davidwaterman sevilla movies 2011 final

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David Waterman

Dept. of Telecommunications, Indiana UniversityVisiting Fellow, Oxford Internet Institute, University of Oxford

with Sung Wook Ji, Dept. of Telecommunications, Indiana University

Technology and the U.S. Movie Industry

The Economics of Media and Content IndustryIPTS

European Commission

Sevilla, Spain

May 30-31, 2011



1

How has technology affected movie industry revenue

sources?

In domestic (U.S./Canada) market

In international (“foreign”) markets

What have been effects on movie production?

How is the digital (IPTV) conversion affecting the industry

—and why?

Questions



Great expansion in domestic and foreign revenues since 1970s

due to:

Successful market segmentation and price discrimination as

new movie media proliferate—especially in the U.S.

Great expansion in U.S. production investments, due to…

higher revenues, more efficient distribution

Stagnant/falling revenues since IPTV diffusion, due to….

several factors…including lower costs of rentals and

VOD

Overview

2



Use an economic model of market segmentation and price

discrimination to interpret trends

First, historical expansion, then…

Recent contraction

My approach

3



U.S. Studio Domestic Market Boxoffice shares,

2008-2010 averages

Time Warner(Warner Bros)

19%

News Corp. (Fox).13%

Viacom(Paramount)

16%Walt Disney12%

Sony (Columbia)14%

NBC-Universal11%

MGM

1% Independents14%

Source: derived from SNL Kagan (2011)

4



Theater

Broadcast TV

Basic Cable TV

Pay TV

Home Video

Domestic Digital

0.0%

0.5%

1.0%

1.5%

2.0%

%

o f G D P

Sources: Waterman (2005); SNL Kagan (2010)* Revenue from merchandise is not included.

U.S. Movie Distributor Revenues*, Domestic Market,

as % of GDP, 1970-2009

5



Distribution technologies--analog and digital

Analog: broadcast/cable TV; VHS

Drivers of the expansion

6



Theater

Broadcast TV

Basic Cable TV

Pay TV

Home Video

Domestic Digital

0.0%

0.5%

1.0%

1.5%

2.0%

%

o f G D P

Sources: Waterman (2005); SNL Kagan (2010)* Revenue from merchandise is not included.


as % of GDP, 1970-2009

5





Digital: digital cable/DBS;HDTV; DVD/Blu-ray

Drivers of the expansion

6






Economic factors

New media usually lower cost and/or higher quality--

especially digital

Successful market segmentation and price discrimination by

studios

Drivers of the expansion to mid-2000s

8



(1) (2) (3) (4)

Media

Approx Window

(after theatrerelease)

Retail Price

per

Transaction(2002)

Realized Retail

Price per

Viewing**(2002)

Theaters $5.81 $5.81

Video sales 4-5 months $14.77 $3.69Video rentals 4-5 months $2.84 $1.13

Home PPV/VOD30-45 days after

video$3.50-$4.00 $1.50

Subscription pay TV 1 year $7.64/mo $0.76

Basic cable TV 2-3 years $34.52/mo $0.46

Broadcast TV 2-3 years $0 $0.00

Release timing and pricing of theatrical features

(2002-2005)

Source: Waterman (2005); SNL Kagan (2006)

9






Economic factors

New media usually lower cost and/or higher quality--

especially digital

Successful market segmentation and price discrimination by

studios

Result: stacking of media revenues over time

Drivers of the expansion to mid-2000s

10



Theater

Broadcast TV

Basic Cable TV

Pay TV

Video

International Digital

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

% o

f G

D P

U.S. Movie Distributor Revenues*,

Foreign Markets, as % GDP, 1970-2009

* Revenue from merchandise is not included.

Sources: Waterman (2005); SNL Kagan (2010)

11



Boxoffice market shares in European Markets

Sources: EU (1994); EAO (2011)

*not including European films with major US investment

A major reason: more rapid movie media development andhigher movie spending per capita in U.S. since 1970s (Waterman,

Hollywood’s Road to Riches, Harvard U. Press, 2005)

Changes in Hollywood shares of European film

markets over time

U.S.-producedfilms

European-producedfilms

1968 35% 60%

2010* 68% 25%

12



0

500

1,000

1,500

2,000

2,500

3,000

i n d e x

number of theatrical features released by MPAA member companies

average production cost of in-house MPAA member company-produced theatrical features

$3.1 million138

$82 million

158

Number of MPAA Releases and Average

Production Cost per Movie: 1975-2010

Sources: Waterman (2005); MPAA(2010); MPAA&BMO (2011)

13



14

The recent decline in U.S. studio revenues

(Domestic market)



Theater

Broadcast TV

Basic Cable TV

Pay TV

Home Video

Domestic Digital

0.0%

0.5%

1.0%

1.5%

2.0%

% o

f G D P


as % GDP, 1970-2009

Sources: Waterman (2005); SNL Kagan (2010)

* Revenue from merchandise is not included.

15



Falling DVD revenues since 2004 the main factor


(Domestic market)

16



13.314.3

15.015.8

18.4 18.0 17.616.5

14.8

13.3

0

2

4

6

8

10

12

14

16

18

20

2 0 0 9 C o n s t a n t B i l .

$

HD/Blu-ray

DVD

VHS

US home video retail sales spending, 2000-2009

(constant 2009 $):

Sources: derived from SNL Kagan (2010)

17




18

10.4 10.29.8

9.5 9.38.6

8.27.8

7.5 7.4

0

2

4

6

8

10

12

2 0 0 9 C o n s t a n t B i l . $

VHS

DVD

HD/Blu-ray

US video rental spending by format,*2000-2009

(constant 2009 $)



19


Mainly sales (some rise in Blu-Ray) Slower decline in rentals (28% vs. 20%)


(Domestic market)



US home video rental spending by retail type,

2000-2009: (constant 2009 $):


20

10.4 10.2 9.89.5

9.38.6

8.27.8

7.5 7.4

0

2

4

6

8

10

12

2 0 0 9 C o n s t a n t B i l . $

Kiosks

Subscript

Brick & mo



21


Mainly sales (some rise in Blu-Ray) Slower decline in rentals

Growth in subscription (Netflix), Kiosks (Redbox)


(Domestic market)



24

Piracy

Several economic studies, mixed results

Cannot explain most of the decline Worst decline is sales

Relatively successful MPAA anti-piracy efforts

“We believe consumers are simply not interested in owningcontent anymore” – Richard Greenfield, BTIG

Implies evaporation of a very high value market (85%

margin for studios)

or…

Consumer substitution toward relatively low priced

rental/IPTV movies

Reasons for the DVD decline



Total electronic a la carte spending, 2000-2009

(constant 2009 $)


22

11.1 11.010.7 10.5 10.3

9.5 9.5 9.3 9.4

10.1

0

2

4

6

8

10

12

2 0 0 9 C o n s t a n t B i l .

$

Cable/DBSPPV/VOD*

Digital**

* PPV/VOD spending = U.S. motion picture distributor revenues from PPV/VOD × 2

** Digital spending = U.S. motion picture distributor revenue from Digital ÷ 0.7

Kiosks

Subscription

Brick & mortar



26

“Brick & mortar” DVD rental (2002) vs. Online “rental” (2010)

Cost reduction in a la carte movie distribution

Rental price Studio share*

2002 $3.25 33%

2010 $4.41 70%

* Before duplications/distribution cost

Sources: author calculations from SNL Kagan and Adams Media data



25

The studio copyright dilemma (“First Sale Doctrine”)

…but

Generally robust demand for movies

A direct pricing model that works

Lower costs mean expanding markets in long term

Prospects

davidwaterman sevilla movies 2011 final

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