UK Digital Discussion September 2011. page 1 Executive Summary – Industry Trends As consumer...

UK Digital Discussion

September 2011

page 2

Executive Summary – Industry Trends

• As consumer behavior shifts and digital consumption increases, the windowing concept remains– Existing windowed distribution models are expected to remain in place

• Initially, titles are monetized most strongly in sale and rental• Thereafter, sold in exclusive packages that support channel or online distributor brands

for subscription and ad-supported models

• However, new windows and business models are being added– For Hollywood studios, each existing consumer business model is expected to have an analogous

digital component (e.g., ad-supported, subscription and transactions, both rental and sale)– New windows for VOD, and potentially EST, are being introduced to driver higher value

• As with existing models, the margins for these new models vary widely– In this landscape, studios seek to emphasize and drive adoption of higher margin digital models

Privileged and Confidential; For Discussion Purposes

page 3

• The UK market, similar to the US, is in the early stages of developing a vibrant, legal digital marketplace – Globally, digital transactional revenues already represent in excess of 25% of the home entertainment

business contribution, and this number is expected to increase rapidly– In the UK, the physical market is characterized by a higher than normal mix of sales to rental

for films, and the early indicators online generally support digital ownership as a viable product

• Challenges in driving the sale of digital product today are four-fold– Encouraging consumers to own content, rather than rent or steal – Improving the digital product proposition– Driving the speed of adoption and movement of product online while managing incumbent businesses– Addressing bandwidth and infrastructure issues

• Ensuring a viable marketplace for digital downloads will require – Making the product digitally available at the right price, both SD and HD– Ensuring that incumbent players do not inhibit the development of the digital marketplace– Managing piracy appropriately – Supporting infrastructure development


Executive Summary – Digital Marketplace and a Way Forward

• Background – Industry Trends

• Consumer views on digital

• Current status and challenges to digital adoption

• Driving further adoption

Agenda

page 4Privileged and Confidential; For Discussion Purposes

Back-ground

Consumer & Digital

ChallengesDriving

Adoption

Traditional Windows


TheatricalHotel & Airline

DVD Sell-Through & Rental

PPV /VOD

Pay TV Pay TV Broadcast

+60 Days +90 Days +120 Days +2 years0 Days +180 Days

From CY1998 to CY2005, the industry’s window structure was generally stable, generating strong profits for studios during the growth period of the DVD market:

page 5

Introduction of subscription/kiosk rental and EST


TheatricalHotel & Airline

DVD Sell-through and Brick & Mortar Rental

PPV /VOD

Pay TV Pay TV Broadcast

Subscription Rental

Kiosk Rental (primarily U.S.)

Electronic Sell-Through

+60 Days +90 Days +120 Days +2 years0 Days +200 Days

• VOD and EST are digital counterparts to physical rental and sell-through offerings

(respectively)

• Subscription (LoveFilm, Netflix) and kiosk (primarily U.S.) rentals have come to market as

a low-cost alternative to consumers and is contributing to declining home video profits

• Studios are experimenting with other offerings, such as Premium Home Theater, a high

priced PPV/VOD product offered in advance of other home entertainment offerings

page 6

HomeTheater

+45 Days

WorldwideTheatrical

Physical3

Digital

Physical

Pay / Free / Subscription

0%

20%

40%

60%

80%

100%

The three major windows each capture roughly equal gross profits – Digital’s growth has helped offset declines in physical home video

% o

f G

ross

Con

trib

utio

n

10 Year Gross Contribution1, by WindowFY10 Theatrical Releases

40% 25% 35%

Notes: 1. Before marketing, amortization, and overhead2. Except for Netflix (subscription model)3. ~70% of physical contribution occurs in the In-Home Transactional window

Exhibition In Home Transactions2 MultipleBusiness Models

Privileged and Confidential; For Discussion Purposespage 7

Digital is an attractive opportunity for content owners and retailers


• Digital has higher margins relative to physical for both sell-through and rental

• Traditional B&M offerings and new digital offerings all have higher margins than low-cost subscription and kiosk business models

EST

BD

DVD

VOD

B&M

Kiosk

HighMargin

LowMargin

Sub. Mail

Sell-Through

Rental

Digital

Digital

Key Observations

Relative Margins by Business Model

The UK has a relatively strong sell-through market, leaving it more exposed to piracy and introduction of lower-cost rental options (as in U.S.)

Source: Screen Digest Notes: Excludes subscription revenues


$2.5B $18.3B344M 3520M

Sell-Through

Rental

Home EntertainmentConsumer Revenue (2010)

Home EntertainmentTransactions (2010)

• Ownership still makes economic sense as a means of accessing content for multiple/repeat viewing– On average, consumers watch a movie that they bought 3 times

• Online’s share of movie viewer-ship is growing rapidly– The incidence of watching movies online (through subscription streaming, digital

rental, and EST) doubled over the past year

• However, increased online activity requires:– Increased connectivity of TVs to digital content– Increased ability to access content across different devices

Summary of Consumer Behavior


Back-ground

Consumer & Digital

ChallengesDriving

Adoption

Source: 2011 SPHE UK A&UNotes: How many times did you watch…?

Data based on New Release buying occasion in the last 6 months

Inherent viewing behaviors with purchased physical discs continue to support ownership of content as a means to enabling multiple title views


• The vast majority of consumers who bought a movie ended up watching the movie

• For consumers who watch a movie multiple times, ownership remains a compelling option– From the stand-point of a consumer’s

wallet, a £4 rental from Blockbuster or online through Apple would cost £10.40 if rented 2.6 times

– Ownership increases convenience by eliminating the need to return a DVD or watching within a defined time period

– Furthermore, ownership preserves the future option value to watch again at no incremental cost

Watched DVD/BD Purchased – Yes/No

Avg. # of times Watched Movie Overall:

2.6

Key ObservationsDVD/BD Ownership Behaviors

Digital – as a channel for both ownership and rental – is expected to benefit from improvements in consumer understanding


Technology and Home Entertainment Attitudes% ‘Definitely Would Agree’ 6,7 Rating on 7-point scale*

Source: 2011 SPHE UK A&UNotes: * 2009 & 2010 data shown is 8,9,10 ratings on a 10-point scale ; Base: Total HE Respondents (2011 = 2149); A1. Now we have some questions about your

general technology and home entertainment attitudes and behaviors; PA7. Listed below are some possible future scenarios in home entertainment. Please indicate when, if ever, each scenario might happen for you.

Future Scenarios % Scenario will happen to me

2009 2010 2011

Improvements in connectivity and access are top consumer motivators to drive digital sales


Source: 2011 SPHE UK A&U;Notes: Base: DV7 – Have not streamed/downloaded movie or TV show in past 6 months = 898; EST9 - Purchased movie digitally in past 6 months = 267

DV7. Which, if any, of the following would encourage you purchase films digitally?EST9. Which, if any, of the following would encourage you to purchase more films digitally?

Motivators to Purchase Movies DigitallyTop Mentions

Challenges in driving the adoption of digital product today are four-fold

• Encouraging consumers to own content, when:– The online sale offer exists immediately adjacent to lower priced rental offers– Subscription and ad-supported catalog content are a click away– Illegal alternatives to new release and catalog product continue to evolve

• Improving the value of digital ownership and ensuring that consumers understand potential benefits of storage and access relative to the existing physical product

• Driving the speed of adoption and movement of product online, as traditional distributors such as Sky fight to defend their existing businesses. Sample contractual holdbacks include:– No VOD during Pay TV window– Cap on EST transactions allowed during Pay TV window– Floor for prices for EST during and ahead of Pay TV window

• Addressing bandwidth and infrastructure issues– Tiered pricing and usage caps– Cloud-based solutions to make storage and ubiquity of access more viable and user-friendly


1

2

3

4

Back-ground

Consumer & Digital

ChallengesDriving

AdoptionC

on

sum

er-r

ela

ted

3rd P

arty

-rel

ated

High-quality copies of pirated content are available both physically and digitally before official studio releases

Resident Evil: Afterlife Piracy Timeline Activity Chart

25

20

15

10

5

0

# of Piracy Incidents

Notes: Number of piracy incidents includes internet finds as well as hard goods. Red lines represent days in which at least one new picture source appeared


1

EXAMPLE

UK Theatrical Release

Sept. 10, 2010

UK DVD Release

Jan. 10,.2011

9/9/10 9/13/10 9/17/10 9/21/10 9/30/10 10/17/10 11/25/10

Russian CamSept. 9, 2010

Suspected R5 DVD Rip

Sept. 28, 2010

Blu-ray RipNov. 22, 2010

Cloud-based solutions (including digital lockers) are hindered by low awareness and security concerns


Attitudes Towards Digital Lockers% ‘Definitely Would Agree’ (6,7 Ratings on a 7-point scale)

Awareness of

Digital Lockers

19%

TotalBASE n=2149

I would be concerned about the security of my content if I were to store it digitally 30%

I would be concerned about the ability to play my content on different devices if it were stored digitally

24%

Accessing my content digitally would be a more convenient way to enjoy my collection 18%

Creating a digital locker/ cloud would allow me more flexibility to build my collection 18%

I would convert my current DVD and Blu-ray collection to a digital library 10%

Source: 2011 SPHE UK A&UNotes: Base: Total HE respondents (2011 = 2149); DL1. Before today, were you aware of digital lockers/cloud?

DL3; DL4. How interested are you in creating an online digital locker/cloud and using it to access your films and TV shows?DL5. How interested are you in converting your DVD and Blu-ray collection into a digital library accessible through your digital locker/cloud?

2

Traditional distribution partners such as Sky can either constrain or spur digital growth


• In the UK, Sky has competing incentives– As a multi-channel TV operator, Sky wants its customers to buy VOD content– As an owner of Pay TV channels, Sky wants subscribers for its premium channels

• Sky can use its market power to constrain digital growth through extending restrictions in their traditional exclusivity window to digital windows– No VOD during Pay TV window– Cap on EST transactions during Pay TV window– Floor on prices for EST during and ahead of Pay TV window

• On the other hand, Sky (and other broadband providers) can facilitate digital growth through increasing broadband speeds to enable improved digital access

3

Download Times at Current Files SizesCurrent Gen Basic Current Gen Premium Next Gen

1.5 Mbps 3 Mbps 8 Mbps 20 Mbps 50 Mbps 100 Mbps

SD-Quality TV Show 3 hr 1 hr 16 min 6 min 2 min 1 minHD-Quality TV Show 8 hr 3 hr 40 min 15 min 5 min 2 min

SD-Quality Film 9 hr 3 hr 43 min 16 min 5 min 3 minHD-Quality Film 22 hr 7 hr 2 hr 41 min 13 min 7 min

SD-Quality Streaming Poor OK OK OK OK OKHD-Quality Streaming Poor Poor OK OK OK OK

Current Avg. Speed

Usage caps and regulatory uncertainty governing net neutrality inhibit growth in the streaming of high-quality video content


• No official government regulation to date• The Broadband Stakeholder Group—

representing most of UK’s large ISPs—has drawn up a voluntary code of practice aimed at greater transparency (piloting in 2011)

• Fair Usage policies (even for “unlimited” data plans) restrict heavy users

– Restrictions can include warnings, throttling bandwidth speeds during peak times, and terminating service

• In 2010, the FCC adopted the Open Internet Order, which outlines rules around transparency of network management practices and restricts traffic discrimination

– This legislation is currently being challenged in court

• 56% of U.S. broadband subscribers are subject to some form of caps*

– Restrictions can include warnings, extra fees for exceeding allowance, and terminating service

Capped Usage

Regulation

UK USA

Source: Ofcom, FCCNotes: *According to public interest groups Public Knowledge and New America Foundation’s Open Technology Initiative

4

• Whether all traffic on the net should be treated equally remains an open debate

– UK regulator Ofcom to clarify its stand on the issue later this year

• BT offers a service allowing content owners to pay for priority video content distribution

• Net neutrality is a high profile debate in U.S. due to consumers having fewer choices in ISPs

• Google & Verizon support “open internet”, but include loopholes for mobile traffic

Net Neutrality

Ensuring a viable marketplace for digital requires initiative from studios and our various partners

• Industry stakeholders providing support to overcome the challenges previously discussed through:– Ensuring that incumbent players do not overly inhibit the development of the digital

marketplace– Managing piracy appropriately – Supporting infrastructure investments and development

• Studios are actively pursuing the following initiatives:– Making the product digitally available at the right price, for rental and sale

• HD product availability is especially critical• Day/date• Catalog product

– Improving the digital ownership proposition through advancement of UltraViolet:• Compatibility across multiple devices and apps• Cloud-based storage• Wide availability of content through both physical and digital retailers


Back-ground

Consumer & Digital

ChallengesDriving

Adoption

Studios are developing UltraViolet (UV) – enabling a “Buy Once, Play Anywhere” consumer model

Ultraviolet is a free cloud-based solution providing ubiquity of access by enabling consumers to pay once for a physical or digital copy of a film from

one of many participating retailers and play it on a wide range of compatible devices


• Compatibility across multiple devices and apps• Content available across major content owners

and through multiple physical and digital retailers

• Endurance of entertainment collection across future formats and mediums

• Convenience through UV Digital Rights Locker providing access both at home and on the go

• Ability to share entertainment with household via downloads, discs, and streaming

60+ Alliance Members including…Content

Devices

Retail

Technology

Description

Value Proposition

UltraViolet Goal: First true digital “product” for consumers

• UltraViolet branded digital product sold by multiple retailers

• Interoperable Rights Locker for family/household, enabling:

– Interoperable download “product” (cross-platform/DRM + App/Device registration)

– Remote access streaming

– Bundled digital/physical offers

• Consistent message and product proposition

21© 2011, DECE LLC

Retailer Retailer Retailer Retailer

Key BenefitsUV Ecosystem

In Conclusion

• The digital market is at a challenging point in its evolution– Consumers still coming up to speed on possibilities online– Actions by incumbents impacting strength of online alternatives– Piracy siphoning legitimate transactions– Infrastructure still developing

• Opportunities exist to drive online transactions– Right pricing vs rental, and other alternatives (including piracy)– HD product offers– Day/date availability– Robust amount of catalog product – Ultraviolet and other cloud storage services– Appropriate policies with respect to piracy and illegal alternatives

• Studios, service providers and the government will need to work together to make a valuable digital marketplace a reality


Date post:	22-Dec-2015
Category:	Documents
Upload:	harry-jackson
View:	216 times
Download:	3 times

UK Digital Discussion September 2011. page 1 Executive Summary – Industry Trends As consumer...

Documents