Saturday, February 19

On-demand movies? Never say never but...

Disclosure: being in the online DVD rental business (I'm a cofounder and employee of HomeScreen Entertainment) I have an interest in when and how the majority of Australians might enjoy digital on-demand movies to the home. That said, the claims from Telstra and Foxtel that on-demand movies are coming soon to the Australian loungeroom seem optimistic.

In the US, CinemaNow and MovieLink are streaming movies over other people's cable networks, and now cable giant SBC has disclosed it has plans for a service that sounds like it might seriously compete with Netflix and Blockbuster. But the Australian market environment is different, and not in a good way.

SBC's plan sounds like Netflix-via-cable: pay a fixed monthly surcharge on your SBC cable bill, and you can download up to three programs (movies, TV, music, whatever) at a time, keep them as long as you like, and when you download more, your earlier downloads will be automatically deleted (whether by a set-top box or your PC isn't clear.) SBC has a near monopoly in cable in many parts of the US (or at least, as close as US regulators will allow) and its coming acquisition of AT&T makes it the largest telco in the US. With that kind of monopoly power, it doesn't matter that you're not a cable movie channel or a studio - if you want to license latest-release movie rights from the studios, you can pay whatever the studios want to get them.

Why would SBC want to pay over-the-odds to get into the content business? Because, worldwide, the markets are a bit over telecommunications infrastructure players - it's a maturing, rationalising marketplace. If SBC can show that it's taking the first tentative steps into the content business, it gives investors a reason to look at SBC in a new light - as a potential player in what many believe will be the Next Big Business - digital on-demand content to the home.

Problem is, even the mighty SBC is going to have to get down on its knees and beg when it comes to licensing content for these new services.

Hollywood, which was once all about selling movie theatre tickets - one distribution channel only - learned a painful lesson from VCRs and VHS all those years ago - you have to beat new delivery channels into submission, because at worst they kill your business, and at best, they force it to traumatically and dramatically change. In the movie business, there's only two dials you can turn to materially affect your business: the dial marked "cost of production" and the dial marked "control of supply." Anyone or anything (such as a new distribution channel, like on-demand over an IP network) that threatens your exclusive access to either knob is going to enjoy your full paranoid spittle-flecked attention until you've beaten it into submission and tamed it. You can tame it, or at least control its growth, by turning the "control of supply" button way, way down - charge the new delivery channel so much for your content that its growth is slowed to a trickle.

That's why, if you'd been trying to license the rights to latest-release blockbusters to rent to people on VHS in the early days of the VCR, you would have paid through the nose, or not gotten very many blockbusters, or both. Same with pay TV, and more recently, same with DVD.

The DVD format was once feared as the death of the movie theatre industry because its digital fidelity brought a cinematic experience to the home. Instead it's become Hollywood's favourite channel because they've been able to dramatically reduce piracy (compared to VHS) and because DVD retail has become a much bigger business than anyone had forecast.

Now when the studios sit down to do deals with the companies hoping to license content for on-demand IP delivery, they're going to be reluctant to endanger not just theatre revenue, but increasingly, they'll want to protect DVD revenue. It would be very hard to prove to a studio that your on-demand service wasn't going to cannibalise the studio's DVD retail and rental revenue.

So if content will be limited and expensive to license, SBC will need to pay over the odds to get it, accept release dates well past DVD release dates, and see subscriber numbers grow much more slowly than they like. Most likely, in the early days, all of the above.

If it's going to be hard for the biggest telco in the US to pull together a killer on-demand movie network for its internet subscribers, will Telstra find it harder?

Much, much harder:

  • Telstra's a phone company, half a world away from Hollywood. Talk about culture clash. It doesn't have the people or the culture and will need to buy them in. As anyone in television will tell you, television is not a technology business, it's an audience and content business. Telstra's a technology company, and so far, its attempts to attract an online audience and serve it compelling content shows that Telstra believes on-demand is a technology business. It ain't.

  • You can't serve on-demand movies over a DSL network, especially not an Australian DSL network, with its overpriced and under-speed infrastructure. You need at least 1.5mb-2mbps connection speeds, all the way back to the media server and that just doesn't exist for anyone other than Telstra/Foxtel/Optus cable customers, of which there are only about 300,000 or so.

  • If you're serving on-demand content over someone's DSL or cable modem it's going to be shown on their PC or Mac screen, not the big widescreen TV and surround sound system so many Australians have only just spoiled themselves with. How many people are going to sit in front of their 17" PC monitor for two hours to sit thru a blockbuster and leave the widescreen TV and DVD player idle in the living room?

  • You can, of course, put a set-top box in the living room, as Foxtel does. But only for cable customers (which passes 2.5m premises maximum in Australia, if you've got a great content offering and you eventually get 30% adoption your total audience size is 750,000 households. That's a tiny market. Meanwhile, the other seven million Australian households will continue to rent DVDs.

Next time: why Foxtel's EPG isn't worth the paper it's not printed on.

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