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Cost of Market Domination
Consumers are spending more and more on buying and renting movies online. But, says Screen Digest research analyst Marija Jaroslavskaja, the sector is dominated by hardware companies prepared to sell content at a loss to add value to and promote their core businesses, making it all but impossible for stand-alone movie stores to survive.
Screen Digest estimates that in the U.K., where
Apple iTunes accounts for over 65% of online movie transactions,
the store made a loss of around £0.5 million selling new release movies in 2008. Digging further into the Apple iTunes economics presents an interesting picture.
While consumers spent over £2 million on buying new release movies on iTunes, almost all of this went to the studios, which command up to 110% of the wholesale price. The next beneficiaries in line were the Luxembourg tax office (Apple iTunes Europe is based in Luxembourg and under EU rules is taxed based on the citizenship of the company rather than the consumer) with £0.32 million and credit card companies (£0.06 million).
The economics play out better in the case of
catalog titleswhere studios take a 70% cut of the retail priceand digital rentalwhere their share is 60%
helping Apple to minimize the overall loss on its digital movie business.
However, library titles and digital rental, while more profitable for Apple, have traditionally never been at the forefront of studio priorities when compared to the sales and profitability of new releases.
With these dominant serviceswhich set the de facto market pricestrying to at best break even, small stand-alone services are hit by a double whammy of low margin retail prices, which they are unable to influence, and low take-up due to the lack of a device ecosystem.
Moreover, small services are in danger of falling short of the minimum guarantees stipulated by studio licenses, which further inflates their unit costs. Across Western Europe, service providers made a gross loss of Euro 0.2 million from digital retail movies in 2008.
Digital rental is doing slightly better, resulting in gross revenue of Euro 5.4 million. Across the transactional movies sector, service providers made a gross profit of Euro 5.2 million from consumer spending of Euro 44.7 million. Nevertheless, more than 15 online movie services in Western Europe and the U.S. have announced their closure in 2008 alone.
As the stand-alone digital movie business model becomes increasingly unsustainable, the online video services of Apple, Microsoft and Sony, backed by high hardware installed bases and value-add economics, will continue to dominate the market.
The only viable competition will come from other companies whose core businesses lie elsewhere and which are prepared to accept losses on online video delivery to drive consumers toward some other core profit center.
Video services run by super market chains like Carrefour or Tesco might successfully mirror their physical movie loss-leading strategy, but this is only likely to happen through careful management and execution of a digital media strategy that takes in the retailers entire consumer experienceadding value to the existing retail business, not taking a new direction altogether. In the U.K., for example, Tesco has already begun to link its digital music retail operation with the core supermarket business: shoppers receive special codes on supermarket till receipts that offer discounts at the Tesco Digital music store. Developing a similar strategy for movies seems like a logical next step."
http://redigitaleditions.com/Active.../01/26&BookCollection=RVD&ReaderStyle=WithPDF
TV sitting here.
