| The
Hollywood Economist
The numbers behind the industry.
The Ineluctable March Towards The small Screen
Once upon a time—two generations ago—the movie
business was about making movies. Nowadays, it is about
creating intellectual property that can be licensed in a
raft of different markets. The Hollywood studios still make
movies of course, but, by 2005, only 14.2 percent of their
revenue came from movie ticket sales, while 85.8 percent
came licensing or selling their products for use in the
home.
(Click here for the studio revenue numbers.) Up until 2005,
the studio’s principal access to the home market came
through Pay-TV, free television, video rentals, and DVD
sales. But now, with products such as Apple’s video
iPod and TiVo-type digital recorders becoming widely available,
Hollywood is inching towards an even more lucrative way
of exploiting the home market.
Disney’s ABC network has already made a deal with
Apple that will allow iPod users to download and watch shows,
such as Desperate Housewives, for $1.99 an episode. The
company has also been talking to Comcast about a similar
pay-per-view arrangement for Comcast’s 23 million
cable subscribers. CBS, which is still controlled by Sumner
Redstone, and NBC, a subsidiary of NBC Universal, have announced
plans to release their programs for 99 cents a viewing,
whenever a customer wants to see them, through link ups
with cable and satellite providers. Meanwhile, the satellite
giant DirecTV, which is controlled by Rupert Murdoch, is
in the process of equipping its 12 million subscribers with
TiVo-like digital video recorders that have extra storage
capacity for eight hours or so of programming. Fox, which
is also owned by Murdoch, can then download its shows onto
an encoded section of subscribers’ hard disks, which
they can then pay to view.
This downloading strategy is particularly appealing to the
broadcast networks because, unlike cable networrks, broadcast
networks presently get no cash compensation from cable operators.
(At best, cable operators might agree to carrying their
new cable networks.) But by offering their hit programs
for downloading the next day, networks could get cash from
the cable audience. A cost of 99 cents a pop is hardly trivial
when multiplied by an audience of 23 million Comcast subscribers.
The networks are assuming—and this remains to be tested—that
their regular audience, which can watch the programs free,
would have little incentive to wait a day and download them
for a fee.
The studios stand to gain even more from a huge audience
willing to pay to download movies from their libraries.
Unlike DVDs, which require manufacturing, warehousing, distribution,
and disposing of returns, it costs almost nothing to download
a movie or cartoon. Indeed, all of the costs of transmission
would be born by the cable operator (or a site like the
Apple Music Store), whose cut would be less, under present
arrangements, than retailers get on DVDs. So if a movie
were a huge hit, such as Shrek, and millions of orders flooded
in, the marginal cost of filling them would be zero. The
consumer, once he bought the download, could watch it where
and when he chose to just as he once watched a DVD.
The real issue for the Hollywood studios is how they can
dig into this potential gold mine without undermining their
existing revenue streams. Since the 1980s, the studios have
managed their revenue by employing a system of ÒwindowsÓ
to release their products to different markets. First, movies
play in theaters, then, six months later, the video window
opens, followed by the opening of the pay-TV and then free
television window. But giant retailers, to spur their seasonal
sales, have been demanding their DVD delivery earlier and
earlier. They’ve thrown this system into turmoil.
With the possibility of costlessly providing millions of
downloads to consumers of both their older and new films,
the studio heads, including Disney’s Robert Iger,
are openly discussing a radical revamping the window system.
Obviously, if a home download of a movie were available
at the same time (and price) as its DVD release, the download
option might replace retail sales. To avoid that outcome,
and a potentially dangerous confrontation with Wal-Mart,
the studios would have to delay the download release until
well after the DVD release. But while the studios may find
this embarrassment of choices somewhat paralyzing at present,
as more and more consumers get digital recorders or video
iPods, downloading for dollars may prove irresistible—even
if it means doing away with the windowing system.
Hollywood’ downloading option, by whatever device
it may be realized, is just one more part of the transformation
movies from a big screen to a small screen experience and
from a theatrical to a home– or even mobile Ipod–
product.
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