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Digital Growing Pains

26 May, 2014 By: Stephanie Prange

Digital delivery of content is growing, and growing fast.

Digital HD, the home entertainment industry’s agreed-upon term for digital sales and ownership of movies and TV shows, is making inroads, boosted by early release before disc.

Subscription video-on-demand, the digital answer to video rental, is taking root abroad as it did domestically, led by industry pioneer Netflix and competitor Amazon Prime.

But each form of digital consumption is experiencing growing pains. Digital HD, while gaining traction, isn’t yet making up for waning disc sales, which fell 13.7% in the first quarter of 2014 compared with the same period of 2013, according to the most recent data from DEG: The Digital Entertainment Group. Electronic sellthrough (Digital HD) surged 43% in the first quarter of 2014, but the total amount of money generated from digital content sales during the first three months of the year, $330.25 million, remains small compared with the billions of dollars studios have realized each year from the sale of DVDs and Blu-ray Discs — $1.82 billion in the first quarter of 2014 alone.

On the SVOD front, Netflix and others are getting some pushback from the companies that deliver their heavy traffic. The courts have rejected previous net neutrality rules that prevented cable and other companies from charging for better access to the digital highways that host traffic hogs such as Netflix. Thus, Netflix held its nose and made high-profile deals with Comcast and Verizon to pay for better delivery of its content.

"Tolls coming for the Web thanks to the FCC. What is the FCC thinking?” wrote Netflix CEO Reed Hastings on Facebook in April.

It is unclear how many more pipeline companies will look for a piece of the video delivery pie, as net neutrality is undergoing a revision at the FCC, and that could eat into SVOD profit. Meanwhile, both Amazon Prime and Netflix have raised subscription prices to pay for the growing cost of licensed and original content, in addition to possible delivery tolls.

Despite these growing pains, the digital future still looks bright.

Digital ownership, dubbed Digital HD, has gained momentum with a concerted effort by the studios to support it.

“The industry has rallied around Digital HD, an initiative that allows consumers to download or stream their favorite movies and TV shows on a variety of devices,” noted Mike Dunn, president of 20th Century Fox Home Entertainment, at the Consumer Electronics Association's Industry Forum in Los Angeles last fall. “The strong growth in digital consumption proves that there is an appetite for this with consumers and that is a significant positive for our business.”

“Domestic EST spending was up close to 50% in 2013 compared with 2012, and tentpole titles such as Gravity and The Hobbit perform exceptionally well as EST offerings,” said Ron Sanders, president of Warner Bros. Worldwide Home Entertainment Distribution.

UltraViolet, the digital locker that allows consumers to buy content once and play it anywhere, has grown to 18 million accounts worldwide (16 million domestically), according to the Digital Entertainment Content Ecosystem (DECE) consortium backing the service. Following Walmart, with its Vudu service, and other retailers, retailer Target joined the UltraViolet universe with its newly launched Target Ticket service in fall 2013.

“UltraViolet continues to gain traction as consumers increasingly become comfortable with the concept of digital ownership,” said Eddie Cunningham, president of Universal Studios Home Entertainment. “With [millions of accounts], the emergence of a record number of digital storefronts and the proliferation of compatible devices on the market, UV and the notion of shared entitlements is well on its way to becoming an industry standard.”

“UltraViolet has gained a great deal of momentum in 2014, with account creation and usage increasing at an encouraging rate,” said Man Jit Singh, president of Sony Pictures Home Entertainment. “Another key takeaway for UltraViolet is that, in parallel to the increases in quantity, the quality of the ecosystem and consumer experience have been enhanced, with more to come throughout the year.  Consumers who have tried UltraViolet have demonstrated that they are excited about the service and have actively engaged with their digital library. So while there is still work to be done around education and continued growth, we feel confident, based on recent studies that the levels of consumer comfort and satisfaction are increasing.”

“Research shows that as consumers see their digital lockers grow, they better understand the value of the service and invest in porting their libraries and content,” added Madeline Herdrich, SVP of digital and new media distribution for Paramount Pictures.

Early release before disc also helped boost digital ownership in the past few years, with studios such as Sony, which pioneered the practice with Bad Teacher in 2011, and Fox leading the way. The strategy has worked, according to studio executives.

“SPHE was the first to use this new business model, and we have been quite happy with its success,” Sony’s Singh said. “Consumers have recognized the benefits, and early sellthrough is now an important yet incremental revenue stream for the industry.  Across the board, we feel that the early release pattern increases digital sales significantly with certain titles performing considerably better than the norm. The greatest success stories have been on young male skewing titles such as 21 Jump Street and This Is the End. We have also seen great results on action and thriller titles such as Elysium and even family product such as Hotel Transylvania and just recently Cloudy With a Chance of Meatballs 2.”

“We are seeing that early EST windows have firmly taken root with consumers — in fact, they have become a critical motivator behind digital purchases, helping to drive overall engagement in the format and providing significant year over year growth,” Universal’s Cunningham said.

“Early digital releases have been gaining traction with consumers,” noted Paramount’s Herdrich.  “We’re seeing strong gains on EST, which is our most profitable channel on a per transaction basis, and no signs of material cannibalization on our other platforms. The Wolf of Wall Street performed particularly well on digital in part because of the title’s appeal to the average early adopter, as well as our promotional partnerships and bonus content that we offered exclusively on Digital.”

That doesn’t mean physical sales are playing second fiddle. In fact, studio executives say discs are an important part of the sales puzzle, and in the transition to digital consumption.

“Digital HD continues to add value to Blu-ray combo packs,” noted Warner’s Sanders.

“The most engaging way that the studio has bridged physical and digital content has been through the inclusion of UltraViolet on our Blu-rays and DVDs,” said Sony’s Singh. “This strategy has helped drive digital ownership, served as an ideal gateway to digital and has added value to the physical product.”

“Universal is determinedly focused on leveraging physical to drive digital and vice versa,” said Cunningham. “We have made very meaningful strides in effectively bridging the two through our Blu-ray Combo Pack strategy.  By bundling flexibility, utility and affordability into one high-quality offering, consumers have come to recognize the superior value that the Blu-ray Combo Pack provides as well as the unprecedented choice they now have in how and when they watch their favorite films.”

As are the studios at large, the home entertainment industry is looking to expand internationally and digital is a key component.

“The digital business has been making significant inroads internationally over the past few years and will continue to grow alongside our global and local retail partners,” Sony’s Singh said. “The increase in services and EST retailers available abroad — as well as the continued rollout of UltraViolet in select territories — will help solidify and enhance the overall digital proposition.”

“We are very excited about the opportunities and growth stories emerging from the key international territories,” Cunningham said. “We approach the digital business with a global perspective.”

“We’ve had great success with our unique Disney brands and franchises on the digital front as they resonate with audiences of all ages on a global scale,” said Janice Marinelli, president of Disney Studio Global In-Home and Digital Distribution and Disney-ABC North America Content Distribution. Disney, in February, lauched its own cloud service, Disney Movies Anywhere.

While physical disc sales are doing well in many countries, digital may be the preferred delivery mechanism in others.

“Each country develops at its own rate, and different consumption and competitive dynamics come into play,” Marinelli said. “When we take into account all forms of digital consumption (electronic home video license, video-on-demand, subscription video-on-demand), we see enormous opportunities for growth in markets where physical home entertainment products have largely disappeared. Markets such as Korea, countries in Southeast Asia, and Russia are starting to have very meaningful digital businesses.”

Netflix and Amazon Prime, too, have eyed the international market, expanding their subscription VOD services globally.

“SVOD, with appropriate windowing, continues to work well for our business and internationally,” added Warner’s Sanders. “We are experiencing strong digital growth as a result of alternative marketing initiatives and as distribution platforms expand into new territories.”

Netflix in April announced that its current global operations will become profitable in fiscal 2014.

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