The Studios’ New Challenge: Direct-to-Home Movie Delivery

By Dom Serafini

Is Hollywood quivering in fear in the face of new media? Recently, The Los Angeles Times wrote that, “Mainstream media [is in] a digital panic,” and this is, perhaps, the reason behind its rush towards million-dollar purchases of social networking websites that are easily replicable. News Corp., Fox’s parent company, for example, paid $580 million to buy the social networking website MySpace, adding it to their 19 other Internet-based operations. A gossip website,, has even become a television show produced by Telepictures and distributed by Warner. Bros. At this point one still gets the impression that entertainment professionals tend to be fearful of Web content made by amateurs (essentially 60 percent of videos that show up on YouTube and other social Web networks are made by amateurs).

Buying and Selling
Gary Marenzi, co-president of MGM Worldwide Television Distribution

Hollywood is displaying a somewhat schizophrenic attitude towards new media. It’s true that technology is changing everything for the studios, but it’s also true that, for the majors, to paraphrase late Italian author Luigi Pirandello, everything can change as long as nothing changes in their pockets. While, on one hand, the studios are in a digital panic and blindly embracing all kinds of digital media; on the other, they know perfectly well where they want to go: To take advantage of digital technology and broadband transport in order to deliver their movies directly into the homes of consumers without the need of middlemen, thus lowering costs of production, promotion and distribution. This is called a door-to-door window in the Italian press.

Meanwhile, as media consultant Russell J. Kagan pointed out, “The younger generations don’t know DVDs, thanks to broadband.” But until studios stop making money with DVDs, they won’t do away with them.

Indeed, what gives agita to the majors is the current need to share revenues with their middlemen: 60 percent to chain stores that sell DVDs (not including manufacturing costs), 50 percent to satellite and cable operators (for on-demand services), and 20 percent to movie theaters (in the first week; later it can go up to 50 percent).

Commented Gary Marenzi, co-president of MGM Worldwide Television Distribution: “We don’t like to give our product away on consignment and merely share revenues, but we are open to building businesses where we get our fair share. [Furthermore,] we cannot ignore the different distribution technologies. As a content provider, it’s our job to efficiently distribute and monetize that content. We must remain flexible, but also underscore our concerns about security and about being properly compensated.”

According to Kagan, the majors are still riled up for not having taken full control over the development of HBO-style TV networks for movies in 1981. These networks were first to understand and exploit the then-new satellite technology. This is an error that the studios would prefer not to repeat.

To the studios, the elimination of some content exploitation “windows” could be inauspicious and undesirable. Nevertheless they fully intend to encourage the introduction of new forms of exploitation for their audiovisual products. The mistakes of the record industry are there to serve as a warning.

As Edgar Bronfman, chairman of Warner Music, recently told an investors’ conference in New York: “The music industry is growing. The record industry is not growing.”

For the majors, their experience with the videocassette was enough. It was a technology that the studios wanted to eliminate at its birth in 1984, but that later became one of their largest sources of additional revenue.

Broadband, more so than satellite, is poised to open the door-to-door window for the studios. They have already benefited from this technology by reducing DVD piracy. In fact, in 2005, the American studios were subject to losses valued at $3.7 billion due to the pirating of films around the world. In 2006, this figure was reduced to $2.3 billion, thanks to the growth of movies downloaded via Internet. Soon it will cost too much to produce and sell pirated DVDs as compared to legitimately downloaded films.

Furthermore, three additional developments play in the studio’s favor: The virtual absence of new costs for broadband; the low cost of widescreen flat TV sets; and technologies for immediate playing, like Vudu, a device developed by a Santa Clara, California-based firm. For the second element, Internet pioneer Marc Cuban has stated that: “Consumers prefer watching movies on 70-inch TV screens.” He then predicted that “HDTVs will get bigger and cheaper. In six years, 100-inch flat-screens will be the norm in large homes.”

In order to avoid downloading wait time, all the majors –– except Sony Pictures –– have negotiated with Vudu for the door-to-door delivery of their movies via broadband.  The Vudu box, which costs $300, permits viewers to, for just $6, watch a film on a television screen immediately after having selected it.

Marenzi elaborated, “We are working with Apple in the U.S. and other platforms and we are embracing all forms of digital distribution, both streaming and downloading. We are platform-agnostic and technology-neutral.”

Cable TV has benefited from TV services like HBO’s, which the studios themselves have helped to grow. Today’s studios benefit from broadband services offered by cable TV.

The fixed price for broadband, however, is now a problem for cable TV operators, so much that one of these, Comcast, has even taken it away from some of its subscribers because they consumed too much. Comcast’s aggressive way of managing its network is to keep traffic from swallowing too much bandwidth.

For studios, the cost to transport a film from servers to consumers on broadband is about one cent per user per hour. Said Kagan, “For the majors the cost of transport via broadband is comparable to that of DVD manufacturing.”

To appease cable TV operators, studios are now examining the so-called “day-and-date” model, that is, the release of films simultaneously to theaters and via VoD. This model obviously does not appeal to movie theater owners.

Marenzi explained: “MGM will evaluate day-and-date opportunities on a market by market basis. Experimentation continues in the U.S. and in a few months we’ll have a much better body of knowledge on the subject. [Right now] there is not enough information. Some signs show that day-and-date potentially could stimulate additional business, but there are other concerns that show it could negatively affect various parts of our business.”

With the ultimate goal of a door-to-door delivery model of movies via broadband, the Hollywood-based Alliance of Motion Picture and Television Producers is declaring what has been called a “jihad” (holy war) against the Writers Guild of America for the elimination of residuals, a practice initiated in 1935 when radio stations started using recordings for time-shifting broadcasts, and paid artists a portion of what they would have been paid if talent had to broadcast live for different time zones. Then, in the 1950s, television borrowed this residual payment structure from radio, which later was applied to reruns and to the licensing of international rights. Today, the battleground for residuals mainly concerns the Internet or electronic sell-through, because it is the area in which the studios can now claim a disadvantage. In the immediate future, however, the elimination or reduction of these Internet, or digital residual rights, will turn out to be as good as gold, since studios will ultimately be taking advantage of all aspects of digital technology and broadband transport.

After this overview, one can imagine, around 2010, how studios will make use of digital technology and broadband for the whole process of production, promotion and distribution of their movies: Scenes filmed in digital will be sent via broadband to post-production houses, cutting production time and costs. Once completed, movies are promoted utilizing various forms of “viral” marketing, such as websites and blogs (a word-of-mouth marketing association, WOMMA, has already been created) saving on what currently represents 30 percent of a film’s budget. Finally movies will be simultaneously distributed directly to homes, to movie theaters and to VoD outlets in all their forms (Cable TV, IPTV, cell phones and computer downloads).

But Marenzi took care to dampen excessive enthusiasm: “The timetable starts now. [However] it’s not a sprint, it’s a marathon. As content owners, we don’t necessarily feel the pressure of the technologist.”

This article, by the same author, originally appeared in the Cinema insert of Italy’s Il Sole 24 Ore, Europe’s largest financial daily.