VOD has failed. Instead of the world, we just got more of the same

The Internet carries this beautiful, implicit promise of worldwide communication and global services. It delivers on it fairly often too.

Video should then be ideal for the global streaming. Early on, YouTube showed us how user generated content, uploaded from anywhere, easily could be shown across the globe. We expected scripted content to appear online and the initial signs were good: video-on-demand (VOD) services appeared, offering us blockbuster movies on our computers and smartphones. Today, there are in fact over 3000 VOD-services in Europe alone. With such a wealth of services, you’d expect to easily find movies from across the globe, giving you stories, styles and themes that widens your own world.

But no.

VOD has failed.

Instead of showing us more of the world, we just got more of what we already had.

For the sake of exemplifying, say I sit in any European country. I go to my favorite VOD-service, or for that matter, any VOD-service available in my country, and I’m offered the same local shows and American movies as I saw before on my TV or via my cable box.

Which means I have definitely heard of Hunger Games, Frozen, Iron Man, Monsters University, The Hobbit and Django Unchained.

But I probably don’t know of Drogówka, Monica Z, Tres bodas de más, Les Profs, Soof or Babovresky.

These were all high grossing movies in 2013 in Poland, Sweden, Spain, France, Netherlands and the Czech Republic respectively. Recognize their posters below? Know where to look if you’d like to see them?

These films are among the 1500 movies made in Europe in 2013, as compared to the 450 movies that Hollywood released. Yes, Europe produces three times more movies each year than Hollywood.(1) That’s not evident when you look at a movie listing, TV guide or VOD service in any European country. It more looks as if, apart from the US, yours is the only country that makes any movies at all.

Even Netflix, the only online subscription service with reasonable claims to being international, has 10%-20% local fare in each market; the rest is American. They’re not alone, though: there are hardly any VOD-services, at least in Europe, with more than a fraction of their catalog form outside the local or American markets.

Of course, this has been the situation for cinema for years. Staying in Europe, of the 100 most popular movies in European theaters in 2013, about 20% were from the theater visitor’s own country; 75% from the US; and only 5% from other countries. (Based on data from Box Office Mojo.) The picture below breaks this down for some selected EU countries.

In theory, VOD should be able to break cinema’s limited world view, since it has no physical limitations or logistical challenges to struggle with. But I still have no idea where to go online if I want to see a Polish drama series, a Czech action, a Spanish rom-com, a German romance or a Dutch sci-fi? (And I’m limiting myself, again, to Europe.)

Industry pundits say that I’m the exception. Entertainment is local, just like news, and people only want to see their own culture’s stories. And then of course American movies too, because they’re…. you know… from Hollywood.

But I consume books from across the globe, so why wouldn’t I want to watch the world’s movies?

Moreover, as international trade has proven repeatedly, giving consumers a wider choice results in both more diverse and increased consumption. The industry grows for everyone. It’s only the incumbents, guarding their local fiefdoms, who can see this as a threat and not an opportunity.

Perhaps that dynamic provides part of the answer to why VOD has failed. With the exception of the Hollywood majors, there are no truly multinational media groups. (This of course is part of the explanation to why Hollywood movies are so dominant overseas.) But in for instance each individual European market, large media groups do well domestically, but very few operate in more than maximum 2–3 countries. Their strategies, their relationships, their spreadsheets, their business DNA is all about serving their own market. Of course, they do realize that video consumption is moving online also at home, and they have followed (remember the 3000 European VOD-services), making sure they mark their territory also online. “Let’s take our pay-TV-service online and call it ‘Play’ or ‘Go’, ok?”

For their Play-services, the media groups continue to license content from the same content owners as before. That’s probably an even larger part of the answer to why VOD has failed: licensing and content structures haven’t changed.

To be fair, licensing content is a time-consuming, costly and tricky business. It is also an aspect of the international video industry that has not been affected by the digital development. Content deals are still primarily conducted in face-to-face meetings and over phone, with a large portion of the trade handled by sales agents and intermediaries who meet at conferences and trade shows. (Did I hear anyone say Cannes or Mipcom?) Digital marketplaces for global content licensing still do not exist. Instead, we are still working in the complicated value chain illustrated below.(2)

Moreover, rights are managed by geographies; licenses are given by territory. If it’s even possible to get multi-territory rights for a title, its often financially prohibitive. So if you’re a European VOD-service, finding out-of-market content to license is therefore as difficult as it always was for a TV broadcaster. Except for US fare; the Hollywood majors are nicely organized and few enough so that you don’t have to shop around too much for a good catalog of US content.

Anyway, as we’ve already touched upon, the audience in your market for [French/Polish/Bulgarian/Latvian/name your country] content is anyway so small it doesn’t make commercial sense to serve them. The industry pundits, who claimed that people only want their “own” movies, nod in agreement. It makes sense then for a media house to focus even harder on domestic entertainment and news. (As this interview with Swedish TV4's CEO illustrates; in Swedish ) They’ll of course also add American content too, since it’s easy to get and audiences like it.

If territoriality is a key concept in the business, release windows is another. Content is normally licensed to different distributors for limited periods of time, so called windows. As consumers we don’t need the terminology to recognize this; we know that new movies first come to the cinema, that we have to wait a few months before we can rent them for home viewing, and that’ll be even longer before they appear on our pay-tv channels, and that’ll be more luck than anything if we manage to catch them on a free TV channels two-three years after they first came to cinema.

The picture below illustrates how these four main windows simply moved online as VOD matured. What used to be DVD is now pay-per-view (TVOD; think ITunes) and pay-TV is now subscription services (SVOD; think Netflix), while free-to-air TV became the catch-up services. Cinema retains its pole position at the food chain also in a world where the three home entertainment windows have moved online.

Granted, the window dynamic is under some pressure to change. The time between cinema and pay-per-view is decreasing in many markets, except where it is legally regulated with the argument that the cinema industry needs protection (I’m talking about you, France, Portugal and Bulgaria). There are also interesting examples of day-and-date releases, when a movie is released on both cinema and VOD. By and large, though, these remain the exceptions to the windowing dynamic.

Territoriality has also moved online, as anyone who travels and tries to use their favorite home-VOD service on the road realizes: “Sorry, this service is not available in the country you are in.” Now, that’s a message that does appear in language after language.

But all this is really nothing new. These three guiding principles — territoriality, windowing and exclusivity — have ruled our industry for many, many years.

Let’s not also forget that this business dynamic grew out of free trade. These principles have neither been mandated by governmental rules, nor instituted into legislation (with the exception of some cinema protection laws; yes, that’s you again, France, Portugal and Bulgaria.) Instead, they established themselves over time; and they did it in the video industry in a way that we haven’t seen in for instance literature or music. (It’s fun to imagine a geoblock or region limit on a book: “Sorry, you cannot read this book you bought in France here in Sweden. Want to try ‘Girl With a Dragon Tattoo’ instead?”)

But business practices don’t just emerge. They appear for a reason. And the reason, in my view, is cost. Making movies is just so much more expensive than recording music or writing a book. Collective arts normally are. Furthermore, since so few movies actually become successful, it is also a highly risky game. (It’s the same sort of blockbuster dynamic that governs the pharma industries, where each new drug development project is ten times more likely to fail than succeed.) Therefore, if you invest in a movie or own content rights, you will be looking for ways to minimize your risk. A time-honored way of hedging financial exposure is to sell the same product as many times as you can. Economic theorists think of this as “versioning”. I think of it as trying to sell the cat’s skin as many ways as you can skin it. You’ll divide up the rights by territory, so you can sell it again in the next country. You’ll limit the rights by windows of time, so you can continue to sell it for several years. You’ll hand out exclusivity if the bid is good enough. All this until you’ve recouped your costs, and also hopefully made a good profit. (3)

It’s these revenue streams from the analog world that we have to help the content owners find in the digital word, if we ever want a more energetic flow of content across borders. That’s not to say, though, that in the midst of this dynamic, we can’t find government interventions that would help create a better functioning market. I’ll get back to this soon.

Before that though, and against this backdrop, it’s encouraging to see some VOD-services that do swim against the stream, offering multicultural or out-of-the-ordinary content. Four examples spring to mind:

Mubi, www.mubi.com, which offers global arthouse classics to the world; think Fellini, Bergman, Tarkovskij, Varda, Truffaut, Kubrick and Chaplin.
Viki, www.viki.com, offering primarily South-Asian TV-series, with the added feature of allowing its viewers to upload their own subtitles.
IMVbox, www.imvbox.com, showing Iranian movies worldwide
Bollyvod, www.bollyvod.com, which shows current movies and shows from Bollywood online. (Disclaimer: Voddler is a partner in this project; we try and do our part to break out global VOD.)

(Do you know of more? I’d love to add them here. Please email me at anders.sjoman@voddler.com.)

Some shared traits between these VOD services strike me:

Their content is considered a niche audience in each individual market, but when aggregated globally they become a commercially viable market.
Global rights for their content seem to be immediately available or at least easier to aggregate
Localization is available, at least in the form of subtitles, making it easier for the content to “travel”.

Those few examples aside, the three ruling business practices — territoriality, windowing and exclusivity — hinder multiterritory VODs and content licensing. And this despite that consumers want global content; that the industry as a whole would grow from offering consumers a wider choice; and that movie producers would, all else equal, prefer wide distribution of their content over limited releases.

It seems to me that the way forward, in order to unlock global VOD services, is to

Make it easier to license globally, both for content owners and VOD-services
Make it financially more attractive to choose multiterritory licensing over single-territory.

My business education is further in the past for every day, but doesn’t it sound as if we, like many B2B-industries before us, need to make our industry more efficient and transparent for both sellers and buyers?

We need a better functioning marketplace for rights holders and services, void of some current artificial barriers and with incentives for more open, cross-border trade. This marketplace has to stretch beyond the annual conferences and fairs. Given my digital bias, I see an online solution for rights owners to upload their content and the terms under which they license it; and where licensors can go to strike deals for their services. But I’m sure this market place can take many incarnations other than just a digital one.

(Update: London-based Under The Milky Way has been pointed out to me as a good example of an aggregator, acting as a market facilitator to help movies and VOD-services meet more easily. I am very much looking forward to following them.)

In an ideal world, this marketplace should also enable easier handling of orphan works or other works where the rights situation is unclear. Sweden has a tradition of using Extended Collective Rights Management for such situations, that could be applicable. And while we’re in that legal space: Hey, collecting societies, here’s a chance for one of you to step forward and become real market makers, don’t you think?

In addition, there are surely other public or governmental activities that would help promote global licensing. Here’s a few thoughts of the top of my head:

Make public subsidy systems (such as film aids, production support etc) truly window- and technology neutral. Getting funds to help develop your audiovisual work should not be tied to the work being shown in one particular setting.
Give public funds for multi-territory licensing and non-exclusive rights. If a content owner chooses to make its content available across territories, thus forgoing in theory the opportunity to “sell the movie” several times, let there be a financial incentive for this. The producer could apply for distribution support; and the support is forfeited if any deals are limited to just one market or one actor.
Limit the use of holdbacks between windows.
Ban certain practices, such as the use of “minimum gross price”-clauses in content deals. (Content owners cannot dictate the price a VOD-service can charge its customer for a movie rental, since this would constitute price rigging. Instead, most content deals include a clause whereby the licensor must give the content owner a minimum fee per rental, regardless of what price that licensor charges its end-customer. In effect, this has the same effect on consumer prices as price rigging.)
More generally, any public support should mandate public distribution. If a content owner or producer receives public funds for their movies, these monies should come with the requirements of cross-border licensing, no exclusivity sales etc.

Any of these steps would help propel the digital transition that the movie and TV-industry is already undergoing, while at the same time open up for more cultural diversity in our VOD-services. I want to see more movies from more countries, be entertained and challenged by other cultures and in the end understand more about my neighbors.

Which in the end, if you pardon a very EU-centric ending, is what our European Project is all about.

Anders Sjöman
VP Communication
anders.sjoman@voddler.com

This text is based on a presentation with the same title. .

Footnotes:

(1) Or more exactly: 1546 movies in EU versus 255 movies in US. This does not include minority co-productions. Source: The European Audiovisual Observatory (EAO) Statistical Yearbook 2014, available for purchase here

(2) From slide 11 in Nicola Allieta’s presentation on digital film distribution in Europe from an EU hearing on the promotion of European films online; available for download here

(3) This European Union-report is a great read about release windows. The examples are EU-specific, but the description of the release windows dynamic is general to all parts of the world. The idea that “versioning” drives the use of release windows is, for instance, well explained there. There’s also a good overview of legislation surrounding release windows for all EU countries. The report was done by Dr. Heritiana Ranaivoson and analysts/researchers at SMIT and iMinds .

Anders Sjöman

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