My 2 Cents

Some observers, like those at the daily newspaper USA Today, “see a downloading revolution coming to the movie business.” Others see it as an “evolution” thanks to broadband and IPTV platforms which reduce piracy, increase consumption of content, and monetize every aspect of the television business. Prior to broadband, large-scale piracy of DVDs prospered despite the fact that setting up such an operation required an organizational infrastructure, manufacturing facilities, distribution channels and lots of capital. Indeed, manufacturing costs represent 40 percent of DVD production. Nonetheless, a pirated movie on DVD costs less than a legitimate disc and the means of distributing these DVDs has always been limited to furtive transactions.

Looking at figures from various sources, we found out that, in 2005, movie studios in the U.S. lost $3.7 billion due to worldwide DVD piracy. In 2006, this figure was reduced to $2.4 billion, thanks to broadband. During the same period, the loss to international Internet piracy was estimated at $2.3 billion, but only five percent (or $115 million) was for mainstream movie content. On the other hand, the 55 million U.S. homes with broadband generated legitimate download business of $43 million a year (according to Adams Media Research).

Today, downloads and IPTV have broken the chicken and the egg riddle: To reduce piracy, the price of DVDs had to come down, but it couldn’t be lowered because the high level of piracy reduced the consumer universe for legit buys. Downloads and IPTV sales also reduce distributors’ costs since, unlike DVDs, which are returnable, with broadband there are no returns and no packaging. It costs more to return DVDs (from $1 to $2 each) than to manufacture them ($1.85 each with case). Returns can reach 30 percent, and when costs are that high, they can break a company.

Despite all the advantages of IPTV and downloads, studios were reluctant to get into this area because they did not want to alienate Wal-Mart, which generates 40 percent of all DVD sales in the U.S. But now that Wal-Mart has entered the download-to-own (or DTO, here another acronym for us to remember!) video business, the industry is starting to reap all the benefits of this aspect of distribution. Nevertheless, according to www.dvdinformation.com, in 2006, overall DVD shipments in North America were 1.65 billion units, the same as 2005.

Internet guru Mark Cuban is convinced that media companies are in no hurry to have the online movie business succeed: “It’s one thing to allow downloads of yesterday’s TV shows and create a market and revenue that didn’t exist last year. It’s another thing to mess with your biggest revenue stream.”

However, both download and IPTV platforms still present a few technical, regulatory and licensing problems. With downloads, problems are that, even though they are priced about the same as DVDs (from $10 to $20 for a new release movie and $2 for a TV show), movies and TV programs take a long time to download even with a broadband connection, and present inferior video quality to DVDs. Plus, the download standards vary from company to company and it costs too much for the memory to store 200 DVDs on a computer. The TV vs. PC is no longer a problem, due to the fact that many companies are coming up with computer-to-TV devices. Consumers can also burn their downloads to a DVD for  TV viewing from a DVD player.

For IPTV, the problem is that Telcos –– once their franchising dispute with MSOs is resolved –– could become the nation’s largest aggregators, leaving independent platforms just the ethnic TV channel niche, as well as obscure movies.

The major competitor against Telcos’ IPTV platforms could turn out to be satellite television, which could easily replace its satellite set-top boxes (STB) with IPTV STBs. Actually, in order not to give Telcos a headstart at becoming influential aggregators, satellite TV operators should jump on the IPTV bandwagon immediately.

The magic of IPTV could prove to be a boost for television stations.  In a single stroke, this Internet Protocol-based TV technology –– which is, at the same time, a technical standard and a business model –– will solve all the problems that afflict today’s TV industry:
standards confusion, audience fragmentation, ratings problems, reduced revenues, cable carriage, coverage areas and frequency allocation.

Currently, TV signals take different paths to get to consumers: Over the air in two standards –– NTSC for analog and ATSC for digital or PAL and DTV. Plus: standard definition and high-definition in both interlaced and progressive forms. Cable, in analog or digital. Satellite. Streaming media, in several standards, and hand-held (cellular phones) in two or three standards, one of which doesn’t work well indoors.

With IPTV, stations send one signal of the MPEG-4 type and all devices everywhere receive it. In addition, by using the VoD feature, stations could monetize their programs even after the linear TV signal is gone, and even license their signals to IPTV platforms. The audience lost at the local level can be recouped at a national or international level (to keep the CPM stable) and advertisers can get an accurate count of the programs’ viewing audience. Finally, with IPTV there is no need for transmitting with over-the-air frequencies, which can then be rented, for example, to Wi-Max operators, thus creating another form of income for TV stations.

Dom Serafini