under-35 "millennial" age category value purchases via electronic download at twice the levels shown for people above that age. "We're building UltraViolet for millennials," Singer said.
"Today there are 65 million baby boomers and over 80 million millennials," he noted. "By 2014 64 percent of the population will be in the 18-49 demographic. They're not like us. They're digital consumers."
But, as Summers pointed out, millennials aren't necessarily library collectors, which means ownership of content versus rented access may not mean as much to them as it does to the older generation. With the likes of Redbox registering 575 million rentals through 22,000 kiosks at $1 a pop, developing a successful new media strategy is a real challenge for studios.
"The disturbing trend is that people will look for ways to break down the value of content, but as a content owner we want to add value," Summers said. "We have to look at ways to inject value."
With a "whole generation moving faster than any studio or legal team can move," that value will likely come through clever combinations of physical and EST access to content in a hybrid model that changes behavior based on greater convenience, she said. One indication that this is the way to go can be found in the "managed copy" policy adopted as part of the Blu-ray standard, she added.
Managed copy, which the studios implemented in March, offers consumers a backup copy of every Blu-ray disc they buy, starting with the ability to make a copy via PC drives and moving to Blu-ray players with new products slated to be delivered by year's end or early next year. Under procedures established by the Advanced Access Content System Licensing Administrator (AACS-LA), the industry consortium in charge of licensing AACS copy protection used on Blu-rays, consumers will be able to burn managed copies to recordable Blu-ray or DVD discs or as a download to a Windows Media DRM-compatible portable player or hard drive. Other methods are likely to win approval over time.
The copying medium must gain authorization to make the copy from an authentication server, which the studios can provide for their own content and which will be provided starting late this year or early next for all Blu-ray content under the auspices of AACS-LA. So far, Summers said, managed copy has shown strong appeal to consumers. "We all like it," she added, in reference to Disney and the other studios.
Brad Hunt, president of the consulting firm Digital Media Directions and former CTO of the Motion Picture Association of America, said the success of EST as a vehicle for promoting ownership of content hinges on several factors, starting with wide enough participation by the stakeholders to ensure consumer choice with regard to devices, content and retail outlets. "The tablet is definitely a killer device," he said, noting that Apple is expected to sell between 10 and 15 million iPads this year. But Apple is not a participant in UltraViolet, leaving in question the extent to which tablets from Apple and other manufacturers will be a factor in the new EST platform.
Hand in hand with choice, Hunt said, is the need for flexibility of usage, which is a strong suit for UltraViolet, given the platform's reliance on domain-managed DRMs. It's essential that "all the content will play on all the devices that play in your domain," he said. "We have to eliminate 'copy never.'"
Another key factor is the use of physical media in packaging with Blu-ray and DVD players. Tying ETS to Blu-ray by giving consumers freedom to access the content they get with the physical disc through UltraViolet will help educate consumers on the convenience of EST-supported ownership, Hunt said.
But Hunt cautioned that attractive pricing must be part of the EST value proposition. "Studios have to careful," he said. "The ability to package doesn't mean jacking up prices. We have to grow the business on attractive prices to get people to buy."