Google Creating New Rental Window?

12 Sep, 2011 By: Erik Gruenwedel

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Online search behemoth is spending upwards of $200 million on third-party content license rights, which one analyst says could be used to launch an ad-supported rental model

Google is inking streaming rights to myriad movies and TV shows for a work-in-progress YouTube revamp — a move one analyst believes is establishing subscription VOD as the next multibillion-dollar business.

With studios revisiting post-theater distribution windows such as physical and electronic sellthrough, rental, pay TV and subscription video-on-demand (Netflix), Google is showing a willingness to spend on content as it also flexes its fiscal largess ($39 billion in cash), acquiring infrastructure (Motorola Mobility) and restaurant recommendation website Zagat, which could easily accommodate the more affluent “dinner and movie” consumer with an infusion of entertainment suggestions.

As owner-operator of the No.1 social video site, YouTube, as well as the rapidly expanding Android mobile platform and Google TV, the company has the ability to create a new window: ad-supported digital rentals.

Ralph Schackart, media analyst with William Blair & Co. in Chicago, said Google could undermine the currently stagnant transactional VOD window with lower-priced new-release digital rentals featuring advertising.

He said this new window could help create a $65 billion premium video market. The market would include $35 billion from DVD/Blu-ray movies’ continued digital migration, $15 billion from mobile video and $15 billion from subscription VOD.

Principal players in the burgeoning digital market include Amazon (which is seeking to drive Prime loyalty members and ecommerce), Apple (which dominates portable consumer electronics) and Google.

“We believe Google could subsidize the studios’ wholesale fees and monetize the movies (at least partly) through advertising,” Schackart wrote in a Sept. 12 note.

The analyst said that as studios and content owners up third-party digital license fees, digital movies and TV programming will become commoditized with margins three times that of physical distribution. Schackart said studios throughout time will lower digital rights fees to encourage increased adoption and competition.

“We believe key market participants will bid against one another to gain exclusivity windows, and they will need substantial capital (to buy content) and scale/reach (to monetize content) to adequately compete in the market,” he wrote. “As they seek to gain a competitive edge, we believe movie studios may offer exclusive digital windows, wherein companies seeking digital rights to Hollywood content pay a premium for exclusivity.”

Schackart said digital pioneers Netflix, Hulu and Facebook throughout time would evolve into niche providers, with Netflix focusing on catalog fare, Hulu repurposed TV content and Facebook transactional VOD.

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