A decade ago, entertainment giants responded to emerging communication technologies with some detachment. They tried to satisfy the digital customer mostly with basic company portals and product websites. Even as they watched the music industry’s struggle with peer-to-peer downloading with increasing foreboding; many estimated that they were still years away from the same fate overtaking them.
Now entertainment companies are playing a different tune, as indicated by the participants of the “Traditional Media Companies Embrace New Media” panel discussion at PwC's “Outlook for Content and Communications 2006-2010,” event at the Four Seasons in Beverly Hills this past October. Moderated by Mike Kelley, advisory partner, PwC Entertainment and Media practice, the panelists discussed how their traditional media companies are approaching the challenges posed by new and improved content delivery technologies, including higher speed access to the Internet and mobile networks, indicating that now, they are devoting serious resources to exploring new media initiatives – not out of fear, but out of a growing sense of opportunity.
Larry Kenswil, president of eLabs at Universal Music Group described how old copyright regimes in the music industry can drive new initiatives. “We are juggling an enormous number of business models," he said. “Fewer than ten years ago, our business centered on CDs that we sold and distributed, marketing a single product on broadcast radio. Radio stations do not pay the sound recording fees to labels. However, the new forms of radio such as satellite and Internet radio do pay for both sound recording rights to the labels and performance fees to the artists. As a result, we look to reduce our dependence on ad-supported radio. But we don’t know which one of these models will be successful going forward. Therefore, we make hundreds of licensing deals a year with new media entities all around the world. Not all of them launch and not all of them launch successfully.”
The motion picture industry is grappling with establishing the most profitable cascade of release windows as the entertainment landscape changes. “The theatrical release window sets up all of our downstream value,” explained John Calkins, senior vice president of corporate development for Sony Pictures Entertainment. “Even a 10 percent cannibalization of that window could be disastrous. So although there are frequent discussions about whether studios should do simultaneous releases or even early releases ahead of the theatrical release, nothing has yet been validated to create the pull to execute them,” he said.
Companies that act as service providers to the motion picture industry must adapt to their clients. “We need to figure out how to keep from being obsolete with our film business; it is our job to be a service company, and we need to invest in new business models to be technology agnostic for our customers,” said Joe Berchtold, president, Technicolor Theatrical Services. “However, we are mindful that the landscape is littered with companies, which poured money into new technologies well before they were ready. We find that projections about technology adoption tend to be wildly optimistic regarding the next couple years. In general, we overestimate change in the short term and underestimate it in the long term. So what we are doing is to manage the right pace of transition, staying in sync with our customers and neither keeping them from moving nor trying to push them before they are ready.”
Even the much-publicized transition to digital cinema may take longer than some people think. Berchtold reported that about five percent of some part of the digital cinema projection chain – computer, server, and projector – has some sort of problem during the first week of a movie’s release. “If five percent of one or two thousand screens went down when the picture was a new release, you’d have a very serious problem, because studies receive 40 percent of their gross on opening weekend,” he said. “This is improving, and we are moving forward with a substantial market test, but we need to get more buys out before digital cinema is ready for a broad deployment.”
Yet change brought about by technological advances is not going to slow down. The most important development is the continual increase in bandwidth to consumers. According to Blair Westlake, Corporate Vice President, Media & Entertainment Group, Microsoft Corporation, “Telecom companies and other third party IPTV customers are making significant investments to make bandwidth available and the speed should be phenomenal compared to what most customers have now. In Visalia, California, Verizon is testing 20 megabits per second (mbps) downstream bandwidth. I think from the standpoint of content delivery that speed is going to make all the difference when consumers can access video as quickly as they currently access text.”
This means that all forms of content will be racing towards consumers at warp speed. And although content owners want consumers to receive their products, they also need to be paid for it. Consumers want to use the content they pay for freely; content owners fear that the action of just one person releasing a song or other property on the Internet can seriously reduce their revenues. Digital rights management (DRM) systems usually incorporate some form of content protection and a set of rules that guide consumers’ access to that content. Rules include such actions as payment, even tiered payment for different levels of access privilege. Consumers often feel that DRM limits freedom, but content owners see DRM as technology that could allow them to implement profitable business models to ensure revenues. However, until DRM systems become more sophisticated and flexible and able to satisfy the concerns of both owners and consumers, license holders are cautious about deploying them.
“In the music business, record labels pay for branding and brand marketing of the artist,” said Kenswil. “If you remove the incentive of downstream profits for the label, then who is going to market artists and make them a brand? Now, put DRM into the equation. We look at DRM simply as a business enabler: What can we do with DRM that we wouldn't be able to do otherwise? We had the misfortune of having 85 percent of our business dependent on a completely unprotected format because CDs had no DRM, no encryption and no copy protection – no anything. It’s very hard to then introduce new business and distribution models that give the consumer less than they received before.”
Sony’s Calkins believes the motion picture industry still has some time to develop strategies to deal with greater bandwidth. “Customers who download movies are still a very small segment. So although it is a beat-the-clock issue with respect to piracy, we’ve been helped by two things: We already have an encrypted product, and its pricing is generally viewed as being fair. We’re not in a hurry to jumpstart digital downloading, but we do view it as a great opportunity for customer convenience and greater studio revenues.”
Ten years ago, industry leaders saw the digital revolution as a threatening possibility. Today’s discussions are marked by a strong sense of potential opportunity. They now see that timing is everything in this emerging business environment, offering new ways to match increasing bandwidth with appropriate pricing, packaging, and maturing content protection technologies.