Putting the Pieces Together

April 2009

As broadcasters struggle with an economic downturn, the growing popularity of online video and digital media would seem to offer distributors some welcome relief. Last fall, for example, when the legal drama Damages bowed in the U.K., Sony Pictures Television International (SPTI) decided to make the show available not only on the BBC, but also on the BBC’s iPlayer download service and on iTunes.

“The net effect was a ratings increase on the BBC,” notes Keith LeGoy, the executive VP of distribution at SPTI. “It was also the most heavily downloaded show on the BBC iPlayer and the most heavily consumed TV series on iTunes.”

Even so, the much-hyped move to digital distribution has produced more complexity than revenues, a number of distributors contend, creating a delicate balancing act between their traditional businesses and newer digital platforms.

On one hand, there is little doubt that consumers are increasingly embracing online video and other digital media. In the U.S., where the trend is most pronounced, Nielsen Media estimated that about 124 million Americans watched an online video each month in the third quarter of 2008. More recently, the marketing reseach firm comScore reported that Americans viewed a record 14.3 billion online videos in December 2008.

On the other hand, however, traditional television dwarfs the usage and the revenues from digital media. A Nielsen study released in November found that the average American spends more than 142 hours watching TV each month but only two hours and 31 minutes watching online videos.

Despite rapid growth, revenues for digital media also remain paltry. The research firm eMarketer estimates that the advertising revenues for online video in the U.S. will grow by 45 percent in 2009 to about $850 million, but that is only a tiny fraction of the total TV-advertising pie, which will shrink by 4.2 percent to $66.9 billion this year.

“Personally, I’ve always been of the mind-set that every change in technologies has expanded the overall pie for media and entertainment,” says Tobias de Graaff, the director of global TV distribution at ITV Global Entertainment. “In the past, whatever negative consequence you’d see from the decline of an existing window was always more than offset by the growth of a new window and new media. What is different about this cycle is that the industry’s ability to monetize digital media has grown much more slowly than it did during the introduction of home video or DVD, where there were very clear business models.”

How companies manage that conundrum varies significantly throughout the industry. Some of the biggest opportunities and po-tential challenges can be found at the studios or at large distributors tied to major broadcasters—sales outfits with substantial libraries and the resources for staff and computer systems needed to manage the complexities of digital rights.

“Being able to manage all those rights is a major competitive advantage for us,” says Gary Marenzi, co-president of worldwide television at MGM. “There are probably only 10 to 15 companies in the world that are full-service distributors who can manage and fully exploit all of these windows across a large body of rights in the library. Having worked at both the studios and at a number of independents, I can tell you it can be very difficult and very frustrating [for smaller companies] if they don’t have the systems or people to manage those rights.”

Not surprisingly, the studios were among the first to invest heavily in digital-rights management software, computer systems and sales executives specializing in digital rights.

Marenzi remembers revamping MGM’s rights-management systems and deploying new software in 1993 and 1994 to deal with the increasing complexity of program sales. The studio now has an executive to oversee all of its digital rights and is currently in the process of upgrading its rights-management software.

Tracking those rights in order to exploit programs and movies through every possible media will be particularly important for the sales of MGM’s newest series, Stargate Universe, Marenzi stresses. “The sci-fi crowd is an early adopter [of digital media]. Figuring out how to window the show through digital media and VOD so that it sits nicely in with the TV windows will be very important.”

A similar focus on digital media can be found at The Walt Disney Company. A few years ago it deployed a bespoke rights-management system, and last year set up a specialist digital-media team, says Maria Kyriacou, the senior VP of new-media distribution in the London office of Disney-­ABC-ESPN Television.

“This team reflects Disney’s overall belief in new media and how important we think it is to connect with consumers across multiple platforms in new ways,” Kyriacou explains.

In the U.S., Disney’s ABC network was one of the first to put full-length episodes up on its website, and in December 2008 its drama Lost was the most popular TV series streamed online, with the content viewed over 1.4 million times.

Internationally, the studio has also been breaking new ground. It has put high-definition episodes of Lost on iTunes in the U.K., becoming the first studio to offer HD content on the site.

Disney has cut deals with a number of traditional clients and new players in the digital space. It has deals for catch-up rights, which allow viewers to watch episodes online that they may have missed on TV, with Channel 4, Five and Sky1 in the U.K. and CTV and Citytv in Canada, among others, and has sold product to VOD platforms run by a number of European IPTV players, including BT Vision in the U.K., Deutsche Telekom in Germany, France Telecom’s Orange and Free in France and Fastweb in Italy.

“They are all important new clients for us that allow viewers to access our content on demand,” Kyriacou notes.

While digital distribution has brought a host of new potential clients into the marketplace, the growing popularity of download sites and VOD platforms has prompted some executives to worry that these deals will hurt their traditional broadcast clients.

Most studio executives dismiss that argument. SPTI’s LeGoy points to the success of Damages in the U.K. as an example of how digital media can help boost TV ratings. “It shows how traditional linear broadcast media and some of the newer on-demand digital platforms can be synchronized to maximize the benefits for everyone,” he states.

In fact, broadcasters are increasingly making shows available online shortly after the broadcast airing to help attract viewers. ITV’s de Graaff says that catch-up rights “give new viewers who might have missed a program an opportunity to get involved with a show, and it helps retain viewers who missed an episode and might have thought, ‘I’ve missed so many episodes there is no point in tuning in and watching the rest.’ This is clearly valuable to broadcasters.”

Many broadcasters are putting some television episodes online for free shortly after the broadcast airing, but in some cases, particularly in Europe, they are also making content available for a small fee, which is generally split between broadcasters and distributors.

Such VOD services are already starting to produce some nice revenues, according to Cathy Payne, the chief executive of Southern Star International.

In Belgium, for example, the royalties from a VOD service run by a broadcast partner last year hit ¤200,000, Payne says.

“That is significant new revenue from one broadcaster in one territory for just a few shows,” says Payne, who adds that when possible, Southern Star prefers to work with an existing client for digital rights. “You already have a relationship with them, and they have the infrastructure to market the services,” she says.

These on-demand and download services, whether run by a broadcaster or by a company like Apple, are also providing new outlets for library product.

“ITV Global’s library has a wide spectrum of wonderful programs that we can make available on an even bigger variety of platforms to its dedicated audiences,” de Graaff says. “Thanks to this, our buyers are choosing wide ranges of special-interest programs. And we’re doing very well with them.”

Other distributors see the management of digital rights as an important part of their business as they expand their international distribution arms.

Starz, for example, set up a Starz Digital division to manage digital rights. That group is already actively making its content available on a variety of digital platforms in the U.S., including iTunes, and is now expanding its efforts.

“In the last year, we’ve been working together to try to open up distribution for these platforms internationally,” says Gene George, the executive VP of worldwide distribution at Starz Media. “We’ve locked up deals with iTunes and Xbox in the U.K., and we’re looking to bring that into other territories.”

Those efforts will become more important as Starz expands the range of product it is selling to international markets. “Our goal is to establish a fully integrated distribution company [with content ranging] from big theatricals to tele­vision series, specials, documentaries and TV movies,” he says.

At MIPTV, the company will be talking to clients about those new productions, including its second drama series, Spartacus, which is set to debut later this year.

Incorporating digital media into the overall sales process is particularly important for the kids’ business. Besides the fact that younger viewers are early adopters of newer technologies, digital media offer program creators and distributors a way to bring their properties to the widest possible audience, states Brian Lacey, the executive VP of international at 4Kids Entertainment.

“The upside in the kids’ business is all about creating a property that enjoys a long shelf-life and can generate revenues from many sources, including merchandising, video games, DVDs and movies,” Lacey says. “But increased competition and the erosion of the television audiences over the last 15 years means you can’t just rely on free linear TV to expose your content to as many eyeballs as possible. You have to be thinking about everything—free TV, pay TV, home video, the web, digital media, VOD, mobile episodes, etc.”

As a result, 4Kids not only airs its shows in a weekend morning branded block on The CW network in the U.S., it also makes them available on 4Kids.tv, which streams about 16 million pieces of video each month, and puts the shows on VOD, where they are viewed 3 million to 5 million times each month.

While this increases the number of kids who’ve watched the shows and boosts the potential revenues from ancillary merchandise and products, it also increases the complexity of dealing with broadcasters, Lacey admits.

In a specific territory, a terrestrial broadcaster and a cable channel may both want to stream a show, producing conflicts that could hurt the television run if unlimited streaming rights were granted. “If there is too much exposure on the web, you are in some ways undermining the broadcast opportunity,” Lacey says.

Even with a single broadcaster, distributors face a number of complex issues. “It’s no longer about negotiating a broadcast deal for three runs over four years,” SPTI’s LeGoy explains. “The broadcasters are setting up online, mobile and digital presences, and they’re coming to us and saying they want to be able to work with us across all those platforms.”

In tough economic times, these multifaceted relationships can also strengthen the ties between broadcasters and distributors, LeGoy believes.

But, selling all these rights to a single broadcaster may not always be the best path, some argue. “Ultimately, it comes down to money and control,” according to MGM’s Marenzi. “We want to stay active as a full-service distributor and control all those rights. There are broadcasters who offer a big check and say we want it all. In some instances that will work, but in a lot of instances
it is not going to work because we have invested a lot of time and money building a distribution operation so we can make certain those rights are utilized in the most effective possible manner.”

In fact, a number of studios and distributors now regularly include contract provisions designed to make sure certain broadcasters will actually use the rights they acquire and are not simply buying them so they don’t end up with a competitor.

“We want to know how they are going to exploit those rights, and there is an unwillingness to license them unless we know exactly what they are going to do with them,” says Kyriacou.

In tight economic times, distributors are also keen to make certain that the newer digital opportunities won’t hurt their existing businesses. “We don’t want to trade analogue dollars for digital pennies,” quips Dan Allen, the COO at FremantleMedia Enterprises (FME). “The uptake and revenue-generating ability of digital services has been slower and less robust than people might have believed in the U.K. and Europe,” he adds. “The revenue we are seeing is minute compared to our existing business of selling our content to traditional tele­vision, and that is largely because the new kids on the block are finding it very difficult to monetize the content. [Internet users] aren’t paying for the content, and advertisers aren’t really engaging with it in a meaningful way.”

That makes it particularly im­portant that distributors remain attuned to consumer behavior, Allen contends.“The trend towards a digital world is inevitable and unstoppable,” he says. “The danger is that by misjudging the pace of change, an opportunity [in the digital space] could actually be cannibalizing an existing revenue stream.”

Still, Allen believes that FME’s worldwide network of sales offices will leave it well positioned to capitalize on the digital opportunities as they develop. “At Fremantle we have nearly a dozen offices around the world, which gives us a genuine local presence. This is incredibly important, as each of the local markets is getting more complex,” he says. “It gives us much more intelligence about the local broadcasting environment and the pace of technological change.”

Those technological changes are also altering how some indies are approaching the film business. “A lot of our competitors [in the independent film sector] tend to sell all rights to buyers in different territories and let those buyers come in with an advance and do the windowing,” says MarVista Entertainment’s CEO, Fernando Szew. “But because we’ve always been more focused on the broadcast side of things, we’ve always felt it was very important to maximize [the way we exploit] our content in all the windows.”

That philosophy has led the company to invest in rights-management software and to hire a senior VP of sales who has new-media experience, Szew adds. MarVista has also been willing to experiment with redefining traditional windows and with newer media. As an example, Szew refers to Reflections, a thriller starring Timothy Hutton that the company will be selling at MIPTV. “In certain territories, we are going to make it available on the VOD platform first and then move it down the value chain towards pay TV and basic cable,” Szew says.

Beyond Distribution has also been beefing up its infrastructure to handle an increasingly complex sales environment. About eight years ago, the company, which will be selling such shows as Chuck’s Day Off and Science Impossible at MIPTV, invested heavily in a bespoke database, which now allows it to effectively manage all its rights and quickly determine what rights are available, explains Beyond Distribution’s general manager, Fiona Crago.

While stressing the importance of the emerging digital business, Crago notes that “the biggest part of our revenue still comes from old-­fashioned free- and pay-TV rights. The fragmentation of [the media landscape] and the increasing number of rights adds to the complexity of the business and adds to the cost of doing deals. You are doing more deals for less money. The servicing costs are higher and, unfortunately, it hasn’t added to our bottom line.”

In many ways, though, digital media hasn’t radically changed the business. “These days broadcasters cast the net as wide as they can in their rights definitions,” Crago says. “But we are still doing what we always have, which is to try to extract whatever value we can for the additional rights that are granted.”