Europeans take small steps in VOD market

Video on demand remains in arrested development outside the U.S., to the frustration of many foreign distribs who are pinning their hopes on digital sales to replace their crumbling DVD revenues.

According to Richard Broughton, head of broadband for IHS Screen Digest, the American VOD market for feature films topped $1.8 billion in 2011, whereas Western Europe delivered just $900 million.

The entrenched power of European exhibitors remains a big obstacle to contract the windows and moving toward a day-and-date VOD and theatrical model. In France, there’s even a law against it. Euro distribs are frustrated that they can’t develop their VOD revenues to replace their disappearing DVD income.

Sales companies say they aren’t yet seeing any significant revenues from VOD from any territory outside North America, apart from the U.K.

But the launch of the Curzon on Demand platform in the U.K., offering VOD day-and-date with theatrical releases, is a small but significant sign that new digital distribution models are finally starting to reach Europe, following the example set by the likes of Magnolia and IFC in the U.S.

“It’s a paradigm shift in the business,” argues Philip Knatchbull, chief exec of Curzon Artificial Eye, the U.K.’s leading arthouse exhibitor and distributor. “This is now where the market opportunity lies for independent cinema.”

The rest of Europe is watching this arthouse experiment with curiosity, and a degree of skepticism. Benelux specialty distrib Cineart is a proactive VOD player, but has decided against launching its own platform, for now at least.

“We did the analysis to see if it makes sense,” says Cineart chairman and co-managing director Marc Smit. “But in a territory like Benelux, it’s hard to make it work financially. The trouble with a distributor-led platform is having enough films on it. People want choice, and you can’t rely only on your own taste.”

The Brit VOD market is already far in advance of the rest of Europe, with fierce competition between subscription VOD players Lovefilm and Netflix to sign up indie distribs and major studios with lucrative output deals. Those deals, with the likes of Studiocanal, eOne, Momentum and Lionsgate, have revolutionized the economics of U.K. indie distribution over the past 12 months.

Meanwhile, pay TV giant BskyB is also making an aggressive move into the VOD market with its own Internet movie service to supplement the pay-per-view outlet on its own satellite platform.

“The U.K. is very evolved, but continental Europe not as advanced,” agrees Exclusive chief operating officer Marc Schipper. “The main reason is that the key European players are the broadcasters and telecom companies, and they aren’t as entrepreneurial.”

Knatchbull is convinced there’s also room for an arthouse player with a strong brand and a distinctive programming policy to carve out a niche among the big boys, particularly when its virtual service is closely tied to physical cinemas.

“If you’re only on the Internet, it’s quite soulless, but what’s great about having our physical cinemas is that you are more connected to your community.” Knatchbull is such a believer in the importance of combining the two that he says he’s eyeing deals to take over the running of arthouse theaters in Berlin and New York as a prelude to international expansion of his online service.

Cineart, which releases pics such as “The Artist,” “Drive” and “Carnage” across Benelux, prefers to stick with the traditional theatrical window, and then market its titles on as many VOD services as possible. “But the real money comes from the telcos and the cable operators, not the Internet-based platforms,” Smit says.

He says the VOD market is more developed in Belgium, thanks to the investment of telco Belgacom, than in the Netherlands. Overall, Cineart’s VOD income is growing by 50% a year, from 2%-3% of sales three years ago to 8%-10% today. Aside from the top theatrical titles, its best performers are pics with a thriller twist, such as “Essential Killing” or “13 Assassins,” or arty pics with a misleadingly sexy titles.

Sales agents say that VOD is becoming a more noteworthy factor in negotiations with Euro distribs, even if the revenues are not yet significant. “We’re all paying a lot more attention to VOD in deal terms, but it’s not coming through significantly in the reporting yet, except in the U.K. where we’re beginning to see impact on the bottom line from Netflix and Lovefilm,” says Focus Features Intl. prexy Alison Thompson.

VOD deals are negotiated on either a royalty or a fee basis, which varies from territory to territory. The distributor’s share is typically lower than on DVD — maybe 40%-50%, rather than 60%-85% — because the VOD entails much lower physical costs for the distrib. “Historically the DVD splits were terrible for producers, so this is a chance to roll those back,” says one top sales agent.

“The U.K. is the strongest foreign market for VOD. We’re seeing some value in Australia and other parts of the world, but nothing that’s really moving the dial,” says Alex Walton, sales prexy at Exclusive Media Group.

Broughton suggests the slow development of VOD in Europe may have more to do with the relatively primitive infrastucture of cable and telco systems. Once they are upgraded, the potential for VOD will increase significantly.

Many distribs are waiting to see if the likes of Netflix, Amazon (which owns the U.K.’s Lovefilm), Google and Apple (via iTunes) will emerge as significant innovators to challenge those traditional local players.

In the meantime, VOD remains stubbornly underdeveloped.

“Outside the U.K., it’s difficult to see where the value is in the VOD market,” says Andrew Orr of Independent Film Sales. Sales agents who have experimented with offering unsold or library titles directly to pan-European Web-based platforms such as Mubi say that the returns so far have been negligible. “For social reasons, European audiences are just not as advanced as Americans in terms of looking at films on the Internet,” says Bankside’s Stephen Kelliher.

“VOD is still in its infancy in Scandinavia,” says Jim Frazee, acquisitions topper at Scandinavian distrib Scanbox. “It’s doing business, but not growing as rapidly as we hoped, and not nearly enough to compensate for DVD which is declining far more rapidly than we feared. VOD needs to be 10 times larger than it is to make up for DVD.”

Robert Beaumont of L.A.-based Lightning Entertainment sees a role for U.S. sales agents and distributors in helping to develop the foreign VOD market by exporting their domestic expertise.

“We’re a technical aggregator for cable systems in the U.S., and we have so much experience about best practice, that we are contemplating offering this service in Europe, to act as a go-between between distributors and VOD platforms,” he says. “We would continue to sell rights as a sales agent, but because the VOD market in Europe is immature, we could also service the ambitions of our European buyers by providing technical support, not just for our content but for other sales companies as well.”