By Devendra Mishra, Executive Director, HITS and Chief Strategist, MESA –
Hollywood has long relied on exhibitors and retailers to deliver its products to the consumer through a physical supply chain spanning the transportation of film canisters to theaters, the pressing of plastic discs and the delivery of pallets of prerecorded product to mass merchants.
Today, of course, digital technology is recasting the links of the supply chain, enabling content owners to deliver their IP not just faster and with more transparency, but also to a different destination: directly to the consumer, instead of, or in addition to, the traditional middle men.
Early efforts in direct-to-consumer (D2C) distribution — think Crackle, HBO Now and CBS All Access — have not yet brought a full paradigm shift, but more game-changing services are on the way. Nearly a decade after the adoption of digital technology, the Hollywood studios — long full-blown media conglomerates that nevertheless continue to expand — are seeking to build direct relationships between their brands and consumers, in some cases using their own pipes to deliver their content to consumer devices. Disney’s new streaming service, called Disney+, will launch late this year, as will a branded D2C streaming service from AT&T’s WarnerMedia. NBCUniversal will launch in early 2020 a unique streaming service that will be free to cable customers of its parent company, Comcast.
One wonders: Why the sudden rush by Hollywood’s content holders to eliminate traditional distribution intermediaries as they build the digital marketplace? Competition from those intermediaries, which are expanding into their own original content, is certainly one reason.
The media conglomerates have finally recognized the competitive delivery capabilities of the digital distribution standouts — namely Netflix, Amazon, Facebook, Apple and Google — who have built from scratch global content platforms specifically for content delivery. This race to satisfy the insatiable appetite of the consumer for entertainment was led by Netflix, which now boasts more than 130 million customers worldwide.
Streaming has provided a quantum jump in delivering video with ease and extraordinary quality, making binge-watching a cultural phenomenon. In the process, Netflix has rewritten the rules of TV and movie production, talent paydays, TV scheduling, film release windows and marketing campaigns.
In August 2017, Disney CEO Robert Iger decided to get out of the business of supplying content to others in favor of launching the studio’s own direct-to-consumer streaming service featuring Disney, Pixar, Star Wars and Marvel titles. Disney also took a 75 percent ownership stake in BAMTECH, the streaming technology company originally founded by Major League Baseball, providing it with a robust platform of its own for new services.
The reconfiguration of the studios as a result of acquisitions has created a direct path to consumers. The 2013 acquisition by Comcast of the half of NBCUniversal that it did not already own supplied the cable operator with content for its established delivery system. AT&T made a similar move with its acquisitions of DirecTV in 2015 and Time Warner in 2018, building out its own operation of pipes and content.
Business models and the back end
But the desired transition to D2C has been a Herculean task. For example, historically the greenlighting of a film or TV show has relied on estimating profit by aggregating all sources of potential revenue, and offsetting it by cost of production, marketing and distribution. Projections of revenue and costs were made for theaters, TV, retail (home entertainment and merchandising), third-party licensing and distribution deals. On the other hand, in the case of D2C, it’s all about subscription and/or ad-supported entertainment delivery for a critical mass of content. Crossing the chasm between these two methodologies for revenue recognition, from monetization to subscription, is an onerous task to be embarked upon.
A formidable challenge remains to sort through the existing licensing and distribution contracts for content in territories of the world, so that the avails can be reengi-neered for D2C. Certain licenses have to be bought back from territories. And considering the windows governing licensed content, the economics of the transition is plagued with uncertainty. Further, one has to have enough content to make a branded D2C platform attractive and viable. No wonder you see AT&T mining every corner of the Warner Bros. catalog to build its digital service.
The technology challenge of building the digital infrastructure to support D2C is exacerbated by the legacies of century-old studios Balkanized by franchises, businesses and functions. Integration of content scattered over discrete systems in a studio is a hurdle to overcome. While enterprise resources planning (ERP) systems are in place at a majority of the studios, the digital Lego blocks are being assembled for the D2C platform. Disney had the foresight to acquire BAMTECH for $2.5 billion to build the infrastructure required. But integration of countless operating systems with the backbone has to be accomplished.
True success of such an endeavor must also incorporate principles of design thinking, to build intuitive user interfaces. While data analytics is the staple of FANG (Facebook, Amazon, Netflix and Google) companies, it remains to become a critical forte of Hollywood.
Fortunately, TV arms of studios have had the extraordinary advantage of having direct access to their consumers through their networks. In addition, their content being episodic, as opposed to feature films, makes the business model more nimble with reduced risk. Finally, TV networks have sports fans who demand real-time experience from their sports events, like the news channels, without latency.
Hollywood’s ongoing evolution of D2C is going to be hard, and comes with considerable risk. To build their own platforms, Disney, AT&T and Comcast have to invest billions of dollars in digital infrastructure and reconfigure their business and systems. They may even have to forgo some traditional licensing revenue from selling rights to third-party networks and distributors.
It has been reported that it will take 40 million subscribers paying $6 a month for Disney to break even on its D2C service. (Disney set the price of Disney+ at $6.99 per month in April.) Furthermore, the requirement of a brand with sufficient content to determine the success of the D2C platform cannot be overstated.
All these concerns, aside, though, technology enablers and service providers have an unprecedented opportunity to make D2C a reality for Hollywood.