Downloads a dilemma too

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There's a second elephant in the overheated room where producers and writers are haggling over a new labor contract. And making matters worse, no one seems sure about just how big that elephant is — or is going to get.

The animal in question is the digital download business, and determining a fair cut of that digital revenue for talent is at the heart of the contentious talks between the WGA and Alliance of Motion Picture & Television Producers.

Every Hollywood studio has a different way of measuring what its digital business is, with Disney right now touting fairly loudly its successes in this area and NBC among those suggesting that the coin is fairly negligible.

For their part, analysts in the digital sector are increasingly hinting that the growth in the biz is anything but straight up. Some even hazard that consumers might not for years feel comfortable ditching their DVDs in favor of Internet-delivered movies and TV shows.

Take a recent study from Forrester Research. It argues that the growth rate for paid digital downloads might have already peaked.

The crowded field of download services that includes iTunes, Movielink, CinemaNow and Vongo might have expected to "see an avalanche of consumer demand," says the report, which was conducted this year.

Forrester analyst James McQuivey sees the paid download market in the U.S. growing from $98 million last year to $279 million this year but predicts that the nearly 200% growth rate will be sliced in half next year.

Some analysts are more bullish, but all seem to be predicting a dramatic slowdown in growth.

PricewaterhouseCoopers, for example, sees online sell-through of movies in the U.S. growing 460% this year over last — but then dropping to 56% growth in 2008.

In raw numbers, PWC estimates online sell-through of movies and TV shows will grow from $315 million this year to $1.16 billion in 2011. Putting that into perspective, though, consider that in that same time frame sell-through of DVDs is expected to grow from $17.3 billion to $20.7 billion in the U.S.

Clearly, then, DVDs will dominate the market for the next four years and beyond. (That's likely one year beyond whatever new contract the various guilds end up agreeing with the producers aligned in the AMPTP.)

Still, the subject is fraught for other past perceived mistakes that the guilds made two decades ago with the producers. Writers in fact aren't cashing in much from DVDs because they struck what generally was considered a lousy home video deal 22 years ago, one that hasn't been improved on since.

The WGA wants to make sure the same doesn't happen in the Internet era; the AMPTP, not surprisingly, wants to treat digital downloads no differently from the way VHS tapes were — and DVDs are still — treated.

As it is now, writers get 1.8% of just 20% of wholesale DVD revenue. That formula translates to about $64,800 flowing to writers of a DVD that sells 1 million copies. The WGA would like to see that formula doubled, or more, when it comes to the selling of Internet downloads — even if, right now, sales of such are paltry when compared to DVDs.

Forrester's McQuivey, for one, thinks haggling over the paid download business amounts to small potatoes because the real business when it comes to video on the Internet is in advertising. There again, the WGA wants a piece of the ad-supported market and the AMPTP is balking.

McQuivey estimates the market for in-video advertising on the Internet will grow from $471 million this year to $3.2 billion in 2010. Looking only at TV shows viewed online, the in-video ad market will grow from $250 million this year to $1.7 billion in 2010. And those healthy in-video ad figures don't even take into account sales of banner ads that will populate the sites where videos are featured.

Not surprisingly, some insiders are skeptical of that sort of bullishness and prefer to think of online free streaming of TV shows as merely a marketing tool for the shows watched and not as vehicles for serious ad sales.

But Disney CEO Bob Iger boasted just last week that 160 million free online streams have been viewed at ABC.com, so it's not hard to imagine advertisers who would pony up ad dollars to get their 15-second messages in front of those eyeballs. Messages, by the way, that can't be easily skipped, a la TiVo.

Not only will consumers shun — relatively speaking — the download-to-own model, but also online rentals, according to Forrester, mostly because it's an inelegant solution to move content from a computer screen to a TV set and rental rules are too restrictive.

"You have 30 days to watch the movie, but only 24 hours to finish it once you start. If your spouse falls asleep half way through, it's tomorrow or forget it. Mainstream viewers won't buy this nonsense," the Forrester report contends.

Thus the dollar amount studios and writers are arguing over could be more easily settled on if studios would disclose their revenue from digital downloads. Instead, studio execs insist on speaking in generalities and their messages are usually most optimistic when they're speaking to Wall Street analysts and investors.

Clues are everywhere, though.

Last week, for example, MGM chairman Harry Sloan was told his studio's "The Princess Bride" had been the top-selling movie download at iTunes for a few weeks. He expected, therefore, to hear that iTunes had sold upward of 50,000 copies. Not quite. It needed just 5,000 sales in two weeks to claim that top spot. ITunes sells each "Princess Bride" download for $9.99, and MGM's cut is $7.

Then, NBC head Jeff Zucker said that NBC made just $15 million in a year selling video on iTunes, and they were — until a recent spat with Apple caused the Peacock to defect from iTunes — the No. 1 supplier of TV shows to the service. NBC-Universal's overall revenue last year was $16 billion.

Disney has said it sold 24 million TV shows and 2 million movies via iTunes since launching with TV shows in October 2005 and with movies 11 months later.

Iger estimated last week that Disney's digital revenue will be about $750 million this year, though the CEO, as well as the company's CFO Tom Staggs, are so cryptic about the meaning of "digital revenue" that it's impossible to determine how much of that comes from the sale of digital downloads. Online subscriptions and online advertising are also included in the figure. (Excluded is another $750 million or so related to e-commerce associated with the theme park business.)

"If you look at Internet/digital revenues, I think we're among the biggest of the established media companies in that regard," Staggs told Wall Street last week.

Finally, the issue of cannibalism may come into the producers' arguments at the negotiating table, as some studio execs suggest that online viewers of TV shows are simply migrating from their TV sets so, presumably, writers shouldn't expect too much extra compensation.

But Iger provided a clue that partially undermines that theory, telling an industry gathering last week that the average viewer of shows at ABC.com is under 30 while the average age of an ABC primetime TV watcher is over 40.

"You're capturing a completely new audience," he said.

The elephant is not about to leave the room.
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