Original URL: http://www.theregister.co.uk/2005/11/04/faultline_movie_downloads/

Movie download services quietly working on licensing

Just how much is not enough

By Faultline

Posted in Financial News, 4th November 2005 10:58 GMT

A report landed on our desk last week from a respected European research company, that said that European movie downloads would reach £60m ($106m) by 2010. There is so much wrong with this prediction it’s difficult to know where to start. This was supposed to be encouraging for the film industry and make them invest in online downloading, suggesting that the market for video downloads will follow in the footsteps of music.

I suppose that’s what’s most wrong with it, the fact that there has been no single innovator yet to emerge, as in iTunes for music, so it makes it tough to gauge just how successful downloading is going to be. But there are some indicators, such as the fact that as many as 150,000 movie titles were traded each day over P2P networks up until those networks started to withdraw from the piracy market. Also pure DVD sales, which absorbed over $21bn in revenues last year in the US. The top 25 US released films grossed $11bn so far this year at the box office, say £14bn for an entire year. For downloads to be significant they need to be able to reach 10 per cent of all film revenues. Total film revenues per annum must be around $35bn a year if our sums above are right, so movie downloads are really only viable if they promise one day to hit 10 per cent of total film revenues, let’s say $3.5bn. In order to reach that exalted number during the next five years they would have to be in sight of $350m in the first year they take off.

Given that Europe may digest around one third of the global film download revenue, that might lead you to think that $106m is reasonable, but it’s not. That would be for a first year when video downloads get off the ground, which will be next year, not for 2010, by which time we would need to be approaching 10 per cent, otherwise the studios would just give up and forget about it.

By 2010 not most, but a considerable proportion of internet lines, will have been upgraded to ADSL2+ or better, yielding last mile speeds of 20 Mbps and above. While it won’t be possible to download a film in real time because of the Quality of Service guarantees that you’ll need right the way across a network, buffered set tops or PCs will be able to deliver a film using best effort internet and begin playing it five or ten minutes after the download started.

Downloaded video gets more attractive every year. Also as piracy over P2P networks gradually evaporates, due to the recent successful legal rulings in the US, P2P will begin to be used as a rapid delivery technology, and we already know that this can offer much improved delivery performance.

So it is reasonable to assume that this 10 per cent threshold will be reached and film download will be established by 2010, and that revenues will be around $3.5bn globally with around $1.2bn of that coming from Europe

Already in the UK alone there are a number of initiatives with the BBC, British Telecom and BSkyB each separately expecting to have millions of customers downloading programming. The BBC is planning to charge for non-UK video downloads and has 24 million overseas visitors each month to its web site.

It is also reasonable to take viewing habits from people who rent DVDs whether via retail or via online DVD services. In which case we can pretty quickly establish the type or number of people who watch films and what they are prepared to pay. Given the much wider variety of films that can be kept in stock with an online service (virtually unlimited) it suggests that much of these two rental markets and some of the DVD purchase market will drift to movie downloads. The one thing that is missing to trigger all of this activity, so far, has been the lack of a single market leader for video downloads that has “got the proposition right” as iTunes did for music.

In two years since the launch of iTunes, some 500 million songs have been bought using iTunes, and at a dollar each that is more money than Screen Digest is predicting for movies. That’s can’t be right. Not when for each song the record labels want something like $.65 for each track sold, while the movie industry would want more like $8 for each film sold, perhaps $1.99 for each film rented, in line with Apple’s video pricing.

That $8 isn’t pulled out of a hat by the way. It is understood that this is what Sony will be asking when it finally releases its top 500 films, next year, triggering the take off in legally downloading films. There was one hope that Apple would unblock the log-jam earlier, when it launched its video iPod, but it looks like the Movie Studios have learned from the disillusion of the Record Labels and are refusing to let iTunes call the shots on pricing, delivery timescales and tying the films to a single, first to market device like the iPod. Instead it looks like Apple will get these films at the same time as everyone else, and probably around the end of March Sony will deliver on its promises to release these films in digital online format and the rest of the studios will follow.

While film licensing is far more complex than music licensing, and it took iTunes almost a year to cross the Atlantic due to licensing negotiations, it is likely that US only or Japan only or both countries will see film services launched by the Spring and the others would gradually follow.

We know that such negotiations have been going on at Bertelsmann subsidiary Arvato and also that Tiscali has been attempting to build European licenses for CinemaNow content, for over a year, so Europe may not be quite so far behind the US this time.

The result will be multiple commercial outlets in almost every country by the middle of next year, and while Apple will not be left out it will have its work cut out trying to climb to the top of the pile in films, without the head start it had in music.

Screen Digest says that every broadband household in the UK will have downloaded at least one movie from a legitimate Internet movie service by 2010 citing 18.5m broadband homes in the UK by 2010, consuming over 20m movies a year via Internet platforms.

We say that the market will be that big next year, rising in a parallel development that music experienced with iTunes, thereafter, until it becomes 10 per cent of the global movie market. Let’s see who’s right.

Copyright © 2005, Faultline

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