Analysts Predict Studios' Premium VOD Plans Will Have Limited Impact

"I'm not sure what the incentive is to pay six times what you would pay for a regular VOD title," one analyst says. "It's going to be a marketing problem."

Gabelli analyst Brett Harriss argued that VOD will be a threat for exhibitors but mitigated by the fact that the theatrical window has traditionally worked well for studios. Plus, exhibitors could make true on their threat to charge studios for trailers they have in the past attached to their releases for free, which he estimates are worth about $1.5 billion in advertising.

Marsh's analysis shows that nearly 85% of a typical film's box office is generated in the first 30 days of theatrical release and 97% in the first 60 days. He also cites data about the reach of VOD that supports his belief that the impact on theatrical results will be muted. According to that data cited by Marsh, only about 60 million U.S. homes are capable of viewing VOD, and only about 15 million have the HDMI (High-Definition Multimedia Interface) connection that is needed for secure transmission. "They could decide to make content available on non-secure set top boxes, but that would add to piracy risk," the analyst said.

What does that mean in terms of financial impact? Marsh expects "modest incremental revenues to the studios." His base case scenario suggests studios will see less than 0.5% of a revenue benefit when looking at all film windows, including DVD, international and the like.

Meanwhile, exhibitors could lose "a paltry" 0.4% of combined box office and concession revenue for each film that is also offered in the premium VOD window, the analyst has estimated.

"A minor adjustment to film rentals could close the gap and get all parties to simmer down," he said.

But it may not be worth all the trouble for the studios. "You get an extra dollar, but you risk relationships with existing partners and may increase your piracy risk," said Marsh. "So, you take a lot of risk to make an extra buck."

If there is bigger premium VOD success that hurts theatrical, the fact that box office numbers dictate the price of other windows would negatively impact other revenue streams. "If you suck dollars out of theatrical, your output deal with HBO might be worth less," Marsh said. "They have to be very, very careful."

Beyond exhibitors, at least a few members of the creative community have also spoken out against the VOD plans. "If I had wanted to make movies for television, I would have been a TV director," Hangover director Todd Phillips said at CinemaCon last week.

Analysts said they were surprised that more actors and directors have not voiced concerns yet. "What I have learned is that it's not the studios that are in control -- it's the directors," said Marsh. "When the hot directors want something, they get it. I wouldn't be surprised if we saw more of the top name directors vocalizing their opinions."

Upsetting key partners could boost the risk profile for film production and raise costs, he suggested.

One of the winners amid all the debate could end up being Viacom's Paramount Pictures, which has said it won't do premium VOD releases due to piracy concerns and to protect its relationship with exhibitors.

"The exhibitors could well deliver on their implicit (but maybe not that effectual) threat to favor Paramount films, with that studio refraining from premium VOD releases and having an appealing 2011 slate," said Harrigan. "That said, threatening to restrain movie trailers and dampen marketing for new releases may be a lose/lose proposition."

As an alternative approach, Marsh suggested to expand the theatrical window ahead of its current start by adding a brief exclusive 3D or Imax window before the regular theatrical run.

"Instead of compressing the theatrical window or everything after it, expand the theatrical window," he said, pointing to recent trials of that sort by studios overseas that have charged consumers premium prices. "Domestically you want to do it only if you have a tremendous amount of confidence in the movie to avoid bad buzz in a limited early release."

Similarly, exhibitor management teams are maintaining that studios "could have more upside in galvanizing growth/perceived movie value off the theatrical window rather than thrashing around to revive challenged home entertainment," said Harrigan. "This could be particularly apropos if accelerated home digital copies equate to more overseas piracy that compromises box office momentum in markets such as China and Russia."

All eyes will be on upcoming premium VOD test runs and the resulting usage data and analysis of financial effects.

"I expect the studios will test it, it will be ineffective and it won't create a lot of added revenues," predicted Marsh. "My concern is they could very easily use the high price and the relatively lengthy after-theatrical as an excuse to move the price lower. They'll say: It wasn't successful at $30. Why don't we try it at $15? There's a slippery slope element to the new window. That's one of the things that frighten the exhibitors."

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