Digital movie microeconomics: new opportunities for Hollywood

Leonid Belyaev
Nov 10, 2017 · 8 min read

In my previous post I have mentioned several areas where blockchain technology and smart contracts will shape the future of digital video. Today I would like to go deeper into one of these areas and explore how digital movies are being sold now and how it will change in future.

Behind the windows

Right now, when we want to legally watch a digital movie, we typically have one of the following licensing options:

  • Buy, professionally known as EST — electronic sell-through — allows you to watch the movie unlimited amount of times, online or offline, for the lifetime of a licensee or a licensor, whichever is shorter (Yep, if the video service where you bought the movie ceases to exist, you’ve got a problem);
  • Rent, a.k.a. TVoD — transactional video on demand, allows you to watch the movie unlimited amount of times within 24–48 hours window, depending on a service being used;
  • Pay-per-view — like it reads, allows you watch the movie just one time, being equivalent of a theatrical ticket. Most frequently found in hotel in-room entertainment systems;
  • Subscription, a.k.a. SVoD — allows you to watch the movie along with other movies and shows that are part of subscription, within the paid window (30 days for Netflix, 1 year for Amazon Prime, etc.) The catch here is that the movie could disappear from the service catalogue at any time, because its availability depends on the arrangements that the movie rights owner has with the subscription service operator. It should be mentioned that pay TV subscriptions operate within the same type of arrangements, it’s just linear type of TV programming doesn’t allow you to watch any movie that an operator could have licensed, at any given time;
  • Ad-supported, a.k.a. AVoD — allows you to watch the movie along with some ads in a form of pre-rolls, mid-rolls or post-rolls in TV format, along with a banner option in desktop browser format;
  • Free — allows you to watch the movie without any limits and charges. This could be a movie specifically released into public domain (sponsored, educational or promotional), or this could be a movie that got into public domain after its rights have expired.

These license types take origin in the so-called windowing system, created and thoroughly maintained by movie studios, most notably the Hollywood, in order to maximize their profits over the lifetime of each and every movie. Surely you must know that the biggest and therefore the most important window for movies is theatrical window, and another non-digital (physical) window is a DVD/Blu-ray one (rapidly shrinking, but still a multi billion dollar market).

The windowing system gives us clues to why all these license types exist. Before digital video came into game with iTunes movies offering in 2008, rights owners would release a movie into a DVD window 16 weeks or more after theatrical premiere, in order to protect box office revenues. DVD sales would then continue for years and would also spawn derivative businesses like DVD rentals and secondary sales. Several years down after theatrical premiere a movie could make its way onto a pay TV network, typically for a limited number of runs, and then, several more years later — to a free-to-air TV network.

Digital video brought lots of improvements in user experience for those who enjoy movies at home — iTunes and later Amazon replaced DVD purchases and rentals, Netflix and other subscription services are successfully replacing linear pay TV, however, licensing options largely stay the same. Why? Does the current licensing system provide an ultimate triple win for owners, distributors and viewers? Let’s take a closer look.

Ok, but why?

Probably no-one will argue with the statement that a movie follows a typical product lifecycle — it is most desired when it is fresh, and its value gradually decreases in time, following a decay curve. Surely, all movies are born different — some are being awaited long before they are released, get a huge box office and then earn sizable revenues in home entertainment and pay TV, while some are important only to a certain niche (think art-house), and stay almost equally important throughout a generation. Still, we can see that the majority of newly released movies follow the same track — they get to digital platforms like iTunes initially with the “Buy” option, followed by the “Rent” option several weeks later. In time, movie price decreases in a couple of steps, from $19.99 for a new movie to $9.99 for a library one.

Which brings in several questions:

  • Why does it still take so long (9–12 weeks on average) for a movie to appear on VoD platforms?
  • What defines and drives the movie price?
  • Why do we still have to pay $10 to buy a really old, classic movie?

The short answer is: there is no free market for movies. Period. Price is not defined by balancing supply and demand, but is set in agreements between owners and distributors, and we … we just have to take it or leave it.

So, why there’s no free market for a $100B global industry in the XXI century? Main reasons are hyper-concentration of power in the hands of 6 Hollywood studios (the Majors) and TV networks, and legacy tiered distribution system. The whole industry is notoriously opaque; it’s close to impossible to tell the economics of any single movie.

All this doesn’t really help people, but what are the consequences for the industry? Also not good:

  • Step pricing function means there are quite large areas of either missed opportunity (people didn’t buy or rented a movie because it was too expensive), or under-priced deals (at that time people could have bought it at a higher price);
  • No transparent movie P&L means there’s no liquid market for financing (investing in) movies, which in turn means discounted valuations, lost opportunities and unfulfilled demand.

Looking for a silver bullet

Let’s pretend there is a free market, and look at a movie lifecycle from a market perspective. We can define bid price, corresponding to the perceived value of a move, as a decay curve that starts at some price point X. This X corresponds to a market-defined value, that people on average will be willing to pay for a movie on its premiere day. Certainly, this price point is very dependent on a movie, as well as on how fresh is it. What if you could watch the next “Transformers“ movie at your home, in 4K cinematic quality with Dolby sound, 6 weeks after theatrical premiere? Will you pay $30? What about 3 weeks after premiere? Or event on the same date? Perhaps $75–100? Too much? Not necessarily, comparing to a family movie night out (including tickets, popcorn, etc., etc.). What I’m saying is that there’s a certain market-defined “fair” price for any given movie. If you are a studio, and you’ve got a really smashing hit and are willing to get a jack-pot, you could do an exclusive premiere, running an auction to sell first 1,000 (100,000?) licenses to the highest bidders. Crazy? Just look at people standing in lines to be the first to grab a new iPhone…

Why this is not happening? A couple of reasons -

  • A strong push-back from theatrical chains, defending their “native” territories;
  • Huge piracy concerns;
  • Existing tiered distribution system not ready for this kind of economics.

I would leave the first reason out of the scope of this post, just because it is a very complicated, macroeconomic or regulated issue. In my opinion, VoD will never kill theaters, same as food deliveries will never kill restaurants, those are just complementary experiences, and can easily co-exist.

Piracy is definitely a valid concern, and there’s no silver bullet yet to eradicate it (just as there’s no silver bullet to eradicate crime), however there are solutions available to minimize probability of theft. My previous company, Okko (link in Russian) — the largest premium VoD service in country — was one of the first in the world to bring content fingerprinting technology, which is used to track individual theatrical copies of movies, to Smart-TVs. This allowed Okko to offer local premieres in a super-early 2–4 week window, with a few exceptional cases of simultaneous premieres. Having said that, I definitely agree with the people who say that the real reason for piracy is exactly windows and other restrictions imposed on users, along with unjustified prices.

Which brings us to the last reason — the current system is just not ready for market prices. What will change the situation, and when?

Towards a free market

For me, the answer is in the overall movement towards decentralization and transparency, the movement powered and empowered by blockchain technology. One of the most exciting features of Ethereum blockchain is its ability to execute pieces of code, a.k.a. smart contracts, opening lots of opportunities in virtually every business vertical. Imagine that instead of setting fixed license prices on VoD platforms like iTunes or Amazon, a movie owner sets out a smart contract that runs an auction? The beauty of blockchain is its trustless nature, meaning that an object state (movie price) change is auto-enforced and guaranteed by network protocol.

Blockchain is also an immutable ledger, meaning that all transactions and events are set “in stone” and could be traced and audited independently, at any time. In my opinion, these are essential enablers for a real open market for digital movies. In addition to the above mentioned “limited premiere”, an open market would allow people to:

  • Choose their own trade-off between movie freshness and its price (is it really important to me to watch it when my friends will, or I’ll just take it nice and slow), set a “limit price” and wait for the market to cool down until the price is acceptable;
  • Offset the price of a movie by doing some useful work for community (think blockchain miners’ rewards);
  • When a movie is not hugely popular altogether, or reaches the long-tail phase of its lifecycle, be able to set their own price, or tip, whatever you call it;
  • Sell a ‘used’ movie license on a secondary market (this will require new form of license with auto-decreasing value, which is perfectly possible with blockchain and smart contracts).

And, similarly, this will have a huge positive impact on the industry, allowing creators and owners to fully monetize their creations, creating transparency, liquidity and fairness.

So, when will we see it happening? Actually, it’s happening already, for a while now:

We at Zeen, too, recently launched a pilot where you can put digital video licenses onto Ethereum blockchain and allow people to pay ether to watch it, with the whole purchase or rental process being completely decentralized and taking just 2 clicks and 30 seconds.

Overall, this looks like a long way to go, and it is. But the good news is that we are already en route ;-)

Welcome to the future!

About Zeen

Having started as a global AI-powered video content discovery service, Zeen is set to bring transformation to all aspects of digital video industry value creation chain.

Please endorse and share this post if you find it interesting / useful.

I’d really appreciate any feedback / comments. Let’s get talking! ;)

Leonid Belyaev

Written by

Founder of Enchaint, JustUs and Zeen. Applied blockchain, reinvented media.

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