In this paper I will review the current movie eyeball market, which refer the market of watching the movies through various media, such as theaters, video rental, video sell through, and PPV, and expected change due to the emerging video on demand.
As a way to find the change in eyeball market, I will first assess
the current market and define the concept of VOD(video on demand),
and then estimate the impact on the future eyeball market. Even
though VOD is not simply the on-line version of blockbuster movie
rental, I will narrow focus down to movie market and impact on
it. The focus of this review will be placed on each medium's
position in the market and the impact on customers' behavior.
Once a movie is created, the first place we can see the movie is theater. With average $4.6 per person payment, we can get the right to see the newly born movie. The market size of theater eyeball was 1.26 billion with $5.5 billion revenue in 1995 and this figure has fluctuated within less than 6% since 1990. The official report of 1.8% revenue increase from 1994 mainly owes to the increase of ticket price, while admission decreased by 2.3%. Exhibit 1,2,3 shows the trend of theater market.
Theaters have way bigger screen than home TV and much better sound quality. Nobody will disagree that going to theater movies deliver somewhat different feeling from watching TV. We may define theater customers as quality buyers.
Another differentiation point is purpose of watching movie. Going to a theater means that we need a car, parking lot and may have to wait in the line. The purpose of going to a theater is definitely different from renting a movie from blockbuster or buying PPV. Socializing would be the main purpose, such as date. Pioneer effect could be applied in theater market. In the market there are some group of customers to whom watching a movie just released means a lot, that is, whose value of waiting time is much bigger than the other factors. This market segment has sustained the theater market. As we can see in the above graph the average theater movie admission has not been changed more than 5% since 1990. After overcoming the downturn from 1989, market has slowly recovered its highest point. While admission shows steady fluctuation, market revenue has shown mild growth since 1991. The main reason comes from the change in the admission price. However, customers did not response the price hike, as we can see in the admission. Rather admission has been slightly increasing since the price started to move up in 1991. Loyal customer would be the explanation to this trend. As we already saw, theaters have somewhat different customers with definitely different purpose.
In conclusion, despite the ever-increasing competition from video rental and pay per view, theater market will not exit as an outdated product.
After theaters, a movie usually changes its form to video cassette tape and goes to video rental store and retail store for sell through purpose. With almost 80% household penetration of video cassette player, this market brings $12~17 billion to video producer and video rental service providers. The estimates generally agree that rental income is about 70% of total, the rest coming from tape sales. Based on this, we can do a simple math. The 70% of $15 billion (the middle of estimate range) would be $10 billion. Assuming per rental charge is $3, we can get 3.5 billion rental. If we say two people watch the movie per rental, we can get 7 billion eyeball market for the video rental, assuming each person has one eyeball. With the penetration of video cassette player approaching that of U.S. television households, the growth of cassette sales and rental is shrinking. Growth of revenue from video cassettes has slowed for the last three years and it is unlikely to return soon to its high growth rates of the 1980's.
When a movie changes its cloths, its price is also changed. In the first phase, videos are offered at a relatively high price and aimed primarily for sale to rental stores. After rental interest begins to cool, the video is re-released at a much lower price in an effort to stimulate consumer purchases. Videos are said to be "rental-priced" or "consumer-priced" depending on which release phase they are in. As we can see in the Exhibit 4, the share of sell through in video tape market will be getting bigger and reach almost 40% of total video market in 2000.
The most important competitive advantage of video rental in movie distribution is variety and convenience. These characteristics fit well with purchasing process of movie. Majority of movie customers first decide whether to watch a movie or do something else. After finishing this decision process, customers decide which movie they are going to watch. The purchasing decision is made without the selection of name of product. This process is different from grocery shopping. When we go to Safeway, we decide first what we are going to buy. This is exactly reverse from the case of video rental. This process brings the most important advantage to video rental. With thousands of selection, rental shop can meet any need of customers, who already decided to buy. Also the process decreases inconvenience of driving to rental shop. Another form of convenience is timing. Retail rental normally give two day rental, allowing a plenty of time and flexibility for customers to watch the movie. The movie customer does not plan to rent the movie one or two day advance.
However, this rule does not fit with the new hottest release. With the limited shelf capacity and high initial purchasing price, $50-60, rental shop can not meet all the customers' need on time. Some agile customers can rent the newest one but majority of them should wait several days. If customers change their mind and rent other movie, that would be the best case. But, if customers just exit without any rental, it only gives inconvenience to customers.
The next application would be pay per view and premium channel of cable TV. With the similar rate with video rental, pay per view market have grown together with the cable penetration. Cable television in the U.S. appears likely to level off at about 70 percent of TV household by the end of this decade. Also as statistics say, 26.4% of average US household watch premium channels and 13.2% watch pay per view regularly. The acceptance of premium channel will continuously go up as cable penetration and household income grows. PPV has been slow to develop as a major revenue source. Because its programs typically show at predetermined time periods, PPV is often less convenient than other forms of entertainment. In addition, many popular movies have already become available on home video by the time they are available on PPV. Although PPV has enjoyed moderate success as a result of live sports events, not from movie, pay-per-view cable has made no dramatic inroads among mainstream TV viewers. However, PPV demand is getting a boost from the debut of satellite television service that can provide dozens of channels for PPV programming.
The most important advantage of PPV against video rental is convenience. Average customers can handle the on-screen menu and choose the movie they want without driving to the rental shop. However, another form of inconvenience is exist. If there is only one PPV channel customers should wait average two hours to watch the movie. Furthermore, customer should select one out of several, not from thousands. Physically there is no capacity for broadcasting movie through the channel, but more channel capacity is needed to reduce the average waiting time for customers.
The final place we can see the movie is broadcasting television. Usually customers do not pay additional fee for watching the movie, instead have to watch the commercial during the movie.
In conclusion, current eyeball market is leaded by video rental service providers, but its market growth already reached its summit and is on the way to downward. Rather customers prefer buying the movie to own and having more flexibility in timing and frequency. It seems theater industry already finished finding its pie in movie eyeball market by not changing significantly in market volume. Even though I can not find exact numbers for PPV and premium channels, their market are continuously gaining more market share as cable penetrates TV households.
One critical driver in movie eyeball market is movie production,
who set the order of release. Why movie goes to video rental,
not PPV. Or why two-tier pricing is norm in video sell through.
The answer would be the benefit of movie manufacturers. As we
can see in Exhibit 5 for new movies, on average 25% to
30% of distributors' total revenues are derived from domestic
theater rentals, which another 15% to 20% coming from foreign
theaters. Worldwide home video brings in 35% to 40%, and television
provides 10% to 15%. Although movie theater holds substantially
smaller eyeball, box-office performance still has a major bearing
on a film's ultimate profitability. Also increasing video contribution
shows that current release order will be continued in the short
Video on demand is a hot topic in the networking arena. Many people want to get involved now, so they can reap benefits from potential profits later. There are many different ways to perceive video on demand. It can be seen as providing many channels of television programming with an opportunity to choose among top movies. This view of video on demand is actually implemented today. Direct TV has over 100 channels of regular programming. It also offers a "pay-per-view'' option that allows you to choose from movies that are rebroadcast every half hour. However, this is not so to say "Video on Demand".
Video on demand is a large database of movies from which people can choose and receive, when and where they want it. This implementation involves many more resources, and several yet to be developed technologies. Changes need to be made in phone and cable systems. Some of the technology that must be developed is a faster network, a movie server, and the movie client that would be able to receive the movies.
For showing movies in real-time, a very fast network that would be able to send the movie through the cable television wires is necessary for showing movies in real-time. Such networks are being developed. As each new network is developed, a standard for usage needs to be developed. Right now the fastest network available is Asynchronous Transfer Mode (ATM).
Another part of the technology under development is a movie client-server. There are two ways to solve this problem of hardware and software. Since movies are transmitted compressed, a client-server package is needed to decompress movies and show them on the viewers television screen simultaneously. The client-server could be implemented in hardware in a set-top box. The box would have enough memory to hold an entire movie, and have enough capabilities interface with the television. Set-top boxes are being worked on, and one day the hope is that you will be able to store a full movie in a box where you would be able to fast forward, rewind and play the movie at will.
A software video decoder is another solution to the video server problem. The software video decoder would send parts of a larger file which contains the video. There are many video decoders right now, but not all of them are efficient enough to handle the amount of bandwidth required to send and receive a long and detailed movie. Bandwidth is the amount of data that can be sent through a communications circuit per second.
Fiber to the home that incorporated with ATM switching technology, standardization set-top box and video server software, plunging costs of storage, memory and computing components and sharp change in FCC policy finally allow the possibility of video on demand.
Video dial tone is defined by both technical considerations and
regulatory considerations. The FCC described video dial tone
as " An enriched version of video common carriage under which
the telephone company will offer various non-programming services
in addition to the underlying video transport." The VDT
system designed to carry full-motion video at say, 1,544Mbps,
will also carry other types of information, such as image, multimedia,
and games. As long as there is some return capacity for signaling,
even an asymmetric system such as ADSL, can support multimedia
and games since the upstream command will consist of relatively
short data bursts. There are several technical currents at play
with the context of VDT. First, the cable TV companies wish to
upgrade their systems to carry more channels, support interactivity,
and carry telephony services. Second, the RBOCs wish to get into
the residential TV distribution business, at least in terms of
providing the underlying structure, but perhaps also the content
As Bell Atlantic's programming and video services company, BVS
has been a pioneer in the development of an early form of interactive
television known as video-on-demand (VOD). This service allows
customers to retrieve, on demand, videos stored on computer servers,
much as they retrieve electronic mail messages. When coupled with
"cable television-like" services, VOD programming will
provide consumers with an attractive alternative to existing cable
and video rental services.
From 1993-95, Bell Atlantic conducted a successful technical trial of VOD in northern Virginia, transmitting video to consumers across the telephone network, which in this setting was called the "video dial tone network." In April of 1995, regulators granted Bell Atlantic permission to conduct a market trial of its video dial tone network. BVS was the programmer on the network, delivering a VOD service -- provisionally called "Stargazer" -- to 1,000 customers in northern Virginia. BVS licenses, organizes, prices and sells the programs delivered during the trial, which is scheduled to run into the fourth quarter of 1996.
Following comment describes well about the current advance of
VDT by Bell Atlantic.
I just signed up for VOD offered by Bell Atlantic, my local telephone company. The cost is $4.95 a month PLUS most everything you watch. Prices range from $0.29 per show to $3.95 for a move. I want to give it a try and if I like it and it cost less, I can drop my local cable company, which is costing me about $40.00 a month for service, with HBO being the only premium channel we have. I like the idea of watching what I want when I want, but don't like the idea of paying for most everything I watch. I don't mind paying for a movie when I get to see it when I want, but I do mind paying for every program I watch. It also means hooking up the old "rabbit ears" again for local broadcasts.
Full Service Network by Time Warner Inc.
Time Warner Cable's Full Service Network is the first in the world to integrate cable, computer, and telephone technologies over a fiber-optic and coaxial cable network. This allows the Full Service Network to be a single-source provider of traditional cable, interactive television, telephone services, and high-speed PC access to on-line services.
Currently, the Full Service Network adds digital, interactive television services to the traditional cable services of Time Warner Cable customers in suburban Orlando. These customers have on-demand access to a variety of entertainment, informational, and transactional services. The Orlando pilot is helping to improve the technology and determine how to bring innovative services to customers. To provide customers with new ways of accessing information, entertainment, communication, health and education services, and to move Time Warner into profitable new business areas, providing new outlets for its creative products. The Orlando pilot program is helping to improve the technology and determine how to bring innovative services to customers.
The 4,000 people lucky enough to get Time Warner's Full Service Network can pick from more than 100 pay-TV movies and use their hand-held clickers to pause, fast-forward or rewind. Through their TVs, users can play chess with friends across town. They can choose the order in which news is presented - say, sports first, then weather, then foreign news. They can order pizza, stamps, books and clothes and check bank account statements. All without leaving the couch. In March 1996, the FSN expanded its reach to the millions of visitors to Walt Disney world each year. At the FSN exhibit visitors see a live demonstration of the network through a live connection to the FSN, and then pick up a remote control and try it out for themselves.
What makes the VOD is different from conventional PPV, the most advanced video watching mechanism?
First, VOD will differ from PPV on the basis of transmission. The basis of the transmission of VOD is point-to-point compared with pay TV which utilizes point-to-multi-point. The limitation of bandwidth is the most significant barrier to realize reliable VOD. Even though technological advances show some possibility to deliver high volume video data through conventional twisted pair, the real VOD would require broader bandwidth to meet the customer needs. Currently Bell Atlantic offers VOD service over fiber optic environment as an experimental service.
Second, the timing difference focuses on whether the service-provider or the consumer of the service controls the timetable for the provision of the service. In other words functions such as consumer's choice of timing for viewing, pausing, rewinding and fast forwarding will be available with a VOD program service, not a subscription television broadcasting service which is scheduled in advance by the service-provider. In this sense VOD requires tremendous memory capacity and sophisticated routing technology to meet the huge amount of traffic between customers and movie servers.
As cable companies' attempt to update the existing cable line up to 750Mhz broad has proven to be a failure, cable giants turn their eyes to fiber optic information super high way. The cable companies boosted its cable rates in 1995 to pay for system upgrades such as implementing fiber-optic cables and preparing for the switch to digital for clearer picture and sound. However, many of these promised advancements have been slow in coming because of the costs of their implementation. Even though its implementation will be delayed, it is expected that interactive switched digital video system eventually will grasp most of the movie eyeball market.
Video on demand has not been a huge success for the cable and telephone companies in their tests as of yet. However the future impact on the video rental market could be scaleable in the near future. Following comment by Edward Horowitz, senior vice president of technology at Viacom Inc. shows the obstacles in front of the commercialization of video on demand.
"I don't think we will sever see the 500-channel TV. Time Warner is proving it can work, but I don't think that the money it costs to build vs. revenue it brings in will support the Full Service Network. I just don't see it. To make interactive TV work, requires an extraordinary build-out of new infrastructure, including a billing system that can support individual services and a set-top-box that is reasonably priced. All of these pieces have yet to be truly developed.
Consideration for the change
Even if rental business has peaked, it's expected to dwarf VDT-VOD for rest of this century and beyond. Industry forecast put size of VDT-VOD market for 1994 at $200 million and forecast it would grow 50% next year to $ 300 million. It would grow 66% to $500 million in 1996, followed by another 60% increase to $ 800 million in 1997. Market is expected to reach $ 1.1 billion in 1998, but growth rate will have decreased to 38%. In 1999, VDT-VOD market could reach $ 1.2 billion -- with growth rate dropping to only 9%. Figure of $ 1.3 billion for 2000 would represent only 8% increase from preceding year.
Figures could even be much higher than expectation. Basically the major barrier for the full blast VOD can not be solved solely by the network operators, who are now actively working on VOD. Fiber optic network should be accompanied by telecommunication players strategic intent and plan, and movie client server would be the role of computer manufacturers. Set-top box would need the help from electronics manufactures. Due to the on-going consolidation in this area, the industry direction would move to collaboration among the players in terms of network. Therefore, the physical environment won't be the significant barrier for the augmentation of VOD.
Recent Telecommunication Act also helped these industry directions.
Allowing cable companies into local exchange and telcos into
video market, the regulatory environment for the full service
network was established. The permission of cross ownership between
telecommunication company and cable company also will be helpful
to develop the cooperative environment.
Those two characteristics of VOD, which are point to point network and control of time, will affect on the current movie distribution value chain. Point to point network will allow unlimited capacity with time division duplication, providing low cost potential with proper physical environment. At the same time the server capacity will enable the VOD to have almost equivalent variety to video rental. Surely interactivity would be the strongest advantage VOD can have against its competitors. Control of time will be pass to the customers with VOD. Customers can plan and even design its time. The relative advantage video rental has had in timing will be diminished, and the limitation of time control in PPV will be a bigger liability.
To position the various media on the perception map, I picked two traits for customer selection, quality and price. Quality includes product quality, time controllability, product variety, convenience, and time of availability. Service price, needed network and needed equipment will be included in service price.
Using five scales each medium is evaluated and plotted in customer
perception map. For more useful result arbitrary weight is allocated
in each criterion. As a result, VOD got 4.4 in service quality,
3 in service price. Compared with video rental, which got 3.8
and 5 respectively, VOD has a superior quality but needs more
price to buy. PPV shows 3.2, 3.75 which is relatively lower
than theater both in price and quality.
|Timing of availability|
|Service unit price|
|Needed network price|
|Needed equipment price|
As a way to get to the conclusion, I will consider following several
factors. The first factor would be location on the customer's
perception map. As we can see on the map, the distance between
video rental and video on demand is relatively far. Rather, pay
per view is a little bit close to video on demand. Let's assume
there are several segments of customers in terms of quality and
price, which means different levels of needs. Price/quality(value)
performance would be the key ingredient to decide which channel
the customer will use to watch the movie. In this term the distance
from mew emerging VOD is critical to find the position in the
market. Video rental, which is fairly apart from VOD, can sustain
its competitive advantage within foreseeable future.
Second factor would be the stake holder's interest. As we already
saw in the each channel evaluation, the order of release fully
depends on the movie distributor interest. As long as video rental
hold more than 50% of revenue, distributors will not change the
order of distribution. This kind of change also reflects the
current release pattern for new hot movies, which simultaneously
available both from rental and sell through market. Because the
sell through market is getting stronger and a lot of customers
want to buy movies rather than just watch them once. The change
in channel structure has been made. This industry structural
problems will not be easily overcome neither by the new fancy
technology nor within a short time frame.
Third one would be the customers' habit of purchase. As mentioned
earlier, customers' buying habit has given the fundamental opportunity
in video rental over PPV. The video on demand selling process
may fit with the current buying habit, but needs huge capacity
to simulate the Blockbuster visit experience. In other sense,
video on demand can do the push marketing by advertising during
the normal broadcasting air time, but still we need time to expect
to change in purchasing habit.
Lastly, implementation time could be the critical factor for video
on demand. Requiring high speed broadband networks, huge capacity
for movie server, and sophisticated client premise, such as set-top-box.
VOD still need several years for the full blast service, which
defined in this paper. This lead time will allow the rest of
the channels to prepare and expand their installed base. Direct
broadcasting satellite(DBS) would be the good example. If VOD
had been available in last year, we could not have expected today's
success of DirecTV and PrimeStar. By providing more than 50 PPV
channels, DirecTV has upgraded the position of PPV in the movie
distribution value chain. By the age of VOD, DBS may hold significant
penetration and preempt the market of VOD. We also can understand
the current expansion plan of Blockbuster as a way to increase
convenience to customers.
My conclusion is the impact of incoming VOD on movie distribution channel will be a little bit suspicious. The degree of impact will vary by the several factors mentioned but still the strength of impact won't be as strong as we are expecting. I think current channel entities' market position will be stable within foreseeable future
Exhibit 2 : Theater revenue trend
Exhibit 3 : Theater ticket price trend
Exhibit 4 : Composition of rental and sell through
Exhibit 5 : Contribution to the movie distributors' revenue
Exhibit 6 : Home entertainment household