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Analysts Predict Studios' Premium VOD Plans Will Have Limited Impact

A niche product in search of a market. That is how Piper Jaffray analyst James Marsh describes studios' plans for a $30 premium VOD service that would beam films into satellite and cable TV homes 60 days after their theatrical release.

The lack of nationwide availability of the necessary technology, the high price and consumers' perceived lack of interest in paying up for but a few titles offered to them slightly earlier are among a range of arguments analysts and observers cite as hurdles for the planned service. Plus it runs the risk of alienating key studio partners -- exhibitors, directors and unions whose members get paid based on theatrical revenue.

With details emerging at CinemaCon in Las Vegas last week that Time Warner's Warner Bros., Sony Corp.'s Sony Pictures, NBCUniversal's Universal and News Corp.'s 20th Century Fox will launch the offer with DirecTV under the brand Home Premiere in April, industry watchers started discussing the potential impact on the film business, its financial balance of power and the relationships that currently underpin it.

Studios are looking to use premium VOD to make up for DVD weakness, but how big is the market potential?

"It's not clear to me who the market for this product is," said Marsh. "I hear studios talk about people who wanted to see the movie but couldn't get a babysitter. But in general, people who go to the movies go for other reasons than just to see the movie. They want to get out of the house or see it in Imax or 3D or go on a date. The bulk of cannibalization would probably come not from the theatrical window but from VOD. The studios will up-sell some people who would normally pay $5 for regular VOD releases."

Marsh predicted that only a very small number of people will be incremental viewers of a movie in the premium VOD window.

"I think that's a tough sale," he argued. "There's a tremendous amount of content that people have missed in movie theaters, and I'm not sure what the incentive is to pay six times what you would pay for a regular VOD title just to see it 60 days earlier [than on regular VOD]. It's going to be a marketing problem. I think it's a very small group of people that will want to see that -- maybe if they have a bunch of people over at their house and they can justify the price that way."

Other Wall Street observers polled agree. "We view this as a too-high-for-mass-appeal price point that should have limited fallout for box office," Wunderlich Securities analyst Matthew Harrigan wrote in a report last week titled "Spartacus Revolt at Caesars Palace." "Despite this, the exhibition window, particularly with international growth, should continue to become more rather than less pivotal to the studios for both value-determinant marketing and eyeball-counted initial receipts."

Early talk about likely premium VOD test titles has focused on Sony's Just Go With It, Fox's Cedar Rapids and Warner Bros.' Hall Pass. Why no blockbusters? "The content that's most spectacular like Harry Potter in 3D will all look better on the big screen," suggested Marsh. "It's going to be mostly films with decent buzz where people are frustrated they missed it in theaters -- something like Inception."

But will consumers shell out $30 though to see a movie 60 days after its theatrical release and 60 days before it hits the regular cable VOD window? PricewaterhouseCoopers found in a recent study on attitudes towards the availability of video content that 71% of consumers said the timeliness was not a priority for them and that they would have no interest in paying more to see the movie sooner. More than 70% of respondents told PwC that they are willing to wait three months or more for rental availability rather than pay a premium to see the movie sooner, with reasons ranging from not being in a hurry to not having the capability or convenience.

PwC said that those people who were ready to pay wanted to shell out no more than $3 to download a movie -- and it would have to be available within a 30-day window. "Many consumers said if they really wanted to see the movie, they would have seen it at the theater," the firm said.

Asked about potentially purchasing a disc after leaving the theater or within two weeks of the theatrical release, the willingness to pay a premium reached 36% and 38%, respectively. After a two-week window, the willingness to pay a premium dropped off, with 26% saying they would be willing to pay after one month.

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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."