Hollywood Drifts Into the Cloud

But the studios need more time to end their addiction to DVDs

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Steven Cherry:

Hi, this is Steven Cherry for IEEE Spectrum’s “Techwise Conversations.”

Silicon Valley has a sunny future in large part because of the expansion of cloud computing. Now the cloud is drifting down toward Southern California and should be hovering over Hollywood in time for the holiday season, when a whole lot of Blu-ray discs are expected to be given as gifts. Here’s how it will work: The discs will come with an access code that lets you log in and stream the movie to whatever device you’re using.

It’s a big step in the same direction toward which Netflix has been resolutely marching. Next month—September, that is—Netflix’s rates will go up for subscribers who have been paying for postal delivery of discs and happily using the service’s instant streaming for free. Under the new rates, we’ll pay separately for each service, and the total is quite a bit more.

There’s an upside to the shift from discs to cloud delivery. Services like iTunes and Hulu are getting stuff earlier and earlier in the distribution cycle, meaning you can often rent or buy a movie only a few months after it’s in the theaters—or watch a TV show soon after it airs—without ever leaving your couch. That may seem like a small convenience for us couch potatoes, but it’s a tectonic shift for Hollywood, where change is usually thought of as a crisis, not an opportunity.

My guest today is well positioned to describe for us the crisis in film and television distribution. Harold L. Vogel is the author of Financial Market Bubbles and Crashes, published by Cambridge University Press. He’s a venture capitalist and a fund manager. Previously, he was the senior entertainment industry analyst at Merrill Lynch; Institutional Investor magazine named him its top entertainment industry analyst for 10 years in a row. He joins us by phone from New York City. Hal Vogel, welcome to the podcast.

Harold Vogel: Fine. Thanks for inviting me.

Steven Cherry: Hal, right now there’s a very fixed sequence of releases—for major motion pictures, at least. Why don’t you walk us through how Hollywood distributes movies today and where DVDs fit into that?

Harold Vogel: Yeah, the window—what Hollywood calls windows—are really rights—openings, if you will—and the typical rights window still extends typically to the theater, where the most effort is expended on promotion and marketing. And the next window is typically going to be a DVD release three or four months later. That window is now shifting closer to the theatrical window, because it’s more efficient to spread the marketing over both the DVD release and the original theatrical showing. After that comes cable, and pay cable, and there are a whole bunch of other sequences of different outlets that are contractually negotiated. And then ultimately it might end up on television as a program service or something relative to the streaming world, and those rights are still being negotiated. Hulu, started up by three out of the four networks, started with the streaming of relatively new programming. In other words, if you saw it on the broadcast network the night before, you might have been able to get it the next day on Hulu. There have been changes in that approach as well. Of course, Netflix is trying to get into the business. So the windows are still theatrical first and then lots of things follow, and the new technology is messing up the traditional sequencing of the windows. So there’s all this tugging and pulling and negotiating between the different rights holders.

Steven Cherry: So let’s get to these combo packs—the Blu-ray discs with the movies also available from the cloud. There’s basically two new services: One is called Ultraviolet and the other is Disney Studios All Access Keychest.

Harold Vogel: Well, they call it Keychest and Ultraviolet. And consumers in the next four to six weeks will start to see a lot about Ultraviolet, and undoubtedly Keychest will be promoted pretty much side by side. And what these things do is provide access to the programming. You pay your bill and you will have access or a right to view the content, and it doesn’t matter what device it is; in theory, at least, it’s going to be compatible with a wide range of hardware, and that really is the advantage of the cloud that it should, in theory, be available everywhere and accessible to viewers on most kinds of common devices.

Steven Cherry: Is it fair to say this is a response to—there’s all these third-party ways you can get a movie now, iTunes, Amazon, Netflix, and so on.

Harold Vogel: Right. It’s partly that it allows greater control and a direct relationship to the ultimate consumer, because part of the marketing and branding problem for Hollywood has typically been that they’re two or three steps removed from the ultimate consumer. And this enables the studios to examine the demographic and marketing characteristics of their ultimate viewers much more carefully and target their messages more appropriately, and also circumvents some of the wholesalers that are in between and are capturing some of that value in the data stream.

Steven Cherry: So I guess it also gives them a stronger bargaining position when it comes to dealing with somebody like Netflix, right? They can say, we don’t really need you.

Harold Vogel: Yes, it gives them a stronger bargaining position, and it may ultimately transcend the Netflix approach. That’s where the friction is right now, and the uncertainty, because you are going to increasingly have the ability to see whatever you want, whenever you want it, no matter what. And the consumer will utilize these services through the cloud, which is becoming more and more known and widespread in its usage. So the marketing advantage to the studio is to enhance these types of things, and I think they are moving in that direction rather quickly.

Steven Cherry: Just this week, a court ordered the shutdown of one of those third-party streaming services—it was called Zediva. Their model was a little bit like Ultraviolet and Keychest, wasn’t it?

Harold Vogel: It was a little bit different, and it wasn’t clear to me that they were skating on solid legal ground. I’m not a lawyer, and I don’t know the details of the case, but that seemed to threaten the pay services that are now popping up from the studios. And there was a good reason for the studios to sue or try to stop that other service.

Steven Cherry: As I understand it, Zediva owned tons of physical DVDs. And then they had a bunch of actual DVD players, and those were hooked up to the Internet. And the idea was that, I guess, like the airport rental services where you rent the player and some discs for your flight, but it was a cloud-based version of that.

Harold Vogel: That’s a very good description—concise and accurate—and I believe that for the reasons you can understand the studios didn’t take kindly to somebody buying one DVD copy and distributing it and collecting revenues from hundreds of thousands of people. For the studios, it was a rather dangerous—it was not an innocuous type of situation.

Steven Cherry: So what’s your picture of a movies distribution sequence in the future? You know, the whole thing seems to be slowly collapsing anyway, but the DVD was the linchpin, and these new services kind of loosen that linchpin.

Harold Vogel: I agree with that statement. The new services are going to take a large segment of the movie business’s ultimate viewing. I still think there’s an important role for the theater as the start of this sequencing; the windows after the theatrical will move around to jockey for position. Theater owners are not too happy to see the window of the DVD shrinking or converging towards the theatrical; that’s what the studios would like, but it’s still about a three to four months’ time span between theatrical and DVD. I think that the theater owners don’t like this thing to be shortened, and the studio owners don’t want to antagonize the theaters at this point. That said, there’s going to be more and more on the cloud in streaming services, and it’s not clear exactly that the revenues from the cloud in the new streaming services, whether it’s Ultraviolet or Keychest, are going to be nearly as large as what is derived from DVD or current theatrical and other television-type release patterns.

Steven Cherry: The key for Hollywood is still the theatrical release, but people are going to the cinema less and less, aren’t they?

Harold Vogel: Attendance has been flattish to down for about now 8 to 10 years. And it does have little blips upward from time to time, but a lot of this has kind of flattened out in the United States. It is still growing overseas significantly, because many countries, developing countries especially, have not had a wide network of theaters that are modern and clean, and places like Russia, or Brazil, or India, or China are still building their theatrical venues. So a large part of the business will remain in the theaters—in fact, even in the United States, because there’s a difference in experience of going to, say, a good 3-D movie or even a 2-D movie in the theater joined with other people who react emotionally at the same time, as compared to looking at it on a little box or screen on your smartphone. It’s an entirely different emotional experience, and the immersion in the theatrical environment makes it a much better experience. So I don’t think theatrical is going away, and it’s growing outside of the United States quite rapidly still.

Steven Cherry: And in the U.S. they are innovating—I mean, besides 3-D we’re seeing things like, basically, theaters becoming little restaurants, right?

Harold Vogel: Yeah, they’re sort of regressing in a sense because in the old days—meaning 70, 80 years ago—you had movie palaces where you actually had string quartets and served food. So in a way we’re regressing, going backwards, but the main experience is still in a community environment where your fellow viewers in the audience react, laugh at the jokes, or cry at the proper places. And it reinforces your emotional experience, and that’s really what films and entertainment are about—it’s a transportation mechanism for your emotions.

Steven Cherry: Very good. Well, Hal you’ve made a confusing topic a lot clearer, and I think I can see why you were so consistently Institutional Investor magazine’s top entertainment industry analyst. Thanks for joining us.

Harold Vogel: Sure. My pleasure.

Steven Cherry: We’ve been speaking with entertainment industry analyst Harold L. Vogel, about how Hollywood is slowly but surely embracing Internet distribution of movies and television. For IEEE Spectrum’s “Techwise Conversations,” I’m Steven Cherry.

This interview was recorded 3 August 2011.
Audio engineer: Francesco Ferorelli
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