To: Senate Select Committee
Status: Information
Executive Summary
The development in technology in digital technology and internet connection has changed the business model of movie industries from their production to distribution stage (Zhu 2001). Because of the shift, the traditional way of movie distribution is disrupted by the digital technology. Video On Demand, as the new and evolved way of distributing videos generates opportunities for some of their stakeholders such as the producer and their consumers. However, it also causes some challenge for the distributors. It creates some issue within the movie industry in which the structure of the industry becomes disintermediated and have to go through some transformations. Moreover, Video On Demand have economic and environmental implication as it more profitable for the movie studios because it reduce their production and distribution cost, and more environmentally friendly than the traditional way of distributing the book.
Introduction
The rapid evolve of technologies around digital formats and distribution is reconfiguring entertainment industries such as books, films and music (Currah 2003). The development of technologies triggered the changes made in the movie industry. The digital technologies and internet connection allows the industry to produce and distribute videos digitally. The growth of e-commerce in different sectors are slowly replacing the traditional retailers. One of the example is the existence of Video On Demand. Video On Demand is the delivery of all forms of video content through satellite TV, cable TV, and on the internet (Cunningham, Sliver, & McDonnell 2010).
Traditionally, movies were distributed physically through the value chain from the producers to the users (Zhu 2001). Before the era of digital distribution, people get to watch videos by renting or buying a DVD from a video store and/or watch it in the movie theatres. At first, in 2000 “video on demand” appeared as a prototype additional market. When Video On Demand emerged, DVD was still popular and still are the big source of revenue for the producers from the DVD rentals and sales. The producers typically earns more revenue from the DVD rentals, DVD sales, and for the big movies, the movie theatres, rather than the other forms of distribution (Zhu 2001). As the definition aforementioned, video on demand identifies two different kinds of the appearance of video services such as a web-based video that can be downloaded and the cable television video. The ambiguity of video on demand leads to the new Video On Demand industrial trend now. The cable providers tried to bring forward the high speed internet in a package with subscription TV through digital delivery (Hilderbrand 2010). Nowadays, Video On Demand digital distribution of movies have already provided by the major movie studios (Silver & Alpert 2003).
The raise of Video On Demand started to have effect on the industries. The purpose on the availability of an online distribution is to facilitate the public, and specially the users, the comfortable and easy way to enjoy videos. With Video On Demand, the users can easily watch anything that they want to watch, anytime, anywhere, and from any devices. However, this means it will slowly be affecting the old way of distributing videos, DVD rental stores for example. As people can watch videos directly through their devices, there is no need for them to drive to a DVD rental store, rent a movie, drive back to their home, and then return the DVD. With the emergence of Video On Demand, this means the video is produced and distributed digitally. Thus, Video On Demand also affecting the producer and distributor of the video. The producer used to produce the video physically to acetate movie and DVDs. Then duplicate their videos in order to distribute it to their distributors such as movie theatres, video rental store, and et cetera. However, now the producer now can make a digital movie and without much cost in duplicating the movie they can distribute it to their distributors, or even directly to their consumers. Because of the possibility of distributing the video straight from the producers to the users, it means the industry will disintermediate and cut the middleman.
Video On Demand also have some economic and environmental implications. The appearance of the digital distribution of video are causing cost reduction. The cost reduction is felt by many such as the producer and the users. Even though the users still have to pay to see the video, the cost of driving to the DVD rental stores back and forth is reduced. Thus, the energy used in renting the physical video also lessen when using Video On Demand. In addition, not only the energy used for renting the physical video, but the energy of producing the physical video is also reduced. Thus, Video On Demand is more environmentally friendly.
Key Issues
As the technologies developed and digitization impacting the movie industry, it creates challenges and opportunities to the stakeholders. With Video On Demand, the consumers can rent and watch a movie comfortably from their home or even anywhere from any devices at any time. They also can enjoy basic play-back controls and not worrying about the late return fees (Currah 2003). Video On Demand offer the consumers easier way in selection and location. The selection in Video On Demand is broad and the geographic proximity is inconsequential (Zhu 2001).
However, the benefit that comes from Video On Demand to the users also resulting in challenges to physical video distributor, for example, physical video rental and stores. With the presence of Video On Demand, the consumers can download or digitally rent a movie. This means that they have the choice between going to a video store to rent or buy a movie, return home to watch the video, and the need to return the video to the store before the due date so they do not have to pay the late return fees, or simply download the movie from home (Zhu 2001). In this instant and developed era, most consumers would choose the easy and simple way. Thus, the scale of video store and rental slowly decreased. According to The Sydney Morning Herald, the revenue of video stores has been decreased at 15.8 percent annually over five years until 2014 (Lewis 2015). In the US, Blockbuster choose to close the last remaining 300 video rental stores by January 2014 (Redrup 2013). The consumer demand is moving to the digital distribution of video entertainment. Thus, the demand for physical video is decreased which impact the video rental stores. The same issue is faced by Redbox, the industry that focus on the physical video which sell DVD with DVD vending machines. The business faces the years of declined revenues since 2014 (Spangler 2016).
One of the opportunities with digital disruption in video on demand is impacting the movie studios or the producer of the video. First, it impacts production of the video or movie. With digitization, the movie industry can potentially reduce the cost of the movie production process. In movie production, first the producer shoots the movie and the results of the shooting is the raw movie. After that, they arrive to the post-production stage where the raw footage if the movie is edited into the final version of the movie. This stage is also where the visual and audio effects are added to the video. After this stage, they come to the duplication stage. In duplication stage, they made a lot of copies in order to distribute them to movie theaters. For the duplication, movie studios spent $850 million in a year (Zhu 2001). However, with digitization the cost of the movie production is reduced.
Furthermore, not only the production cost is reduced but the distribution cost is also reduced. With the various kind of consumers that differ in preference, urgency, and also the willingness to pay for the movie, the movie studio have to distribute the video through various channels such as the movie theatres, video rental stores, and other kind of channels. The video rental and video stores are the significant source of revenue for the studios, especially to movies that are not profitable in theaters or not a big hit and goes into the box office. According to Hollywood Entertaiment, video rental and stores accounted for about 48% of the revenue in 2000 (Zhu 2001). Even though Video On Demand makes the the video rental and stores reduced, the movie studios still changing their production and distribution stage to digital because the marginal cost per film decreased and it payed it off.
As aforementioned, with Video On Demand the consumers demand moved to movie streaming. Thus, the movie studios will shift their distribution digitally. With digitally storage video, the movies studios can distribute them to not only individual consumers, but also the theaters. The movie studios also can distribute them directly to consumers and movie theatres. They do not have to pay a distributor’s markup to purchase a film (Zhu 2001). Therefore, it reduces the cost of distribution. This leads to another challenges faced by the distributor.
In the traditional value chain, distributor play a big role in distributing the video. The distributor is the one who gets the master of the movie from the studio and give them to the media or channels such as cinemas in reels and DVDs or videocassettes for individual consumers. As aforementioned, with Video On Demand the consumers and movie theaters can get or download the movie directly from the movie producer. The producers choose to adjust with Video On Demand because of the lower distribution costs. Also, the cinemas could get the movie at a lower unit cost with dodging the distributor and go straight to the producer. Hence, the role and significance of the distributor will decrease.
Implications
As aforementioned, with Video On Demand people are shifting from the retail business or specifically, DVD rental, to the use of Video On Demand via internet. This new digital distribution strategy is impacting the environment. First, it lessens the consumption of primary energy. The traditional option consumed approximately 33% more primary energy than the e-commerce (Sivaraman et al. 2008). The energy consumption in the findings includes the manufacturing stages, the transportation, and the operation of the DVD player. In addition, this study also found that renting 3 movies online emits 40% less CO2 than, the traditional option in renting DVD (Sivaraman et al. 2008).
Besides the environmental implications, the shift from traditional to e-commerce way in renting a movie also have economic implications. In the same study, Sivaraman et al. (2008) also examined the cost of energy and external environmental. With the result of the energy consumption used by traditional and e-commerce option, they found that the cost impact of the traditional option that used more energy and release more CO2 is approximately 33% higher than the e-commerce option. From the total cost impact from ESAL, energy environmental and transportation, e-commerce option is the least-cost option (Sivaraman et al. 2008).
The emergence of Video On Demand also impacting the society and their culture. Because of Video On Demand, people can consume video anytime, anywhere, and on any device. The new distribution method provides an attractive new choice to DVD rental services (Dauchy and Perrin 2013). The simple and easy alternative leads the society to a new consumption pattern. People are now using internet more. This also impacting the internet service provider. The Video On Demand services that need internet means more people are using the internet and so it helps increasing the supply of internet service provider (Dauchy and Perrin 2013).