Collapsing Windows

This feature originally appeared in the May/L.A. Screenings edition of World Screen.

So much has changed in the tele­vision business: the number of platforms that offer programming, the many devices upon which consumers can enjoy content and the way viewers are watching favorite films and shows.

Perhaps no segment of the industry has felt the impact of these shifts more than the distributors that sell product to broadcasters, cable and satellite channels, and Internet companies around the world.

Some 25 years ago, the distribution business was relatively uncomplicated. There was a handful of terrestrial broadcasters in each major territory: the U.S. had three major broadcast networks, a ple­thora of local stations and a nascent cable industry. The U.K. had three main terrestrial broadcasters and cable and satellite on the horizon. Germany, Italy and France had public broadcasters and, with the onset of deregulation, the emergence of commercial networks.

With that handful of broadcasters in each territory, the studios and distributors would license the rights to a movie or TV series to the one that would provide the largest audience and pay the top price to air the product for a certain period of time and a certain number of runs. That product was often licensed exclusively.

The advent of pay television and the home-video industry prompted distributors to learn how to window their product differently in each territory, creating a flow from one outlet to another, to best exploit the rights to their product—and the licensing process started to get more complicated.

Taking the U.K. as an example, the sequence of windows for a Hollywood motion picture has traditionally been: after the theatrical run, the film became available as a retail product on DVD or to be purchased via download. After another 90 to 150 days it also became available via video on demand (VOD), pay per view (PPV) or download to rent. After 12 to 15 months the film went to pay TV, after which came free TV and library VOD use.

Think that’s complicated? Well, today the number of channels is nearly endless: free TV, pay TV, digital, premium cable, basic cable, thematic or general entertainment. Almost all of them have websites that offer catch-up-TV services. So one of the biggest changes in distribution is that the concept of exclusivity has practically disappeared. In fact, the same show can be licensed to different outlets in the same country and, in some cases, even be on the air on different channels at different times in the same day.

And as if this weren’t enough to tax the best rights-management software program, Internet services have lately been altering the sequence of windowing films and TV series from one outlet to another almost daily.

“The business has changed more in the last five years than it has in the previous 50, and the way things are going, it appears we will have an equal amount of change in the next five years,” says Mark Kaner, the president of Twentieth Century Fox Television Distribution.

“The world is definitely a more complicated place and the windows are changing,” adds Jeffrey Schlesinger, the president of Warner Bros. International Television. “In some cases they are changing organically and in some cases they are changing because we are causing them to change.”

The situations and practices are different for the distribution of feature films and of television series, but both sectors are being shaken up by new media.

NEMESIS OR FRIEND?
The biggest disruption in the way product is licensed has come from the online service Netflix. A high-profile deal sealing its status as a major player in the programming business was signed in April when Netflix acquired the rerun rights of Mad Men from Lionsgate. This means that the reruns of this critically acclaimed series will not air on a broadcast or cable network, as is usually the case with a hit series. Mad Men’s new episodes air on AMC in the U.S. and Netflix is reportedly paying close to $1 million per episode to take it online. Netflix subscribers (an estimated 23.6 million) will be able to stream the first four seasons starting in July, and see the fifth season on broadband as soon as it ends on AMC in 2012.

Netflix has a slew of deals with major studios in the bag for feature films and television programs from the likes of CBS (worth “hundreds of millions,” the network said). The company is also in discussions with NBCUniversal over a nonexclusive deal for library TV episodes.

But the most significant deal of all is Netflix’s purchase of its first original TV series. It is committing about $100 million for 26 episodes of House of Cards, an American remake of a BBC political series, starring Kevin Spacey. Netflix outbid HBO and others for the show from Media Rights Capital.

Besides Netflix, there are many factors causing disruptions in traditional ways of selling product. Studios and distributors have to navigate a constantly shifting terrain: technology is continually offering new platforms and devices; new players keep jumping into the programming game, joining the likes of Amazon and Hulu; and viewers have taken complete control of how and when they watch.

“Windows are collapsing to accommodate the changes that are happening,” says Kaner. “There are more businesses being developed and some of the traditional businesses are under tremendous pressure. Some of the physical DVD revenue is disappearing, but Blu-ray, VOD and EST (electronic sell-through) are growing. The problem at the moment is that the decline is faster than the growth. While this is most prevalent in the feature-film world it is also true in television. It varies country by country, but ultimately it is a problem that we will face around the world. The audience going to the cinema seems to be made up of either adults or young families, and much of the demographic in between is distracted by hundreds of different ways to consume entertainment and information. The cost of production and marketing in both motion pictures and television continues to rise, and that to me may be our biggest challenge.”

HOLLYWOOD HITS
All these changes are causing the studios to go with the flow, so to speak.

“Certainly in feature films, the windows continue to shorten,” says Warner Bros.’ Schlesinger. “DVD goes earlier, transactional video on demand goes earlier, therefore pay television comes a little earlier, free television comes a little bit earlier, and additionally there are all kinds of new forms of on-demand licensing that happen in or after the free-TV window.”

In the U.K., a major market, all the U.S. studios make VOD rights available on the same day as DVD.

“The film studios tend to have an agreed set of rules which they all stick to when it comes to the rollout of product,” says Michael Barry, the director of programming of BT Vision, the broadband TV platform owned by Britain’s biggest telecom provider, which has more than 500,000 subscribers. At a price of £12.50 ($18.50) per month, customers can get the whole range of VOD except the latest blockbuster movies. “The next step is going to be making a premium VOD window available before the DVD release. That is being talked about in the U.S., but not been confirmed for the U.K.”

A premium VOD window is being more than talked about in the U.S.—it has happened, and many in the industry are not pleased. On April 21, DIRECTV’s on-demand platform made Sony Pictures’ Just Go with It available to subscribers for $29.99 for a 48-hour window. The movie had been released theatrically on February 11.

This is an example of an initiative by studios and platforms to launch premium VOD services that deliver feature films to the home some 60 days after the theatrical release, instead of allowing the average theatrical release period of 132 days. The other features that will roll out on DIRECTV’s premium VOD service include Warner Bros.’ Hall Pass, Universal Pictures’ The Adjustment Bureau and Fox Searchlight’s Cedar Rapids.

BATTLE IN THE HOME
In response to DIRECTV’s plan, more than 20 Hollywood filmmakers, including James Cameron and Michael Bay, have issued an open letter released by the National Association of Theater Owners (NATO). The letter points out that the premium VOD window makes it possible for new movies to be shown in homes while these same films are still in their theatrical run.

“Make no mistake: History has shown that price points cannot be maintained in the home video window,” states the letter. “What sells for $30-a-viewing today could be blown out for $9.99 within a few years. If wiser heads do not prevail, the cannibalization of theatrical revenue in favor of a faulty, premature home-video window could lead to the loss of hundreds of millions of dollars in annual revenue. Some theaters will close. The competition for those screens that remain will become that much more intense, foreclosing all but the most commercial movies from theatrical release. Specialty films whose success depends on platform releases that slowly build in awareness would be severely threatened under this new model. Careers that are built on the risks that can be taken with lower budget films may never have the chance to blossom under this cutthroat new model. Further, releasing a pristine, digital copy of new movies early to the home will only increase the piracy problem—not solve it.”

In a separate release from NATO, Cameron said, “You can argue about VOD windows all day long, but what you can’t deny is that there is an overwhelming outcry from the theater owners that they feel threatened by this. The cinema experience is the wellspring of our entire business, regardless of what platforms we trickle down to. If the exhibitors are worried, I’m worried. We should be listening to them. Why on earth would you give audiences an incentive to skip the highest and best form of your film? My films aren’t going to the home early, but many will, and that will weaken the movie theater industry—and then my movies are threatened.”

FINDING A FAIR PRICE
New platforms have the potential of threatening more than the movie-theater industry and top filmmakers. In fact, every new operator and device puts existing business models to the test. To satisfy the demand for product, studios and distributors must find ways of monetizing their content, often carving out new windows.

In the U.K. market for feature films, a big recent change is a second pay-TV window. Currently, pay TV—effectively the BSkyB platform—gets an exclusive pay-TV window about four months after VOD and has that window for about 18 months. Now NBCUniversal, Warner Bros. and Sony, among others, have agreed to give BT Vision and Top Up TV a second pay-TV window for their subscribers for one month after Sky’s window, before the titles go to free-to-air tele­vision. Then, after about three years on free TV, the rights will go back to BT Vision for VOD.

The world of television windows, however, is very different.

In the U.K., Channel 4 makes its programs available for VOD as soon as shows air on TV, in most cases. BBC tends to wait about six months, and sometimes longer. The delay can be 18 months or even two years for programs aired on BBC Three or BBC Four.
Warner Bros. and Disney are among the U.S. distributors making programs available to VOD within 12 months, but some others hold back for two to as long as five years, either because they have sold the VOD rights and cannot get them back or for strategic reasons.

“We are not intentionally buying VOD rights ahead of the linear tele­vision channels, but it can happen on occasion when a title has not been acquired by the broadcasters,” says BT Vision’s Barry. “As our customer base grows and there is more money to invest, it will be possible. But buying first-run rights in the U.K. is very expensive and the value to us does not make a good business case for doing that now.”

“For television series, a number of interesting things are happening,” Warner Bros.’ Schlesinger says. “In some cases you have preview transactional video on demand, or EST windows, and we did that last year in the U.K., where we launched the first season of The Vampire Diaries on iTunes after The CW network premiere but before ITV2 premiered the show. That was unusual for a first-season show. It was done to combat piracy but also to build awareness for ITV2’s launch. It did quite well on iTunes and ITV2 ended up having double the number of viewers they expected for the premiere of the series.

“In some cases,” continues Schlesinger, “you might have a pay-TV window for a series, with the free-TV exposure following. Regardless, there is a lot of discussion about the catch-up rights that are granted. What has also become established in addition to catch-up is a nonexclusive SVOD window that runs during the free-TV licensing period, usually after the first telecast of the full season. In many countries we have launched WarnerTV, a branded environment, to exploit and exhibit these SVOD rights with cable and IPTV platforms.”

The notion of catch-up TV has caught on quickly across Europe. All major channels are offering viewers the opportunity to watch online shows they may have missed during the broadcast on linear channels.

YOUTH REVOLUTION
The young target of Channel 4’s outlet E4 makes new media an important part of the strategy for that channel and has an impact on the windows structure. Most programs are shown on linear first and then streamed on 4oD, the group’s video-on-demand service. But E4 does the occasional launch on 4oD seven days before the show airs on the linear channel. This works best with returning shows such as Skins. E4 also premiered the latest season of Misfits with an episode on iTunes seven days in advance.

“After a series builds a following, there may be an appetite to see episodes before they are on free TV,” says BT Vision’s Barry. “It’s possible that they might find some customers on PPV. But most people, if they know something is going to be free, are prepared to wait for it. It depends on the series. It would tend to be the case more with the cult-type shows than mainstream series.”

But catch-up is not an easy thing for the industry to digest.

Warner Bros.’ Schlesinger states it flatly: “One of the very strong feelings we have is that the catch-up rights should be advertiser-supported, and we believe they should have an ad load that is equivalent to what is in the linear broadcast stream. A lot of our discussions with broadcasters revolve around the desire to put less advertising in the shows when they are offered on demand. They might say it’s a much better experience to watch without ads, but then the question is, Who is paying for it? Do we really want to teach a generation to expect that they don’t have to pay for something and they can get it without or with very little commercial interruption? If they are paying for it, fine. But if they are not paying for it, then we need to insure that we help keep the broadcasting industry healthy and don’t create an expectation of viewers watching without payment and without commercials. Nor do we want to draw them away from the linear broadcast stream where they are watching commercials to go watch online with far fewer commercials in a catch-up TV environment.”

DEAL-MAKING FLEXIBILITY
With all of the possible ways of exhibiting product, broadcasters naturally aim to make deals that leave them plenty of room to move between windows.

“We try to obtain as much flexibility in our deals as possible,” says Rüdiger Böss, the senior VP of group programming acquisitions for Pro­SiebenSat.1 Media.

“With more players involved, the cake will not get bigger, the size of the pieces will change. This has to be reflected in our deals. We have to protect our free-TV rights, because we still spend most on these rights, and we don’t want people to know the answers in a series like Lost before we air it. Therefore we have to get holdbacks for ad-VOD”—advertising-supported VOD—“which is a free-TV right, and DVD and much more. On the other side we are a force in new media with our maxdome VOD platform and MyVideo, which is a free online platform. Mostly we acquire rights for exclusive free TV (including ad-VOD) with a holdback against pay, and we air the series as soon as possible. We also buy basic pay and nonexclusive rights for maxdome. And we have some very good ideas on how MyVideo fits in. Every contract is different.”

A SHARED JOURNEY
At the end of the day, both sellers and buyers are feeling their way together in the new market landscape. “Our licensors react differently in negotiations,” Böss adds. “Some are very reluctant, some are easier, but mostly we are all sitting in the same boat. We want to entertain, satisfy the audience—and make money out of it. The studios know that we are very good clients, not only because of our deep pockets but because we are the best way to deliver their product to the audience.”

It’s not always new platforms and technology that create the new windows. Sometimes it’s conditions in a given market that cause the change. In Italy, the traditional windows have been shattered in part because Warner Bros. identified an opportunity. “We went to Mediaset and licensed the pay and free rights to both our features and series,” explains Warner Bros.’ Schle­singer. “That allowed them the flexibility to decide whether they would utilize a pay-TV window or bypass the pay-TV window and go to free TV earlier. In the case of features, this could be a very interesting thing to do because we have been seeing in many countries a decline of audiences for features on free TV because they are commercially interrupted and only available significantly after theatrical release.”

Other times, programmers want to create new windows, Schlesinger says. “In cases where broadcasters come to us and ask for broader rights, more extensive rights, we engage in a conversation to really understand what are they going to do with those rights. Are you asking for them to protect your business? Are you asking for them to exploit new media? Are you asking for them to extend your reach? Are they going to be free, advertiser supported, paid for? And then, most importantly, how will we participate in the additional revenue that will come as a result of exploiting those rights?”

Certainly, the media landscape has become ever more complex. However, Twentieth Century Fox’s Kaner believes that “where there are enormous challenges there should be enormous opportunity as well. The lines between free TV and pay television continue to blur, and traditional linear players more and more want to be involved in digital businesses. In some ways it’s completely understandable because they want to protect their core audience and attract a new one as well. The battle between the computer screen and the TV set is over. Everything will go to the flat-panel TV screen and it will travel there wirelessly. The question remains what will be the nature of the content that people watch on that screen and, very importantly, how do we monetize it? We’re working on that every day, and it is both a very exciting and complicated time to be in entertainment.”