Internet Finds More Favor in Hollywood


Higher margins, the ability to collect and use information about customers, more revenue and greater willingness to share content with Internet operators is prompting Hollywood to join forces with the likes of Google’s (NASDAQ: GOOG) YouTube or set up its own Internet portals.

Online video streaming and digital downloads should nearly triple to a $753 million North American market in 5 years, still a 5 percent sliver of DVD sales in 2008. But, analysts said, with disc sales dwindling and online viewing exploding, that gap will shrink.

“I don’t think that studios are looking at online to save the home entertainment business, but I think they want to avoid what happened to the music business and try to come up with alternative modes of distribution before physical media goes away,” said Stephen Prough, founder of Salem Partners, which advises investors in the film business.

The Walt Disney Co is developing a subscription service to sell premium content like movies and TV shows. And YouTube has reportedly held talks with Lions Gate Entertainment, Sony Pictures and Time Warner’s Warner Bros. about online movie rentals.

But some analysts argued that encouraging a migration online would sap higher-margin DVD revenue, now accounting for more than half of any single film’s viewership revenue and the main way studios make money on their investment.

Inevitable shift, bigger profits

Other analysts said the migration was inevitable as viewers moved online, much as they did with music.

In the first half of 2009, DVD and Blu-ray sales fell 13.5 percent, a decline that has made it harder to finance films.

“What has driven a big part of the (DVD) market in the past has been people building their libraries. That phase seems to be over,” said Larry Gerbrandt, principal at consultancy Media Valuation Partners.

As more people turn to online viewing, Hollywood stands to enrich itself, especially through rentals.

Studios get more than 70 percent of the price of an online rental at websites such as iTunes, compared with a third of that price in a store, said Tom Adams, founder of Adams Media Research.

And even though online sales of movies and TV shows bring studios some $15 on a typical title compared with about $18 for a physical sale, the Internet offers vastly lower overhead and distribution costs, Adams said.

In any deal between Hollywood studios and YouTube, YouTube would likely charge consumers $3.99 per rental, in line with Internet rental outlets such as Apple’s (NASDAQ: AAPL) iTunes store and (NASDAQ: AMZN).

“You can actually turn that $3.99 into much more value,” said Mike Kelley, a partner at the consultancy PricewaterhouseCoopers.

“It’s not just pulling them into the movie and streaming it, but forming a relationship that lasts a lot longer than that two-hour window.”

For instance, customers who show a preference for science fiction become marketing targets for other sci-fi content.

Disney’s chief executive Bob Iger recently said he was “pretty bullish” on direct Internet marketing to consumers.

In the next five years, online subscription rentals are expected to nearly double to 9 percent of overall revenue for the North American filmed entertainment sector, which include box office and DVD sales, PricewaterhouseCoopers said.

In contrast, for North American filmed entertainment sector, PricewaterhouseCoopers expects physical home entertainment video to account for 53 percent of overall revenue in 2013, compared to 70 percent in 2004.

“We’re in an accelerated period where technology and the consumer is outpacing the studios’ current business model,” Kelley said.

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