Why is Video on Demand so Attractive?

And Why Are So Many People Mystified About Video on Demand and Its Contribution to a Film’s Value?

It’s attractive because delivering a film is expensive, and the core purpose of filmmaking is sharing what you made, the story you have told. More ways to share it are attractive, and easier and cheaper ways to share it are attractive, and delivering it, potentially, into the hands of everyone, is attractive. Now, I believe all filmmakers are concerned with that sharing, but some filmmakers are more interested in the making of money than others. Almost all investors, however, are interested in making money, so understanding how to estimate some reasonable region of future value is attractive.

With a declining business in “shrink-wrap” (DVDs and Blu-rays), other markets are necessary to help float the content increase caused by the new production paradigm (cheap, fast and everybody doing it).

Come To the Rescue, VOD

But VOD is complex, and VOD is a mystery.

Just today a new Ooyala report came out that the Premium Over the Top business (OTT, that is: Netflix, Hulu and the like) will grow from $4 billion in 2014 (of which Netflix owns 85%) to $8 to $12 billion in 2018. Now, almost all predictions about VOD since 2011, and almost all predictions about Netflix since then as well, have been below the mark. But let’s just accept the middle, and say that in 2018, OTT will be $10 billion. The Ooyala report also says that Netflix will drop to 50% of the market by 2018 (so, $5 billion of that middle accepted number).

Ooyala Premium OTT Growth

Source: Ooyala

I hate to go off on an aside here, but this story has so many asides in it. The DEG (Digital Entertainment Group) who tracks these things, also tracks Digital Download to Own (also called EST Electronic Sell-through) and Digital Online Rentals (and also shrink-wrap) and puts all of this together into home entertainment. Why is this interesting? Because this lumping of digital and shrink wrap kind of obscures the fact that digital could eclipse former markets, and digital is half just like TV and half just like shrink-wrap, but with newer less-friction technologies for delivery.
History Rewards Content Heading Toward Ubiquity

VHS tapes took about 25 years to achieve the sales that DVDs achieved in about 8 years. Digital could explode beyond that, and faster. All the markers and infrastructure are in place. But there is a further complexity, and that is the fact that digital delivery is really a bunch of markets and platforms that work differently, have different price points and have different deal structures behind them.
Here’s a Tiny Example:

A client of mine made a music documentary, The Wrecking Crew. Here are the prices of the digital movie on select services:

• PlayStation Standard Definition (SD) Rental $6.99
• Xbox Video SD and HD, Own $11.99 and up, Rental $3.99 and up
• Amazon Instant Video SD and HD, Own $12.99 and up, Rental $3.99 and up
• iTunes SD and HD, Own $12.99 and up, Rental $3.99 and up

Another client of mine made a sports documentary (and no, I don’t only work on documentaries, but I do like them and the makers), called Undefeated (Oscar Nomination btw). Here are the prices for that on select services:

• PlayStation Not Available
• Xbox Video SD and HD, Own $7.99 and up, Rental $2.99 and up
• Amazon Instant Video SD and HD, Own $7.99 and up, Rental $2.99 and up
• iTunes SD and HD, Own $7.99 and up, Rental $2.99 and up
• This film is also now available on Netflix

Key in the difference between the two films is age, (2011 Undefeated, and 2015 The Wrecking Crew). That makes Undefeated a catalog title, and explains the general price difference. And some of the platforms are coalescing around similar pricing, but since all of these deals are revenue share, one dollar means about seventy cents per transaction to the rights owner, and about thirty cents per transaction to the platform. 10,000 downloads means $7,000 lost income. 100,000 downloads means $70,000 in lost income. For DVDs, there are not supposed to be separate deals per outlet, so, if Walmart decides to sell it for less, the distributor take is still the same on that DVD.

This is the first major complexity in modeling Video on Demand.

Video on Demand Is Really Kind Of Like 25 To 30 Markets, or Platforms

Here is how they break out, sort of:

MSO’s, or Multi-System Operators, on the order of Comcast, Direct TV, Google Fiber or Time Warner, including small regional operators.
These have subscription options, and Pay per View options (the original VoD).
OTT operators, like Sling TV, Amazon Prime Instant Video, Crackle, HBO, Hulu, Netflix and the like. These are, in general, the Subscription Video on Demand (SVOD) folks, though Crackle and Hulu have commercial-funded elements. Hulu, Amazon and Netflix buy movies, but they are really competing for television windows or rights. They used to buy the 2nd TV window, but now they buy, in some cases, the 1st TV window.

Then we have IPTV, which includes some television content, not germane here, but also some Video on Demand movies, which are delivered over Internet Protocol Television platforms.
Lastly, we have the pure Internet plays who will deliver to any device, and often through their own apps, or through a browser window, or to a set-top box, completely platform agnostic. These include Google Play, Amazon Instant, iTunes less so, Distrify and Vimeo on Demand focusing on Indies, and so on. The larger of these take more for each transaction, but have large marketing footprints, and so on, while some of the smaller ones return all but 10% of sales, with much smaller footprints.

Why did I talk about all that? To show that there is a great deal of complexity in Digital Delivery, and it is getting more so all the time. The Ooyala report that says Netflix will have a smaller share of a growing market, anticipates many small niche players. They will be like art houses, and specialty distributors, and will be boons for smaller films.

Why Is It Mystifying?

The complexity is in understanding and modeling the value these markets offer. Some films will have Netflix, some will not, some will have MSOs, and some will not. This is a very complex environment and my models for estimating the value of a film already in release, and my models for estimating the value of a film in front of us have many moving parts, including 25 to 30 markets, with rentals, DTOs (also called EST) and different market shares for each platform, if they overlap, like many do. The models are not perfect, but no one’s model can be perfect, even more so because so much of the data is hidden from everyone, purposefully.

Exiting the Desert

But we are not still lost out in the sun-baked desert anymore, and we have more points of reference to map out our path, but there are rocks and stones and mirages as we make our way to the oasis. Still, over the last five or so years of studying this, I think we are making progress, and, on that note, I am introducing our ROI Reports (Now with VOD) at the old price of these reports without VOD for the next month and a half. Check them out, but whether you buy one, a handful, a bucket full or none, I hope this discussion was helpful and informative along the way of your own path.

Onward and Upward

Jeffrey Hardy

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