2013 - Ultraviolet prospects (BSAC)

UltraViolet – impacts and opportunities across the value chain

What UltraViolet means to participants across the film industry value chain

Jeremy Michaels, Oliver & Ohlbaum Associates

BSAC Conference, Thursday 14th March 2013

O&O

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A little bit about us…

We are the leading independent advisor to the UK media, entertainment

and sport industries

We provide strategy advice to the organisations, regulators and investors

shaping these sectors

As part of this strategy work, we look at the forces that will drive change

in the industry over the next decade

We conduct large scale consumer research annually to understand the

habits, ownership, attitudes and behaviour of the UK media consumer

We have worked for more than 200 clients in the UK and internationally

inc: BBC, ITV, C4, NBCU, Virgin Media, BT, Discovery Networks, Viacom,

EOne, FAPL, UKTV, Microsoft, O2, KKR, Goldman Sachs, Ofcom, etc…

Contents

What is UltraViolet?

How is the rollout going?

Who is interested in UltraViolet going forward?

Why does UltraViolet matter – the broader context?

What is the impact likely to be?

Some final thoughts

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What is UltraViolet?

Our definition of UltraViolet as used in our annual consumer survey

“In response to the rise of on-demand movie services, major US studios have developed a

system called 'UltraViolet' that allows consumers who purchase a DVD to also have access

to a digital copy of their purchased content for any device”

Three key points to remember

It is a common DRM standard across multiple devices adopted by DVD publishers/studios

and licensed to device manufactures/platform operators to allow consumers to access

their digital locker using multiple devices

It is not the only "tethered" package media/digital access system – US and UK retailers

have introduced similar ecosystems - e.g. Tesco Clubcard TV/Blinkbox; Walmart/Vudu

It allows for up to six digital users (i.e. intended to be shared with friends and family) -

which can be either multiple users or multiple devices/platforms (however, a secondary

market for low cost UltraViolet access codes is already emerging in the US and the UK)

Definitions and key aspects

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How is the rollout going?

Geographic coverage

11m subscribers globally (our October 2012 survey indicated between 500k and 1m in the UK)

Currently available in the US, UK and Canada

The system is operational in Australia, New Zealand and Ireland

Roll out to France and Germany is on track for Q3 2013

Content, providers and retailers

8,700 UltraViolet-enabled movies and TV shows

9 major content providers: BBC, DreamWorks Animation, Fox, Lionsgate, Paramount, Sony Pictures,

Starz Anchor Bay, Universal and Warner Bros

9 retailers including Barnes & Noble (NOOK Video), Best Buy (CinemaNow), Cineplex, Flixster, M-

GO, ParamountMovies.com, SonyPicturesStore.com, UniversalHiDef.com and Walmart (VUDU)

By the numbers: updates as at 1st March 2013

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Over 11m subscribers worldwide with minimal marketing to date is an encouraging start for UltraViolet…

Source: Braincomm, UltraViolet DECE, Oliver & Ohlbaum analysis


Our annual survey:

An internet-based survey, this year with 3,114 respondents

Sixth year of the survey, allowing for tracking of consumer interest and adoption

Up-weighted sample for Pay TV homes

A boosted sample for e-reader and tablet use as looking for behaviour within these owner groups

Weighted back to be nationally representative of TV type and demographics

Results from previous years – i.e. espoused behaviour vs actual – give us confidence in the data*

The O&O ‘Battle for the Media Consumer Survey’

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For the last six years we have run a bespoke online survey of 3,000+ respondents, with an up-weighted sample for pay TV

homes, weighted back to be nationally representative. For the last two years we have asked about Ultraviolet

Source: Oliver and Ohlbaum Analysis

Note: * the variance between planned (intended or espoused) purchase of tablets and e-Readers from 2011 to actual behaviour in 2012 provides less than a 1% variance


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UltraViolet may carve out a niche, and consumers are willing to pay

Source: Oliver & Ohlbaum Consumer Survey 2012 (n=3,114)

3.6%

Yes…

Have you heard of UltraViolet, are you interested and how might it impact on DVD consumption?

…and used it

18.5% …but not used it

78.0% No

Are you interested in using it?

7.5% Very

27.9% Somewhat

Impact on DVD purchasing?

26.1% Buy more

31.8% Pay more

39% Using or

interested in

UltraViolet

Substantial

proportion

willing to buy

and pay more

Our research indicated that 39% are interested in using UltraViolet…

16.5% 8.5% 4.4%

Up to

£1 more

Up to

£2 more Up to £3

more

Since its’ peak in 2004, total home entertainment revenues in the UK have fallen by over 40% in just 7 years, but are now

beginning to show signs of stabilisation. UK digital revenues are not likely to have over-taken physical rental this year


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Declining DVD market has only been partially substituted by on-demand revenues…

451 601

821

1,175

1,392 1,557

1,399 1,302

1,440 1,454 1,311 1,267

1,165 427

500

596

721

853

921

910

917 806 783

664 572

584

494

494

462

476

389

327 280 265

263

253

246

63

68

73

74

67 75 96

101

107

114

0 1

39 52

878

1,101

1,911

2,453

2,775

3,027

2,772

2,613 2,601 2,604

2,361

2,238 2,161

0

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

£ Millions

Online VoD*

TV VoD

Film on

video (rental)

Non-film on

video (retail)

Film on

video (retail)

Source: BVA Yearbook 2012, Screen Digest, Oliver & Ohlbaum Analysis

Note: * includes rental VoD (DTR), retail (DTO or EST), subscription (SVoD) and free/ad supported VoD

UK home entertainment revenues, 1999-2011

9.55 9.27

6.80 6.39

3.99 5.13

17.96 18.00

0

2

4

6

8

10

12

14

16

18

20

Retail 2011 Retail 2012 Rental 2011 Rental 2012 Digital 2011 Digital 2012 Total HE 2011 Total HE 2012

US$ Billions

In the US, home entertainment grew, fuelled by digital growth that was nearly twice as large ($1.14bn) as the decline in

retail ($0.28bn) and rental ($0.41bn) combined ($0.69bn). By some definitions*, digital is now larger than the rental market


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US home entertainment consumer spending 2011 to 2012

… but US video consumption grew in 2012, fuelled by digital growth and maybe Blu-Ray

Source: DEG, Screen Digest, Oliver & Ohlbaum analysis

Note: * definitions vary regarding SVoD and subscription disc/digital breakdown

Retail 2011-12

- DOWN 2.93%

Rental 2011-12

- DOWN 6.03% Digital 2011-12

- UP 28.57%

Home

Entertainment

2011-12

- UP 0.22%

In the pre-web 2.0 era (and to a slightly lesser extent since then) DVD was the ‘cash cow’ for the studios. UltraViolet may

be a successful strategic move to defend and protect DVD revenue, and extend the shelf-life of physical product


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Typical pre-web 2.0 distributor shares by window and driver of revenues of share

Is UltraViolet a defence to protect DVD revenue in the short-term?

Gross

revenue

(exc sales

tax) $Bn

Distributor

share

Net

distributor

revenue

$Bn

Drivers of

share

Theatric 25 40% 10 • Concentration of ownership

and cinema chains in

national market

• Adoption of digital cinema

DVD/VHS 53 55% 30 • Retail DVD concentration

• Mix of retail outlets

• Vertical integration of

labels by distributors

• Role of wholesalers and

vendor management

TV related 22 50% 11 • Increased ownership

concentration of pay TV and

free TV

• Importance of film versus

sport and home grown

programming

Total 100 51% 51 • Market concentration of

distributors

• Throughput of film by

distributor

Source: Interviews, Company Accounts, Oliver & Ohlbaum Analysis, (and “From Middlemen to Mini Majors” © O&O 2007)

Why does UltraViolet matter – the broader context? Home entertainment is just part of a 5 way battle for consumer spend

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Free TV

/ STB

Pay TV /

STB

IPTV /

Games

console

PC /

Home

BB

Portable

PC /

Tablet

Smart

phone

TV

HOME BEYOND THE HOME

Platform / device battle

FTA Broadcasters

OTT Aggregators / Disruptors

Pay TV “packages”

Web 2.0 players

Packaged Entertainment

Services battle

On demand is attracting new competitors – often global – to the UK TV industry. As home entertainment migrates across

devices this battleground further intensifies, beyond the home and across five types of service providers

Source: Oliver & Ohlbaum analysis

Four possible scenarios…


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How will the battleground play out?

A single aggregator –

the ‘Amazon’ of VoD

Piracy wins out

Studios retain control – individually?

Platform operators keep the consumer –

the TV / BB ‘bundle’

Note: we think it is unlikely that device manufacturers (Samsung etc.) will, despite their efforts, have a significant position

1

2

3

4

First Second Third Fourth

Ultraviolet?

Theatrical Theatrical

0m 1m 2m 3m 4m 5m 6m 9m 12m 24m

Theatrical DVD Pay Per View/TVoD Terrestrial

First pay/SVoD

Second pay/VoD

Across the value chain, participants are experimenting with new ways of windowing content, with the theatrical window

being shortened (and sometimes bypassed) and VoD windows widening. UltraViolet maybe disruptive to other windows


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The lines between windows have blurred – UltraViolet provides another substitute

DVD retail

DVD rental

PPV/TVoD

First pay/SVoD

Second pay/VoD

Terrestrial

Early 2010

Theatrical window cut short

(avoid clash with World Cup)

July 2010

To VoD before pay TV

Oct 2011

“Margin Call”

Day and date

Oct 2011

“Tower Heist”

Th + 3 weeks

Various

“Freakonomics” & “House of

the Devil”: pre-theatrical VoD

Dec 2012

The first time that a major studio has bypassed traditional cable

TV outlets for an online distributor

Ultraviolet

Airplane/Hotel

Dec 2012

YouTube on Virgin America

Sep 2012

Digital before Blu-Ray/DVD

• The theatrical window is being shortened and tinkered with

• Digital disruption is impacting all windows

• On demand releases before theatrical

• Digital releases before Blu-Ray and DVD

• Studios bypassing cable TV for OTT distributors

• UltraViolet is – of itself – also disruptive

• The old window system is over

Jan 2013

VoD w/DVD +3

Studios would ideally want scenario (3), and could continue to be successful within scenario (4), but would most likely

want to avoid scenario (2) at all costs and ideally avoid (1) as well (learning from impacts on the music industry)


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UltraViolet may help the studios avoid scenarios (1) and (2), and perhaps achieve (3)?

A single aggregator –

the ‘Amazon’ of VoD

Piracy wins out

Studios retain control – individually?

Platform operators keep the consumer –

the TV / BB ‘bundle’

Note: we think it is unlikely that device manufacturers (Samsung etc.) will, despite their efforts, have a significant position

1

2

3

4

Whilst our research indicates strongly that consumers see great benefit from the UltraViolet service, with no distinction

based on device usage or the number of viewings, it removes the capacity for effective price discrimination


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It reduces the capacity to effectively price discriminate – potentially reducing revenues

5.00

2.00

1.30

1.00

0.40

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Cinema DVD Pay-TV SVoD FTA TV

First Second Third Fourth

window window window window

Per viewer cost of watching a film once – by window (£ net of VAT) By providing content into perpetuity,

at a flat rate cost for multi-device

usage and with unlimited viewing, it

is easy to see why our survey saw a

high level of consumer demand for

UltraViolet despite minimal marketing

However, content owners have in the

past been able to generate greater

revenue by price discrimination –

charging different prices for different

methods of viewing the content, and

for multiple use across windows

Source: Screen Digest, European Audiovisual Observatory, Oliver & Ohlbaum Analysis (and “From Middlemen to Mini Majors” © O&O 2007)


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In particular it could cannabilise lucrative pay TV and SVoD windows

44.0% 52.0%

Percent of respondents interested in UltraViolet who subscribe to SVoD services:

Netflix Lovefilm

UltraViolet may provide competition for Pay TV and OTT incumbents and market leaders as people increasingly access

each others’ digital libraries (be they legitimate or not) or their own digital libraries on the move…

… and using our survey data we were able to estimate that SVoD revenues for Netflix and Lovefilm in the UK totals

between £260m - £275m per annum, indicating further the cannibalisation risk posed by UltraViolet

46.2% 14.5%

Percent of respondents interested in UltraViolet with a Sky Movies subscription:

Sky Virgin Media

… and using our survey data we were able to estimate that subscription revenues for Sky Movies across all platforms is in the

range of £300m - £325m per annum, and so clearly the cannibalisation risk that UltraViolet poses to Sky is considerable

Source: Oliver & Ohlbaum Consumer Survey 2012 (n=3,114)

This is a delicate path to tread…

Some final thoughts

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Three things to be mindful of

1. Trade off between gaining traction and growing to scale without crushing other windows…

… but if successful, do integration issues arise?

2. UltraViolet can be a number of different things…

• NOW: digital locker for purchased, physical product

– Maintains price (e.g. Blu-Ray) for physical product

– Establishes a player infrastructure (and a new, unifying window for the future)

• FUTURE: ‘pure’ digital locker (or hybrid)

… but if successful, do other windows collapse?

3. There are many ways to exploit the opportunities…

• B2B: what would happen if UltraViolet was licensed to Blinkbox, for example? (and are

retailers better placed to stop ‘leakage’ e.g. through use of discount/loyalty cards etc.?)

• B2C: longer term, will one entity dominate the ecosystem as Apple iTunes did for music?

x

x

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Connect

For more details:

Email: [email protected]

Phone: 020 7313 5918

Follow: @OliverOhlbaum

Blog: www.oando.co.uk/blog/category/entertainment/

Web: www.oando.co.uk

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http://www.oando.co.uk/blog/category/entertainment/

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Presentations & Public Speaking

2013 - Ultraviolet prospects (BSAC)