Content Owners Wary about New Distributors, But Need Them

Hollywood studios and video entertainment service providers understandably have a wary relationship with current distributors such as cable, satellite and telco video subscription providers, as well as new distributors such as Netflix, iTunes, Amazon and others.

But there are different tensions within the ecosystem. Video service providers realize they have reached a point where higher content payments to content owners cannot continue to rise indefinitely, since those higher fee payments mean retail prices must be increased. And there are growing signs of consumer frustration over the ever-growing retail prices.

In the home video market, previously driven by sales of DVDs, sales have been falling for about three years, for the most part, even as online sales (streaming services such as Netflix) have been growing. That causes a different kind of friction between distributors and content owners.

On one hand, online delivery of movie and TV content is seen as the future, and revenue trends show the potential. On the other hand, too swift an arrival of that new business could destroy a physical delivery business that, though challenged, remains important.

That is true both of the home video business, traditionally based on sales of DVDs and to some extent by DVD rentals, as well as the bigger video subscription business.

But Netflix and even video on demand continue to grow, meaning growing tension between the legacy and new channels.


 

The digital side of the business generated $2.4 billion in the first quarter of 2012, according to the Digital Entertainment Group, representing growth of  78 percent. Subscription video on demand grew 430 percent for the first six months to $1.1 billion.

Overall U.S. home entertainment spending rose 2.5 percent to around $4.45 billion in the first quarter, according to the Digital Entertainment Group. That means home video revenue has grown for two out of three of the last quarters, a welcome change from revenue trends that had been falling for three straight years.

Since peaking at around $21.8  billion in 2004, the U.S. home entertainment industry has seen steady declines, falling  to $18.4 billion in 2011.  

And the shift top online delivery keeps growing in importance. IHS Screen Digest has  predicted that the number of movies and TV shows legally streamed and downloaded in 2012 will for the first time surpass the demand for those films and shows on physical discs.

IHS predicts that online streaming services like Netflix and Amazon Prime, Vudu and iTunes, will conduct around 3.4 billion individual U.S. movie transactions in 2012. That would be a 135 percent increase in digital home entertainment transactions over 2011. It would also surpass the 2.4 billion DVD and Blu-ray sales and rentals predicted for 2012.

And despite studio unease about Netflix, Netflix U.S. streaming revenue of $1.04 billion in the first half of 2012 might be largely responsible for the growth of content owner revenues.

Will subscription VOD ever displace content sales, in terms of profitability? Not likely, given the vast difference between margins.

The overall disc business keeps declining, with sales of physical video media dropping 3.6 percent to $3.7 billion during the first six months of 2012, while disc rentals declined 26 percent to $2.3 billion.

However, the kiosk rental business, led by Redbox, is still expanding, up 23 percent to $990 million, according to DEG.

So, like it or not, Netflix and Redbox might continue to be important partners as the future unfolds.