HOLLYWOOD — Studios can clearly envision home delivery of movies, where viewers can get any film they want, anytime they want, with the click of a button on the remote control.
But Hollywood can’t figure out how to get there.
As a result, studio executives are doing what they always do in these situations: waiting for some other studio exec to be the first to stick his neck out.
Their eagerness to get going is understandable. A recent report from Merrill Lynch projected video-on-demand revenue will reach an annual $12.6 billion in 10 years.
But the studios’ caution may be costly: By stalling the intro of video-on-demand, Hollywood is increasing the chances of a Napster-like nightmare in the film arena.
In the meantime, the topic is so enticing and foreboding that few will even talk about it. Many, including Disney, Fox and Paramount, refused to put any exec on the phone to answer a single question on the topic.
Off the record, studios generally agree that video-on-demand is going to happen. They also agree that in order to avoid the same near-disaster in the music industry that was Napster, they need to devise a plan that could involve building their own VOD services, with control of security and quality.
But there are issues, multitudes of issues.
Should content owners license the product to third parties or build their own services and keep all the revenue? Should studios work together or separately?
And which technology should be used? Who builds it? When will it be ready for primetime?
No one is quite sure how to approach these issues, much less solve them.
Consumers spent $8.25 billion last year on video rentals, according to VSDA VidTrac, and another $10.8 billion on the purchase of movies on video, according to Adams Media Research.
Both of those figures were boosted substantially by the introduction of DVD, which accounted for more than $3.4 billion of overall video spending last year, according to Adams — an increase of nearly 127% from 1999 compared to a more than 4% decline in spending on movies on videocassettes.
But with hundreds of TV channels to choose from, it’s not clear whether consumers will pony up $4 or $5 to see a film that’s slightly more current than the premium-channel or pay-per-view offerings.
After more than 20 years of concentrated efforts, consumers are spending only about $576 million a year on PPV movies, according to Paul Kagan Associates.
And the predictions of VOD profits are all over the map.
Tom Adams of Adams Media Research predicts spending on VOD movies will be just $3.4 billion by 2010. Kagan believes VOD movies will account for $6.7 billion of an overall $10.6 billion PPV/VOD market in 2010.
There won’t be any clear evidence about VOD’s potential until there is a fair market test. And that won’t happen until all the studios agree to make their movies available for video-on-demand systems.
“It’s the classic chicken-and-egg syndrome,” says Warner Home Video president Warren Lieberfarb, who also oversees the studio’s VOD efforts.
Sony has an Internet movies-on-demand service tentatively called Moviefly ready to go but can’t get many other studios beside Warner Bros. to even talk seriously about contributing programming.
Time Warner Cable is getting low buy rates for its digital cable video-on-demand service being offered to about 100,000 subscribers in each of three systems in Honolulu, Tampa and Austin because it can’t get anyone besides its sister companies WB and New Line to contribute pics.
Paramount, Blockbuster’s sister company in the Viacom family, has not offered any movies to Blockbuster for the retailer’s four-market trial VOD service with Enron Corp. and would not even offer a comment about VOD in general for this story.
Universal just signed on to contribute programming, but only when Blockbuster made the deal a condition of the renewal of its revenue-sharing agreement with the studio on videocassettes and DVD.
That’s the type of power and leverage that studios fear from a third party, particularly Blockbuster, which can pretty much dictate video rental terms and strategies with studios given the clout of its 35% market share.
“We don’t want a monopolist in one area also being a monopolist in another area,” says one studio executive.
“It would be much better for the studios overall to work with us, rather than force us, in order to survive, to compete directly against their own VOD efforts by cutting prices or rewarding customers for not using VOD,” Blockbuster chairman-CEO John Antioco said during a presentation to the Paul Kagan Associates Video On Demand Conference last week. “That’s a scenario where everyone gets hurt.”
Antioco bristled at suggestions that Blockbuster is trying to strong-arm studios into providing VOD and PPV rights: “We’re not asking for exclusivity or anything that Blockbuster shouldn’t receive.”
He said Blockbuster focused on the VOD-PPV deal with U because “they were the first studio whose revenue-sharing deal expired.”
U would not comment on the terms or process that led to the deal. Universal Studios Home Video president Craig Kornblau would only say: “The important thing is that while we continue to aggressively support VHS rental, we’re also exploring with Blockbuster new technology that brings product to the consumer. Our corporate strategy as one of the world’s largest content owners and producers is that we are very strong advocates of all new channels of distribution, including VOD, which offers additional options for our customers.”
Like Par and most other studios, U has been mum about VOD plans, although the company under new owner Vivendi is believed to be formulating an overarching broadband strategy that will address VOD.
Disney would not discuss VOD plans except to point to a statement made during a recent presentation to analysts by chief strategic officer Peter Murphy about the studio’s general plans for a VOD service of some sort next year at movies.com.
“Today movies.com is a premier Web site for movie information. But soon, the next-generation movies.com site will be the place to go on the broadband Internet to buy or rent digitally your favorite movie.”
Sony, U and WB have each licensed product to third-party VOD services like Intertainer and Diva. But Sony says there is a concern about the quality of the presentation and piracy.
A few Netcos, such as CinemaNow.com, are already addressing the complexities of digital distribution that the studios will soon face.
Majority owned by Lions Gate Entertainment, CinemaNow bowed an online pay-per-view service in January for all Lions Gate films that are appearing in the TV pay-per-view window.
The site charges around $3 per film, which can be viewed anytime within 48 hours after purchase. CinemaNow, which also offers films from its library for free, streamed 1.1 million movies to 250,000 customers last month.
“You can talk about digital distributing, theorize about it, draw on white boards and write plans until you are blue in the face, but doing it with a real movie and a real audience is the only way to figure out the true issues,” says Curt Marvis, CEO of CinemaNow.com.
CinemaNow has found that, aside from the challenges of creating a secure and reliable delivery system, it’s been difficult to determine digital rights for a film in light of existing licensing agreements.
To this end, CinemaNow is creating a database for each film specifying where, when and how a film can be offered online, which requires time-consuming work from both engineers and lawyers.
Ultimately, there is a concern that VOD will do nothing more than cannibalize existing video rental revenue.
It’s all a moot point unless all the studios decide to endorse VOD — not unlike what it took to launch DVD.
But that took the powerful force of Warner’s Warren Lieberfarb in the role of an evangelist and the backing of Sony to carry the flag for the new platform and rally the studio troops to endorse the mission.
So far, no VOD evangelist has stepped forward.
“You need a zealot,” says one studio executive. “The psyche in Hollywood, by and large, is to resist change. You need a zealot — and ideally he has some cash.”
(Tim Swanson and Paul Sweeting contributed to this report.)