NATO must speak out

The Challenge of Early Premium VOD

on December 20, 2010 by John Fithian

johnfithian.pngExhibition confronts one of the most significant challenges in the modern history of the industry: so-called "premium video on demand." Despite NATO's repeated suggestions that our distribution partners discuss their potential VOD models with individual exhibitors prior to executing them, several leading studio executives appear determined to roll out early release VOD without proper consultation with exhibitors, without the input of the creative community and without market testing their proposed models to determine whether or not they work. In response to this ill-conceived attempted stampede, NATO and our members have (1) emphasized various possible responses of exhibitors; (2) reached out to the creative community to discuss shared objectives; (3) traveled to Wall Street to challenge the viability of these unworkable models; and (4) begun to educate leading reporters on the dangers of the proposals.

NATO has long maintained that a robust windowing system provides optimal results for the entire movie industry. The primacy of theatrical release enables feature films to demonstrate their appeal in the best platform of the big screen social experience. Success in a theatrical run drives success in the ancillary home markets. Consumers understand that a movie released in cinemas is different than product made for television, or for release solely on DVD or the Internet. Every ticket sold in the theatrical window can be effectively priced, something that cannot be said for the ancillary windowseven a "premium" early VOD window. How many viewers per household will watch each premium-priced offering? Three? Five? More? And will the studios be able to maintain the premium price points for long? Highly unlikely. Consider this fact: every previous model for home release (VHS, DVD, Blu-ray) has experienced an unending succession of declining price points. The theatrical release has proven to be the only platform where price points rise, not fall.

Over the past five years, distributors appeared to understand these axioms. The average release window for DVDs remained stable. The average DVD release window for movies released theatrically during 2010 currently stands at four months and ten daysan average that has stayed fairly stable for six years. And with a stable window, theatrical revenues have grown to new heights. Theatrical box office returns have broken records in each of the past three years, exceeding $10 billion for the first time in 2009.

Unfortunately, the DVD market has struggled. DVD revenues have declined significantly over the past few years. In 2009, total revenues from theatrical releases surpassed total revenues from the DVD releases of theatrical movies for the first time since the at-home technology became popular. There are many theories to explain the declining DVD market: Consumers' libraries reached maximum capacity. The recession drove home movie consumers toward rentals and away from sales. The studios shot themselves in the foot by enabling dollar rentals and unlimited viewing subscriptions. But whatever the reason, the golden goose of DVDs has gone barren and the studio community is panicked.

Panic often produces proposals for untested, radical changeand that is what early premium VOD models are.

So, will exhibitors stand by and watch some studios ruin the business? I don't think so.

Without Meaningful Cooperation, Exhibitors Will Respond to Protect Their Interests

Exhibitors want the studios to succeed in the home markets. Sustained returns throughout all distribution channels enable continued and expanded movie production and marketing budgets for future theatrical releases. That is why leading cinema operators have indicated a desire to work with their distribution partners to test new VOD release models that might grow the overall movie "pie." In a published statement last summer (August 2010), the NATO Executive Board of Directors made clear its desire that studios should engage exhibitors in meaningful conversations about possible VOD models.

Unfortunately, at least two leading studio executives have made public pronouncements about their premium VOD intentions without the slightest consultation with exhibition. In early November, Chairman and CEO of Time Warner Jeffrey Bewkes said, "... (W)e will help lead the industry to launch a premium video-on-demand service that will enable consumers to watch recently released theatrical movies at home in high definition and eventually, in 3D." A few weeks later, Chairman of Fox Filmed Entertainment Jim Gianopulos said, "We're still developing the [premium VOD] offering, but we think there's a sweet spot around $30 and maybe 60 days after the theatrical release that will create a new revenue stream for us and a unique value to consumers."

If the studios give them no opportunity to collaborate prospectively on a mutually beneficial business model, exhibitors will be forced to consider defensive options to protect their interests. The specific responses of exhibitors will be determined on an individual company basis. But if past is prologue, we know that exhibitors will not stand by passively if studios are too quick to release movies to the home after their theatrical release.

Truncated Theatrical Release Damages the Creative Community

The most talented producers, directors and actors aspire to the artistic palette of the big screen. Creative vision can best be displayed on the grand and beautiful cinema screennot on television, computer or hand-held device. That is one reason why the creative community overwhelmingly supports a robust theatrical window. Another reason, of course, is that the creative community profits more from theatrical release than from home video revenues. During the most recent Hollywood labor negotiations, the single most prevalent complaint of the Guilds concerned the small percentage of rights their members received from ancillary home markets. Of all the professional links in the movie industry chain, the studios are the only sector that takes a higher percentage from home video revenues than from theatrical releases.

Given these factors, NATO and our members have reached out more aggressively to leaders in the creative community to explore and capitalize on our shared interest in a strong theatrical marketplace. And the conversations have produced exciting results. A lawyer for several leading directors recently told me that he would include the theatrical window as a new term in his contract negotiations going forward. A major producer of leading commercial movies expressed his strong doubts in the early VOD model and promised to raise his concerns with his studio partners. An agent for a leading star indicated her desire to protect the window for her client's movies. Another leading director asked how he could speak out about his concerns. Indeed, of the dozens of conversations I have had recently with leaders in the creative community, I have yet to encounter one person who supports the proposals of a few studio executives for an early premium VOD release window. We will continue to build coalitions with the creative community on this vitally important issue.

NATO Reaches Out to the Financial Community

Movie studio executives generally listen to two types of people first: the producers, directors and actors who make the movies, and the financial analysts on Wall Street who assess the industry's business models. Without talent, they can't have product. Without a sound business model, they can't raise money. Given this reality, NATO is spending considerable efforts in New York, just as we are in Hollywood.

Recently two of NATO's key member executives joined us in New York City to meet one-on-one with the leading financial analysts who assess the movie business and discuss theatrical and VOD windows. We were quite pleased with the results.

Simply put, analysts want to know how a new model can make money. (They don't care a lick about the creative process.) Our simple story: the studios' proposal to release movies in an early VOD window risks losing two dimes to make one nickel. Potential lost theatrical sales are the first dime in danger as the earlier a VOD release takes place, the more potential movie patrons will simply wait and skip the cinema. Of course we know that most movie patrons come to the cinema for the big screen experience, the shared community, or the "night out." For them, VOD will not deter their patronage. But a percentage of movie patrons does not care how they watch the movieonly when. And for those consumers, early VOD will reduce their trips to the cinema.

The second, and perhaps more problematic concern, is that early VOD will enable earlier piracy of pristine digital movie copies. Illegal movie sales occur in two relatively equal waves: first, the camcorder version, and second, the pristine digital ripped when DVDs become available. As Intel has admitted, high-bandwidth Digital Content Protection has been hacked. Early VOD simply accelerates the second problem-illegal pristine digital copies will always be available substantially prior to the DVD release and while movies are still in theaters. This risk has been described publicly by no less an authority on movie sales than Frederick Huntsberry, the COO of Paramount (which explains why Paramount executives aren't making any noises about supporting early VOD releases.)

That describes the two potential lost dimes. Now what about that nickel? Without proper testing, can the studios really predict how many people will purchase the one-time chance to watch a movie at home for $25, or $30 or $50 to access the movie a month or two before the DVD is available to rent for just one dollar? And won't that initial premium price point necessarily come down with time, as have the prices for every other home movie release mechanism? When we walked through the math, the experts on Wall Street had many questions about the proposals.

As the Final Step, NATO is Taking Our Case to the Press

Exhibition has spentand is spendingseveral billion dollars to bring audiences stadium seating, state-of-the-art digital sound, digital projection and 3D. The viewing experience in modern movie theaters is better than ever. Our industry is undergoing a transformation from yesterday's movie theaters to tomorrow's entertainment hubs with all the modern technologies and amenities that our patrons love. We have a great story to tell.

At the same time, we have stayed relatively quiet with the press on the threats posed by early VOD release models. We did so in the hope that our studio partners would stop floating their VOD trial balloons in public. We told the studios that models driven by comments to the media simply create confusion and generate bad blood between partners. We demanded no surprises and a seat at the table. And then we waited for the real conversations to begin. And they haven't. Given the importance of the issue, NATO's Executive Board has decided to wait no longer. Going forward, NATO and our members will be sharing with reporters the concerns described in this column.

Theatrical exhibition has thrived in recent years as a four-decade trend of growing ticket sales has continued. We simply cannot afford to allow a few desperate studio executives to risk damaging a good, working model for their panic-driven radicalization of the business.


Tags: John Fithian, NATO, release window, VOD, premium VOD

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