The physical distribution of digital video is in turmoil, and the entertainment industry is in a state of fear and denial about online distribution. The signs are that Video could emulate the music market’s disappearing act. Can telcos help?
In the run up to our Executive Brainstorm events in AMERICAS, EMEA and APAC, and Best Practice Live! virtual events, we provide some background analysis:
If you want to know what the entertainment supply chain thinks of the digital online opportunity, then the ESCA Edge conference, the premier entertainment retailing and supply chain event, is not a bad place to start. At the event held in London last month, a major theme coming through from speakers and delegates alike was fear - fear of declining physical sales and fear of online eating into margins legally or pirates destroying them completely.
As a result, most discussions targeted the short-term and were based around protecting physical margins by reducing costs in the supply chain, such as minimising returns and on site disposal. Additionally, the conference questioned the ability of online to deliver video effectively, clinging to a hope that the Internet’s weaknesses would provide the best defence against it.
Negative approach to online
This was highlighted by a strange presentation from Tom Moran, senior director, business development at Savvis, who laid out the limitations of the Internet infrastructure to support professional video. Pitched as ‘realism’, the messages were a little misleading. While it is certainly true that the Internet would not be capable of supporting the switch of all broadcast and physical video today, this is not what’s happening, it is a gradual transition and broadcast will remain a mainstay in the market for the foreseeable future.
Furthermore, customer behaviour online is different to traditional TV as users choose when they watch, rather than always watching live. Finally, the amount of dedicated infrastructure available to video or the development of specific structures such as CDNs that reduce pressure weren’t mentioned.
At Telco 2.0 we would argue a better and far more positive approach to online is to develop an effective supply chain for it and leverage the unique characteristics of both physical and online mediums to maximise profits from both in the medium and long term.
According to Jim Bottoms, director and co-founder of Futuresource who kicked off the event with an overview of the market, even by 2014, 2/3 of video revenues will still come from physical formats. However, overall, video revenues are declining. Across Europe, Futurescore cited a decline in average household spending on video from a peak of UK£72.40 per year in 2005, to UK£53.70 in 2010 and it is a trend that is set to continue, following that of music. In contrast Gaming, the third area of entertainment, is so far bucking the trend, as shown in the Futurescore chart below.
His presentation went on to demonstrate that while revenues are declining, costs are also on the increase. At the same time online video views are increasing exponentially. Although Futurescore predicts that only 1/3 of total revenues will be accounted for by online by 2014, share of viewing will be far greater than its revenue share. The problem, as Bottom recognised, is getting consumers to pay for online video content.
He cited that in the UK, there were 65 billion online video views of which 54% were through YouTube and a mere 0.01% were paid for. To put it simply, consumers are watching video online but they’re not paying.
How can consumers be encouraged to pay?
Firstly, we have to understand the obstacles to consumers paying for online video, beginning with the association between the Internet and free content.
Many consumers now believe that the Internet is a way to access free content. This perception has been enhanced by the failures of the music industry in its online transition and by the P2P and pirate sites that enable instant access to pirate versions of all kinds of entertainment from single music tracks to full form video.
Richard Atkinson, the former head of piracy prevention at Disney and now chief piracy specialist at Anti-Piracy Worldwide, gave a great insight into how video piracy works. He asserted that piracy always happens and should therefore be seen as a continuum on which different incidents can be placed according to the severity of problem.
The challenge for the industry is twofold. Firstly, to make sure that the pirates are identified and illegal copies blocked, something that should be more possible in the virtual world than the physical, and secondly, to ensure that legal video sales give consumers what they are looking for when and how they want it.
The first challenge is about prevention and tracking; the second about challenging the film release ‘windows’ system for sold video content (e.g. the time between a film’s release in cinemas and its availability online) and creating a new model that recognises the unwillingness of consumers to pay for the same content in multiple formats.
Atkinson revealed that most pirates are also consumers of legal material and not just any old customers but the best customers. They are driven to turn to pirate options by price of course but also by availability - the timing of releases and availability of formats. In essence, the very window system on which the video industry has been based also provides the opportunities for pirates. Indeed, he cited examples of how the marketing of movies prior to their availability legally, drives pirate take-up. This phenomenon only increases as regional border and licensing restrictions are undermined by global availability of online distribution.
There is little doubt that the current models are under fire and that new thinking is needed to address the challenges brought by digital online services.
Replacing the DVD ownership model
Yves Caillaud, senior vice president, EMEA, Warner Home Video and Digital Distribution, explained that DVD has worked on a successful ownership model for a decade, but the industry needs to reinvent that ownership model for the digital age. To do this he points to the need for interoperability.
We agree. The concept that consumers will buy new copies of their existing library or to continue to build a library of titles in multiple physical and digital formats that need different players is flawed. It will only fragment and contract the market overall. However, equally, the speed of technical development is increasing and agreeing on a single format is not realistic. Therefore a mechanism has to be developed that enables consumers to continue to build their video libraries.
As we proposed in our recent Executive Briefing ‘Entertainment 2.0: New Sources of Revenue?’, digital lockers offer a solution to this issue and, at the conference, Tim Wright, director for technology of Sony Pictures Entertainment, provided an update on the UltraViolet initiative.
Formerly known as DECE, UltraViolet is the service brand for a cross company, cross industry attempt to create a digital locker system that enables consumers to buy video content once and access it from any and multiple devices.
Wright expounded the consumer and business benefits of the concept, promised service launches in the next 12 months and gave an update on the various roles they’ve set up legal frameworks for. These are:
- Content Providers - owners of the video content
- Retailers - physical and online
- Locker Access Service Providers - Providers or streaming services, such as NetFlix, LoveFilm etc
- Digital Service Providers - Providers of DRM, hosting and other heavy lifting services for retailers e.g. Sonic and Ioca
- Client Implementers - device vendors and app developers
- Right Locker Coordinator - running the rights locker itself, a function that Neustar has been hired to do
There is no specific role laid out for telcos and that is disappointing as telcos are ideally placed with a set of assets that can enable and enhance the UltraViolet structure. However, this reflects the failure of the telco community to engage with DECE in a timely fashion.
Yet all is not lost and there are multiple places they can play, as illustrated in the diagram below extracted from our ‘Entertainment 2.0: New Sources of Revenue? report.
source: Telco 2.0
The most obvious role for telcos is UntraViolet is as a retailer but Wright confirmed that the access and digital service provider roles were both feasible options for more advanced telcos.
The legal frameworks laid down are interesting, particularly that for service provider as SPs are not allowed to deviate from the total proposition. The same service will be offered by all retailers and Wright confirmed that he expected the pricing structures to be the same for all, although the pricing itself is down to the individual retailer as it’s a competitive issue. The lack of service differentiation will concern some telcos but in providing access to a well-stocked locker would provide differentiation from other telcos in the short term and could well become a prerequisite in the future.
There will be more on UltraViolet and the possible roles for telcos at the Entertainment 2.0 Executive Brainstorms being held in Santa Monica and London on October 28 and November 11, respectively.
A second important and connected thread is the retail challenge and opportunity.
Consumers Can’t Help Acting on Impulse
The heads of entertainment of major UK retail chains, Sainsburys and Tescos, provided a serious reality check on the day-to-day pressures on physical retail. Some startling figures included the fact that when two other retail chains - Woolworth, a general store and Zavvi, formerly Virgin Megastore for music and video - closed their doors for good, 50% of their video sales just disappeared. They weren’t transferred to another retailer, a feature that Sainsbury’s Richard Crampton put down to the fact that a significant proportion of video sales are impulse buys. Indeed Richard said that 70% of Sainsbury’s own video sales were bought on impulse.
The importance of impulse buying is a major feature and one that shouldn’t be ignored. At Telco 2.0 we don’t agree with the assumption aired at ESCA Edge that the only way to protect this market is to defend the physical retail space. Instead, we believe that it is essential to provide the impulse opportunity online.
There are two pillars to this strategy. The first is to provide the purchasing opportunity where consumers are online, such as social networking sites and YouTube; the second is to provide proactive recommendations based on unique user data.
Following consumers online
It’s a long-held view that retail success is found where people gather and this just as true online as in the physical world. The ability for content owners and online video retailers to advertise their products in these areas is a start but only if backed by instant purchase and access will it meet the impulse compulsion.
To support this, it’s necessary to enable friends to make recommendations to each other and to have the sort of automated recommendation engine used by Amazon, but it is only a start.
Telco assets supporting impulse buying
Telcos have access to a whole host of customer data. They can supply information on what people have previously downloaded and when (day and time), combined with location information and possibly presence information as well. This could provide a powerful tool to proactively push information about video options to consumers even before they’re aware they might want them but at times when they receptive to them.
Such functionality also needs to be backed by an immediate and simple payment and access system so the impulse to buy can be taken instantly to its natural end.
Music’s warning is still relevant
One thing that the experts on the video supply chain were agreed about was that the experiences of the music industry are highly relevant to their business. Primary amongst those lessons is that price cuts do little to support physical sales in the face of online competition.
Maureen Hughes, partner from Deloitte Consulting, claimed that simple cost cutting is not enough to increase profitability for video, while Martin Talbot, managing director of the Official Chart Company, gave a more positive view saying that digital had not killed the music market but transformed it.
He supported this assertion stating that in the UK, more singles are now being sold than ever before. Sales are now reaching over 160 million and 2009 was the third successive year in which over 100 million singles were sold, whereas the highest pre-digital sales high was 90 million. 98.4% of singles are now digital downloads as consumers respond to the low cost snacking opportunity.
Furthermore, this snacking phenomenon is something that is even more evident when the impulse is prompted by an external force. For example, the resurgence of tracks such as Journey’s Don’t Stop Believin’ after it was featured on Glee, or the thousands of downloads of Ewan McGregor’s single that followed a performance of the song on the UK’s X Factor, demonstrate the power of promoting the impulse and backing it with a download capability.
This brings us back to our earlier concept of the active promotion of impulse purchases. Digital video products will be triggered purchases, by a mention on TV, advert, or some other media, or through recommendation engine or personal recommendation from someone within a social network. Building these and other impulse supporting structures, is as essential as ensuring the transport infrastructure over which video traffic flows is robust enough to support the quality service necessary. This is, in a sense, very much business as usual for the entertainment industry - it’s just that the distribution channel is changing from physical to online.
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