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NEWS ANALYSIS: Is Premium VOD DOA or Being Primed for a Sequel?

2 Jul, 2012 By: Erik Gruenwedel

'Tower Heist'

Last fall, premium video-on-demand (PVOD) appeared to be a short-lived studio experiment that gained little traction among consumers — crashing infamously with the release of Universal Pictures’ action-comedy Tower Heist. Now that window could be re-opening, albeit with a few significant tweaks.

Nomura Securities analyst Michael Nathanson contends PVOD could make a comeback with better marketing and a greater value proposition to the consumer. The analyst said improved marketing, lower prices, better title selection and, more importantly, implementing rev-share agreements with theater operators could produce a renaissance for the nascent window.

“I don’t think PVOD ever had much negative impact on retail or kiosks,” Nathanson said. “We think the premium VOD opportunity may return in the near future.”

The premise of PVOD is simple enough: Offer a movie early in the home through a cable, satellite TV or a telco operator prior to the home entertainment and retail window at a substantial markup on the movie ticket.

With a $3.99 transactional VOD rental seven times more profitable to studios than a kiosk or subscription rental, Warner Bros. Home Entertainment Group president Kevin Tsujihara told an investor group last year the margin on a $29.99 PVOD title is exponentially higher.

The rationale among studios is that the PVOD window taps a market niche (housebound dual-income couples with newborn children) underserved by theaters. This demo is considered eager to consume major theatrical movies — on its schedule without the necessity of leaving the home, finding a babysitter and/or dealing with parking, noisy theaters, etc.

Cinedigm Digital Cinema Corp. in May signed a license deal with Prima Cinema, which operates a business platform that can deliver secured theatrical releases with “better than Blu-ray” resolution — including 3D — into home theater systems. Cinedigm CEO Chris McGurk said the Prima license agreement allows the company to alter distribution windows for its library of independent films, documentaries and other premium specialty content.

It’s a premise Hollywood is considering as lower-margin physical rentals eat into sellthrough and subscription video-on-demand platforms threaten to turn home entertainment into a $7.99 all-you-can-watch smorgasbord. 

“The associated premium business model could represent a significant new revenue stream for us,” McGurk said in a statement.

Cinedigm’s recent acquisition of New Video gives the digital movie screen provider the ability to test a distribution model where it would share a film’s revenue with exhibitors in order to experiment with street date or early release windows on VOD, according to Eric Wold, analyst with B. Riley & Co. in Los Angeles.

“Should this work, it could pressure larger studios to do the same,” Wold said. “I still think it’s unlikely to be tested on any blockbuster titles in the near term.”

PVOD Timeline

PVOD formally launched April 21, 2011, on DirecTV with Sony Pictures’ Adam Sandler comedy Just Go With It for $29.99. Other PVOD distributors experimenting with the window included Comcast, Time Warner Cable and Starz Media.

PVOD, however, proved to ruffle more feathers (mostly among theater operators) than generate the higher-margin incremental revenue. Meanwhile, the traditional home entertainment window — which gets theatrical releases up to four months after launch date — saw little or no negative effect from PVOD, according to analysts.

“If anything, it impacted exhibitors more,” said Michael Pachter with Wedbush Securities in Los Angeles.

When Universal Studios Home Entertainment announced last October it would offer Tower Heist on PVOD just 21 days after its Nov. 4 theatrical launch, theater operators rebelled and analysts lambasted Comcast’s $60 asking price.

Heist was the highest-profile title earmarked for PVOD. Theaters operators threatened to boycott the movie during its planned 3,367-screen nationwide opening weekend. They also pledged to remove theater signage of any other film destined for PVOD.

Universal dropped PVOD plans for Heist a week later — a prudent decision considering consumer interest in paying outsized fees to watch a movie just weeks removed from its less-expensive theatrical run was wishful thinking, said Wold.

“It would be tough to get premium VOD moving again [in its original form] as consumers are unlikely to pay a high price for early access, and exhibitors would likely boycott the movie either entirely or push for a share of the downstream revenue to compensate for lost box office,” he said.

Laying the Foundation for Altered Windows

While PVOD might seem DOA, the window did give studios and distributors a blueprint on how to release theatrical fare early into the retail chain at incrementally higher margins.

Amazon in mid March offered The Hunter from Magnolia for $9.99 for a 48-hour rental through its Amazon Instant Video service. The drama, which stars Oscar-nominated Willem Dafoe as a mercenary tracker, bowed theatrically April 6.

Google Play offered Hunter for $9.99 — while also renting action-thriller Dark Tide with Halle Berry from Lionsgate for $9.99 — two weeks ahead of its March 30 theatrical launch.

Magnolia, headed by Dallas Mavericks owner Mark Cuban, frequently releases independent films on disc and digital prior to theatrical launch. Lionsgate has shifted windows for select titles, including bowing action film Abduction, with “Twilight” actor Taylor Lautner, on VOD ahead of its packaged-media release. Summit Home Entertainment did something similar, bowing Source Code, starring Jake Gyllenhaal, on VOD ahead of its disc release.

Last October, Roadside Attractions’ Margin Call bowed in select theaters the same day it was available on VOD, with the VOD price nearly 40% cheaper than the movie ticket. And Image Entertainment released Passion Play, a limited theatrical release starring Mickey Rourke and Megan Fox, the same day it debuted in theaters.

“The day-and-date for VOD on something like Margin Call makes sense because [the studio] can leverage the theatrical spend on marketing, which is likely to be a lot less than for Tower Heist, and take advantage of any early buzz,” said Russ Crupnick, entertainment industry analyst for The NPD Group. “Plus, if it’s not heading for wide theatrical release, you’ve got an audience that might want to see it but won’t have options.”

Nolan Gallagher, founder and CEO of Gravitas Ventures, which specializes in worldwide independent VOD programming, said VOD allows an independent film immediate access into 100 million-plus North American homes through cable, satellite, telco and online companies. He said films that are simultaneously in theaters will frequently receive prominent merchandising in VOD storefront areas, including website or cable home pages listing VOD movies.

“Consumers are becoming increasingly aware of these VOD storefront areas and appreciate the early opportunity to watch films that may not yet be at their local theater,” Gallagher said.

Analyst Pachter said tweaking release windows remains a work in progress that could also benefit packaged media, specifically Blu-ray Disc.

“I think the real value is in charging more for higher-margin Blu-ray titles and releasing them as collectors editions prior to street date for DVD,” he said.

Still, it’s not an easy sale for theater owners.

Greg Laemmle, president of Laemmle Theatres, a specialized theater chain in Southern California, said he understands content owners’ — especially independents’ — need to find ancillary revenue wherever they can. But that doesn’t make early VOD any easier for theater owners to swallow.

“We’re not opposed to dabbling in this, but from our experience, we see lower box office [revenue],” Laemmle said. “On certain titles day-and-date VOD is going to result in a lower audience. We have a very stable business with theatrical, and you have to be careful with it.”

Laemmle does see the difference between smaller titles such as Margin Call and major studio ventures such as Tower Heist.

“With Tower Heist there would be a lot of teen boys who wouldn’t be in theaters with [VOD 21 days later],” he said.

— Chris Tribbey and John Latchem contributed to this story

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