Coming Soon: The $40 Movie

Premium VOD will bring films to homes in record time. Will it move studio bottom lines?

Despite piracy risks and protests from theater owners and DVD merchants, four studios have publicly announced their readiness at least to test the 
market for so-called “premium video-on-demand.” This means that by first-quarter 2011, films could be available via electronic delivery to the home within 90 days of their theatrical release — for a price.

How will this play out? From my discussions with informed parties (pro, con and skeptical), no clear business model has emerged. But contours of the offering have taken shape.

The Window
The premium VOD window will open anywhere from 30-60 days (more precisely, 28-56 days) after the theatrical release date and stay open for 28 days. A cable or satellite TV subscriber will be able to watch a specific film over a 24- to 48-hour period (permitting only one, maybe two runs after order). The traditional home entertainment window will stay at around 120-plus days on average (subject to change for failures, seasonal or highly successful films), so usually there will be a 28- to 56-day “black period” between the end of the premium VOD window and the beginning of the home entertainment window.

Pricing
Cost will depend on the availability date — 
the sooner the higher, so a film available 28-42 days after its theatrical release might cost $34.95-$44.95 (unlikely more), whereas a film available 42-56 days after could range from $24.95-$34.95. The studios are looking to get paid 80% of retail, and the exhibitors will fight for a 50-50 split of revenue; overwhelming odds are that the studios will get their way, though a 70-30 split is possible (especially if it’s a 56-day exhibition). By the way, R-rated films are unlikely to be offered.

Marketing
Marketing costs likely will be borne by the studio (especially if the split is 80%-20%). One would predict that the marketing spend could range from 10%-30% of the studio’s anticipated gross. We also can expect the studios to arrange “tie-in” campaigns from fast-food or soft drink companies to bring attention to a particular film and perhaps give consumers a discount on the merchandise or the VOD purchase.

Audience
About 85% of theatrical box office on 2D films is earned during the first four weeks of release, rising to 97% after eight weeks. It’s estimated that there will be 13 million secure VOD households in 2011, rising to 
25 million or more by 2014. Running the numbers, and even assuming a high buy rate, the results don’t reveal significant returns for either the exhibitors or studios (or the participants or guilds).

Nevertheless, even assuming 100% cannibalization (i.e., for each viewing household, one or even two fewer theater tickets are sold), the transaction is net positive to a studio because of the high net yield per transaction compared with a theater ticket.

Theater owners certainly will be perturbed, but with four or more major studios going forward, there’s not a big chance of a boycott or of renegotiating theater splits.

The more difficult question is whether there will be opposition or cannibalization from mass merchants, electronic sell-through or transactional VOD providers. Here’s where technology works in the studios’ favor: Vudu (owned by Walmart), Sonic (partnered with Best Buy), Apple and Amazon will be included as exhibitors of premium VOD, so their opposition will be mooted or muted (except for mass merchants like Target, which doesn’t have an electronic distribution outlet).

So, the premium VOD experiment is likely worthwhile and should be encouraged, but don’t expect it to be a bonanza.

Kenneth Ziffren is a partner at the Ziffren Brittenham entertainment law firm and an adjunct professor at UCLA Law School.

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