By Alexander Cameron, Managing Director, Digital TX Ltd.

The very first bandwagon that new proprietors of digital media platforms tend to jump on once they have made the quantum leap of understanding that IPTV is about entertainment, not infrastructure, is that they want movies. Lots of them. Hollywood's best. Everything they can get their hands on. Viewers will see their fantastic movies and come running in their droves to the temple of consumer indulgence they have built.

So they spend months trying to find their way into the studios and being ignored. It's a very small world, and one that you don't get into without a multi-million dollar budget and trusted introductions. Los Angeles' traditional Jewish roots still provide the foundation of the industry today and although times may have change, old conventions still linger. The mass market nature of the pictures, their hundred million dollar marketing budgets and enduring popularity means that the industry is never short of new business.

The first and so called "golden" rule of video on-demand is that it is the primary driver and revenue-raiser for digital TV platforms – the "killer app" that brings in the ARPU from each home that the platform needs to survive. The assumption is that these movies are watched every second of every day, like DVDs are. The whole US TV market (and coincidentally, the BSkyB model) is based on paid sales, rather than the British model of advertising.

This illustrates the serious danger of assumption, because nothing could be further from the truth. You need to see pay-per-view statistics to believe them. If you did, you wouldn't be basing your business plan and platform development strategy on it. By the time you find out, it will be too late. Most services have a few thousand movies to choose from, of which less than 20 or so are the cream of the crop. They would have been available in a DVD store a while ago and of course, are the same price, or even more expensive.

There is a curious phenomenon at work with pay-per-view. Although it may drive us to subscribe, and even though we may like the option of having those premium movies, we don't actually watch many of them at all.

And the truth shall set you free. So what is that truth? It's a lot worse in real life than it sounds. Platform owners are the only people who are able to understand how many movies a household watches per year, and they don't like telling anyone. They don't tell the studios either. The bizarre sales reporting model they use is called a "buy rate" and relates to, wait for it, the total number of purchases made over the year expressed as a percentage of the total number of subscribers the platform has.

Let's say platform X has 100,000 subscribers. If 10,000 pay-per-view purchases were made over the year, that gives the platform a 10% buy rate. Sounds simple, doesn't it? The trouble is absolutely no-one gets a 10% buy rate. Not even close. The average movie studio tends to get a 1-3% buy rate. There are 5 in total, so the maximum you could get would be 15% or so, or 15,000 purchases for our fictional example.

You can quickly begin to see why studios like platforms that have lots of subscribers, and aren't interested in small players.

And if you think that's bad, hold onto to your coffee. PC download statistics are even worse, if it's even possible. The average buy rate for these services is currently 0.02 – 0.05%. No really. That means platform X averages a maximum of 500 downloads a year. Silly window-busting schemes like DRM-riddled download to own services just aren't selling. Even iTunes' sales are down by 65% this year. Whatever is going on, the current formula isn't right. Consumers aren't amused and piracy is winning the day easily. You need volume to make money.

To fully appreciate the dire economic situation, it's necessary to understand how a VoD distribution deal works. To get in the door, you need an audience to make the buy rate attractive. The first thing you need to pay is the up-front sales guarantee. It's all about the advance. The riskiest you look, the more you're going to pay. It's essentially a fat bribe to get the studio's interest and a golden handshake to get your hands on the goods. No advance, no deal. You're going to need £500k or so per studio at the very least, and if you're in the Eastern block or somewhere like Vietnam, just forget it altogether and do a deal with the little guy who comes round in restaurants selling illegally copied DVDs.

The normal type of deal done on an on-demand platform is a form of revenue-sharing agreement. The studio serve you up a hard drive of electronic files pre-encoded in their preferred conditional access or digital rights management system, all to the MPAA guidelines. For independent producers, you will traditionally see a 50:50 split revenue agreement, and for the majors, its 70:30 in favour of the rightsholder. When the sale is done and the operator recoups from their customer, you remove VAT or sales tax. If the studio are hard-nosed, they will demand the whole 70% immediately. If they're remotely kind, they'll share the admin and distribution costs (card processing, CRM, support, bandwidth etc) and then take their share.

If we go back to our fictional example, Platform X, we had 10,000 purchases. To make it more realistic, we'll use a typical 1% buy rate (1000 purchases in a year for one studio). With each title costing £3.75, our gross revenue for the year is £3750. Less VAT, we are down to £3093.75. Even with the most favourable deal, the studio 60% take–home is £1856.25, and the platform's remaining 40% equates to £1237.5. From that, we need to deduct costs to reach our net revenue.

Not exactly impressive is it? If we scale that to include the five main studios each on a 1% buy rate, platform X would make £6187.5 in a year from their premium pay-per-view movies. This is why the studios like Sky Digital and cable and don't pay a whole lot of attention to IPTV systems. Sky Box Office can give you anything up to 1.5 million purchases a year, and in the American market, there are 270 million people who have been conditioned for decades to buy movies on cable at outrageous prices. It might also go some way to explain exactly why Homechoice has suffered so much, and why BT might find themselves in some trouble soon.

If we gradually work ourselves back, chronologically speaking, the picture of adversity to digital media reveals itself. If premium movies need volume, these new platforms can't deliver it just yet. There's no reason to spend anything more than experimental budget on putting content onto new technological systems. Movie studios are essentially fast-return investment bankers. Like venture capital, for every 10 movies that are produced, 7 will flop, 2 will break even, and 1 will make money.

When you're spending hundreds of millions of dollars on a production, you need to be aggressive to make a return on your investment. The massively complex and never-ending chain of intellectual property rights (from the reproduction of an actors' likeness to the artwork on a DVD), the legal and commercial muscle needed just to get something to market is spectacular. All for 2 hours. After that, they bin it, take it back to the shop or forget about it.

Theatrical and cinema release recoups a significant proportion of your revenue, but the pot of gold under the rainbow is DVD sales. The lucrative market for DVD purchase and home video scales into the multiple billions, and the frightening truth is that it underpins the vast majority of the film industry. To eat into that means suicide in an already risky market. But to not change is a bigger risk. Piracy is a business model like any other, and it has volume. You can't sell ads on premium films that equate to rental value, so there is a glaring gap, even with the deduction of physical fulfilment costs for physical packaging.

Forget the premium movies, as unless you are a massive TV platform or a bored billionaire with a pet project who has a few million to bung his buddy on the golf course, you won't be getting them. Approach the studios with a way to monetise the rubbish nobody buys anymore in their back catalogue. If you want to do niche, tell them you're going to do niche. If you want to offer premium movies, there will always be a Walmart or Tesco that will outsell you even on a loss-leading basis, as they already know the power of these products to provide an incentive to get the shoppers through the door.

The opportunity is there for someone to solve it. It needs the willingness of the studios to listen and change, and for an operator to deliver the revenue that returns the investment.

The lesson for operators and retailers is very, very clear. When you are working through your profit & loss account (income statement), premium pay-per-view needs to be in it as a marketing overhead, not a form of sales revenue.


Digital TX offers a great value one-day workshop course on IPTV and Video On-Demand (VoD) specifically for web and media professionals. It can help you get up to speed on the latest technologies, content deals, operators and applications across the world, and offer immense value in identifying both new opportunities and threats for your business and personal career. If you would like more information, call Alex on 07986 37317, email iptvworkshop@digitaltx.tv or visit www.iptvworkshop.co.uk. Readers who quote this publication as their source will receive a 10% discount on the course fees.

About Digital TX Limited

Formed in early 2004, privately owned and based in London (UK), Digital TX Limited are IPTV/VoD consultants for interactive digital television and broadband media. Some of the keywords you might associate with us are IPTV, Video On-Demand, Triple Play, Broadband Entertainment, Video Over IP, Interactive TV, Network Video Gaming and Telco TV.

Digital TX Limited has worked with many leading blue chip communications providers and can help catalyse your route to market for IPTV services by working with you to design your next-generation multimedia network, build your commercial deployment model and broker relationships with vendors, rightsholders, partners and customers. If we can be of any assistance please don’t hesitate to contact Alexander Cameron on +44 (0) 7986 373177 or via email on alex.cameron@digitaltx.tv.

http://www.digitaltx.tv