The Digital Media Project



C. Schultz


Business models: Cinema





I. Abstract

This document makes a study of the history as well as current status of the movie industry in an attempt to show examples of how the DMP DRM specifications can be used to provide new business models as well as provide the ability to rapidly adopt and implement new business models.

II. Introduction

Possibly one of the largest barriers to businesses leveraging the advantages of Digital Media is simply the development time needed to transfer a potential business model into a business reality. More often than not, attempts at creating a business in the digital domain have done little more than expend a lot of time and funds with no useful result.

The largest contributing factor to this problem is non-interoperable proprietary architectures with very specific business models hard-coded in. One of the advantages of the DMP work is that it looks for solutions and crosses boundaries on a scale never attempted in the past, allowing new business models to be more flexibly deployed.

In the case of this document, the work highlighted is the end to end interoperable DRM architecture.

Additionally a brief discussion is provided concerned with an additional limiting factor, broadband network access.

1. Historical Business models

a. Theatrical release

The first as well as a still existing business model for the movie industry is the distribution of media to theatres. In this case, a single set of media could service the needs of as well as draw income from literally hundreds of thousands of paying customers with the Movie industry needing only the one set of media to one theatre.

The Movie industry didn’t need to deal directly with consumers but instead, provided the media to the theatres who then provided the direct service and interactions with the consumers.

b. Avionics

Then, as airline travel became not only more prevalent but also the distances traveled and time spent in the air became longer and longer, in-flight movies became more and more practical as a way to bring content to consumers.

And, although not reaching as many consumers as is possible with theatres, a still large number of consumers can be reached with a single set of media and the Movie industry still did not directly interact with consumers but instead have the airlines as intermediaries.

c. Video sales and rental

Following the technical capabilities provided by new recordable analog video media and the more prevalent presence of video playback devices in homes, the possibilities of the home video market became an ever increasing market for the distribution of titles.

But, instead of having agreements with and distribution channels through entities that provided a fair level of insulation from the consumers and, instead of having a single set of media servicing hundreds of thousands, the Movie industry now had to deal with new types of retailers who were little removed from the consumers themselves and at the same time being required to provide at best one set of media per 100 consumers and in many cases, one set per one consumer.

d. Television broadcast

Although the televised broadcasts of movies existed long before video recordable media was available, it is listed last as it is likely the least money making operation of the previously mentioned business models and distribution channels.

That said, the Television market at least has the advantage of allowing business to be done with well established businesses as in the case of Theatres and airlines and also supporting a single set of media to service and draw income from hundreds of thousands. It also promotes video sale and rental.

2. The Current State of Affairs

a. Theatrical release

The box office in-take has grown from $1.2 billion in 1970 to more than double in 1980 and in 2002, almost $10 billion. But, just as ticket sales have increased significantly, production costs have risen astronomically. And, along with substantially increased production costs, substantially increased risks have followed.

With 40% to 65% of box office sales going to marketing and promotions and distribution fees (~30% to 35%); it is easy to see that the difference between success and failure is slim.

The only alternative to facing risks associated with theatrical distribution are ancillary markets, e.g. video sales and rental, cable, satellite, pay and free TV. But, although the video market during the past ten years has increased by over 200% to being roughly 185% of the Theatrical market, the costs incurred in the distribution of video media reduces the advantage significantly.

So, although the risks of going the theatrical route are rather high, in many cases these risks are mandated by the need to promote to the low profit margin video market.

b. Video sales and rental

Although video outlets support the ever increasingly lucrative market of segmentalized distribution, the costs of providing such service is increasing at a greater rate due to more demanding storage and management requirements.

Due to the increased costs, and the ability of larger chains to reduce costs on scale, more and more of the smaller outlets are closing in favor of the larger chains.

Also, as chains of outlets become larger and larger as well as fewer and fewer, each outlet must then carry a wider array of titles than previously, making it more difficult for consumers to make choices on anything but the latest releases which then drives down the marketability of older titles which might have found renewed interest and sales in a smaller outlet. Additionally, stocking VHS as well as DVD inventory creates new difficulties.

c. Television broadcast

The television market hasn’t changed much since its inception. It still isn’t making much money and when one can simply go down to the local video store to rent what will be shown on television and not have to watch commercials, it could almost be said that televised movies do little more than renew a slight amount of interest in older inactive titles.

d. Cable, Pay TV and Satellite

Although these are lucrative markets with respectable sales and market retention, the overall consumer rating of the received benefit is rather low. Re-runs may be an effective tool in the television industry, but Cable, Pay TV and Satellite services re-cycling offered titles is likely the most complained about aspect by consumers and although driving some consumers to video outlets and thereby recouping some losses there, the latent market would seem to be significant in numbers

Also, due to the lack of interoperability between services, mainly due to Set Top Box design, consumers wishing to receive content from more than one service must then use more than one STB. Most service providers see this as an advantage as they can lock in customers to their service but at the same time considering the extra cost of providing and servicing the STBs, the service providers’ revenues are reduced when compared to what they could be.

e. Video on Demand (VoD)

Although not yet an existing business model on anything more than a trial basis, VoD is likely to be found to be problematic in a couple of important areas, the serving and transmission of media files as well as the requesting and assignment of viewing rights.

Also, although the video market did not negatively effect the theatrical market, it is very likely that VoD will likely draw consumers away from Video sales and rentals.

One might easily dismiss that by thinking that different technologies require and support different business models and that old business models cannot survive in the face of new technology, a study of the Movie industry over the past century would show that this is not the case. Also, although Video and VoD may seem different business models, they are essentially the same.

But, ignoring issues surrounding the lack of broadband access, the load placed on any centralized media server can be expected to be huge and currently have not been technically possible to support with a consumer-friendly level of reliability. Also, and more importantly, the clearing of transactions by a central server to gain the right to view is not a trivial matter.

A comparison could be made between VoD and a number of the music download services. Although less taxing on resources as compared to video, a number of music distribution systems have been created on the Internet, and yet the resources required for any one given distribution system is immense. Entire load balancing server networks must be set up and maintained for each individual service with one entity having to bear the entire costs.

Add to the tremendous resource requirements the lack of interoperability between not only content and applications but also and more importantly the variance of user capabilities between different sources of content and consumer disillusionment is high.

f. Broadband access

Although broadband access in some parts of the world is significantly advanced, Japan, broadband subscribers are now 11 million and most of them are over 1 Mbps., this is No.1 in the world. FTTH subscribers will be 1 million by the end of this fiscal year. Even at such high speeds, true and complete streaming of high quality content is years down the road.

3. End to end interoperable DMP DRM

One of the premises of the DMP is that the lack of interoperable DRM presents barriers to business in the digital domain because unlike the physical world where business can begin upon the signing of agreements, the signing of agreements for business in the digital domain only signals the start of a long process with no guarantees that any actual business will be done at all.

When a business based on a digital distribution system is to be deployed, engineering work begins from scratch each time which includes an analysis of use cases and then requirements and then system specifications followed by implementation followed by in-house testing followed by limited market testing followed by,,,,,,

This process can literally take years and in many cases ends up with a significant amount of development taking place with no results. While in the mean time, business opportunities are lost. When products are finally deployed, they often employ technology rendered obsolete by the long stretches of time consumed by development and roll-out, eliminating the "Wow" factor.

However, the method chosen by the DMP will significantly shorten the above process to the extent that beginning a business venture in the digital domain will require no more time than the signing of agreements and the provisioning of resources needed for supporting the business.

Also, due to the end to end nature of the system provided by DMP’s specifications, which of course will include methods for trust management, new business models and distribution methods will be easily creatable simply by the creation of rights expressions which define the business model and/or distribution methods.

4. The DMP pursuit of ubiquitous broadband access

Another obstacle identified as standing in the way of the expansion of digital media businesses, the lack of sufficient broadband services to support the delivery and consumption of content running the range of low value/quality content, which is basically available now but which has few business applications, all the way up to high value/quality content on which actual business models can be based.

Although the DMP does not yet have a clear and concise roadmap to provide broadband access on a wider basis, it does have a roadmap for determining effective methods to help promote the advancement of services. That said, most of the reasons that services for broadband access are not actively being developed is due to the fact that there are virtually no business models able and ready to take advantage of the increased bandwidth available.

But, although many business models could be made more successful with ubiquitous access to broadband services, none of the work that the DMP DRM will undertake will be reliant upon broadband services being available but instead will provide an architecture that can be used successfully now as well as being able to take advantage of increased bandwidth availability in the future.

5. New Business Models Enabled by DMP

5.1 Business Categories

Of course DMP can be applicable to the existing models 2(a)-(d). But, in addition to 2(a)-(d), the following areas are highly expected.

a. Home Theater

As improvements in Home theatre technology increase and the costs of owning such systems continue to drop, more and more homes are being outfitted with systems capable of rivaling the quality of Theatrical presentations.

Although the quality is there, the experience of a true theatrical presentation will never be experienced in the home for many reason which have nothing to do with quality or technology. And so, the home theatre is not expected to ever be a threat to theatrical presentations.

However, considering that less than half of the feature productions each year actually make it to the theatres, with the rest going to ancillary markets and that currently consumers have basically two choices for new releases, theatres or home video, there exist basically the high end market and the low end market with nothing in between.

The home theatre market could provide a middle level outlet for marginal titles that may fail in theatres but consumed too much in production costs to be relegated to the video market as well as titles destined for the video market which may benefit from an improved quality viewing as made possible by home theatre systems.

But, in neither case would the respective markets be disadvantaged as they could become the distributors for new home theatre content much as they are now with the theatres enjoying first presentation rights to theatrical presentations and video having first distribution rights for titles selected for the video market and secondary distribution rights for titles selected for theatres.

Assuming an average ramping up of the installed base for home theatres over the next 7 to 10 years and a moderate 25% of the titles originally being selected from each of the two markets, the home theatre business, assuming current sales figures, can be projected to reach $5 billion/year.

b. Video on Demand

Since the VoD service is virtually identical to a video outlet that delivers, there are two main advantages. One advantage would be in cost savings due to reduced demands on floor space as well as costs for the physical media. The second advantage being increased sales due to consumers not only being able to acquire titles without leaving their home but also being able to give in to spur of the moment purchasing more easily.

Although the cost savings due to reduced floor space [missing word here] the maintenance and handling of physical media would be considered significant, that of course would be offset by a certain degree by the need for media and rights servers although even then, as the market expands, those costs will reduce over time as well.

Based on conservative estimates from the above, within a 4 to 7 year period of time the VoD market could bring an additional 30% to 40% to the current video market which is currently almost a $20 billion/year business.