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The Effect of Video on Demand Services on the Cinema Industry

John Savage
July 2014

This dissertation is submitted in partial fulfilment of the requirements for Degree of MSc in Marketing Practice, Letterkenny Institute of Technology.

Presented to Kathleen Mc Gettigan Department of Business School of Business Letterkenny Institute of Technology

Disclaimer 1

I hereby certify that this material, which I now submit in partial fulfilment of the requirements of the Degree of Masters of Science in Marketing practice, is entirely my own work and has not been obtained from the work of any other, except any work that has been cited and acknowledged within the text.

Signed:

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Disclaimer 2

I agree that this thesis may be used by Letterkenny Institute of Technology for teaching purposes on future Masters Programmes.

Signed:

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Disclaimer 3

I hereby declare that this dissertation has a work count of 10,146 words. Signed:

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Abstract
Background

The cinema industry may be showing signs of growth since having to contend with increased competition over the last number of decades from alternate offerings such as radio, TV, computer games & Pay TV (Silver and Mc Donnell 2007). The apparent global box office decline in the last decade had been attributed to a number of factors including cyclical poor movie offerings, total costs associated with going to the cinema from admission price and snacks to parking, failure of new screen technologies to boost box office revenue and the emergence of alternative viewing methods (Silver and Mc Donnell 2007).

More recent studies conducted by PricewaterhouseCoopers (2014) suggest that, by 2017, electronic home video (streaming and downloading films) will overtake the traditional cinema as the biggest contributor to total film revenue in the US reaching a total of $17bn the following year. This represents double the $8.5bn the sector currently generates (PwC Global Entertainment and Media Outlook 2014-2018).

Further to this PwC predict a 16% increase in cinema box office sales over the next five years (2014). According to McKenzie of PwC “People still want to go to the movies, especially the big tent pole films” (2014).

The emergence of new Internet Communications Technologies (ICT) such as Video on Demand (VOD) services and an evolving broadband infrastructure have allowed consumers to view what they want, when they want on devices of their choosing (Tryon 2013). This infrastructure has allowed online streaming services to flourish. Further to this release windows have shortened: that being the time period from cinema release to becoming available to download. This has resulted in the loss of the competitive advantage that traditional cinemas have enjoyed in the past.

Online streaming services such as Netflix, Amazon Instant Video and Hulu have seized upon the changing dynamic within the industry and have made the move from “mere middlemen to creators of original content” (Tryon 2013). Netflix in particular has paved the way and has successfully produced and distributed original content, with hits such as House of Cards and Orange is the New Black. This, according to PwC, has resulted in an increased revenue of 24% in the first quarter of 2014 (2014).

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Aim

The focus of this study will be an investigation of the effect of Video on Demand services on the traditional cinema industry.

Primary research questions examine the following; Does the growing availability and choice of audio-visual content online mark the beginning of the end for the traditional cinema industry?

Specifically the study investigated the following factors within the cinema industry;
 The macroeconomic/microeconomic factors that impact demand in the cinema industry.
 The awareness within the cinema industry of this online phenomenon.  The strategic orientation of cinema owners to combat the threat posed by these substitute services.

At the consumer level the study explored;
 Changes in consumer behaviour and preferences towards the consumption of audiovisual content.
 Changes in target markets and consumer segments.

Methodology

A mixed method approach was employed to gather primary data with priority given to qualitative analysis. Qualitative research was selected in order to gain an understanding of the underlying motivations and develop an understanding of the research problem (Malhotra 1999).

A phased approach was employed with qualitative data (in depth interviews) and analysis carried out prior to the collection of quantitative data (consumer survey). This data was then assessed and triangulated against the findings of an in depth interview with an industry expert (Creswell, 2003).

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Findings

Secondary research found that there is a shift in the power dynamic towards the customer in terms of the consumption of audio-visual entertainment content. Consumers can decide “what to watch, when to watch and how” leading towards a democratisation of media. (Tryon 2013). VOD services have removed the shackles of scheduling and given the consumer more control and choice of entertainment options.

It was found that whilst there is an awareness of VOD services within the cinema community, cinema managers expressed low levels of concern regarding VOD having a major impact on their businesses. Cinema managers expressed concern regarding the levels of DVD and online piracy as being more of a threat to revenue than genuine subscription based VOD services. Further to this cinemas are engaging more with alternative events such as live concerts, theatre and charity nights to attract wider audiences.

Consumer research found that whilst cinema was regarded as being poor value for money it was and will remain a desired entertainment option within a number of segments. Summary attendance and forecast figures also uncovered sustainable appetite for cinema in developed countries and double digit growth rates of cinema attendance in emerging countries.

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Acknowledgements

I would like to expressly thank my supervisor Kathleen McGettigan for her help and steadfast guidance throughout the year.

A word of thanks also to Chris “Big Data” Mc Laughlin for his readiness to assist and provide encouragement and advice.

I would finally like to thank all those that gave of their time to participate in the interviews and surveys.

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Table of Contents

Abstract......................................................................................................................................v Acknowledgements ............................................................................................................... viii Table of Contents..................................................................................................................... ix

Chapter One: Introduction

1.1 Introduction.................................................................................................... .1 1.2 Research Objectives....................................................................................... 2 1.3 Context…………............................................................................................ 3 1.4 Value of the Study........................................................................................... 4

Chapter Two: Literature Review

2.1 Introduction....................................................................................................... 6 2.2 Video on Demand…………………………......................................................7 2.3 Online Piracy Issues…………...........................................................................8 2.4 Government Agencies and Support...................................................................13 2.5 Cultural Shift and New Distribution Technology……………..........................16 2.6 Conclusion..........................................................................................................19

Chapter Three: Methodology

3.1 Research Philosophy..........................................................................................22 3.2 Research Design..………...................................................................................23 3.2.1 Phase One – In depth Interviews.....................................................................23 3.2.2 Phase Two – Consumer Survey......................................................................25 3.2.3 Phase Three – Industry Expert Interview.......................................................26 3.3 Measurement of Findings……………………………………………………..28 3.4 Presentation of Findings…………………………………………………….. 29

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Chapter Four: Findings & Analysis

4.1 In depth Interviews – Cinema Managers......................................................... 28 4.2 Consumer Survey..............................................................................................28 4.3 Industry Expert Interview..................................................................................29 4.4 Conclusion………….........................................................................................30

Chapter 5: Conclusions & Recommendations

5.1 Conclusions......................................................................................................45 5.2 Recommendations............................................................................................47 5.3 Limitations of the Study...................................................................................49

References..................... ....................................................................................... 50 Appendix A – Consent form...................................................................................60 Appendix B - Depth Interview theme sheet............................................................61 Appendix C – Consumer Survey……….................................................................65

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Chapter One INTRODUCTION

1.1 Introduction The cinema industry is over 100 years old and had enjoyed a relatively low level of competition up until the introduction of TV in the 1950’5 (Silver and McDonnell 2007).

Cinema attendance figures in Ireland are among the highest in Europe, with statistics for 2009 showing a total of 28.8 million visits (Sood 2012). However these figures have been decreasing since then. Sood (2012) cites information compiled by The Economist magazine which estimates that in 2011 there were 16.4 million cinema attendances in Ireland with a forecasted drop by about 5 per cent in 2012 to 15.6 million attendances.

In recent years the availability of audio-visual content has become more widespread with consumers now able to access movies online. Advancements in Internet Communication Technologies (ICT) and factors such as faster broadband connectivity have allowed consumers to choose what they want to view, when they want. The introduction of a range of devices such as smart phones, tablets, notebooks and laptops means the consumer can also choose how they view content. Some argue that this content mobility is leading towards a democratisation of media (Tryon 2013).

With this greater degree of choice available to consumers in mind, this study will specifically focus on the effect that these VOD services have on the cinema industry in Ireland.

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1.2 Research Objectives

The aim of this study is to examine the effect of VOD services on the traditional cinema industry.

The initial literature review suggests that little academic research has been conducted in relation to the potential of VOD services to disrupt the traditional cinema business model.

Thus the overall aim of the research is to examine the extent to which the growing availability and choice of audio-visual content online in impacting on the traditional cinema industry.

The research questions are as follows: a. To examine the factors that impact on demand in the cinema industry, both at a macro and micro level

b. To evaluate the level of awareness within the cinema industry of this online phenomenon

c. To identify the strategic orientation of cinema owners to deal with this evolving substitute service

d. To examine the changing profile of the cinema target market and related positioning

e. To explore the changes in consumer behaviour, usage patterns and preferences towards the consumption of audio-visual content

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1.3 Context

Tryon in On Demand Culture - Digital Delivery and the Future of Movies argues that

advancements in Information Communications Technology (ICT) have given the consumer more choice in how they access entertainment and audio-visual content. Further to this faster broadband speeds and wider coverage allow the consumer to view what they want, when they want it. Consumer culture and behaviours towards entertainment consumption have changed also leading to what Tryon describes as the “on demand culture” (2013; p 2). Further to this the younger generation, 18-24 year olds, place more value on internet surfing and mobile phones over TV whilst the “baby boomers” or aging population cite the lack of movie suitability and choice when considering a night out at the cinema (Tryon 2013).

Contextual issues of relevancy to this study include;
 the emergence of new entertainment distribution channels  legal versus illegal content (online piracy) downloading  Broadband adoption rates and penetration

1.4 Value of this study

The value of this study focuses on a marketing and advertising context. Entertainment and media is a broad sector when attempting to estimate the advertising spend on the promotion of newly released titles. It spans multiple sectors including radio, cinema and gaming.

Plunkett Research in an Introduction to the Entertainment & Media Industry (2013) estimate

that global advertising media revenues were forecast to be $495 billion in 2012 with projected increase to $510 billion in 2013. Revenue from this sector comes in the form of the purchase of a movie admission, Pay TV subscription, downloading content and advertising fees. The channels available to this sector have increased with online advertising seeing the highest rates of growth in recent years, up 16% to $37.3 billion in 2012 in the US and worth an estimated $90 billion worldwide (Plunkett Research 2013).

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The fact that cinema release comes prior to online release, with the bulk of marketing activities being carried out during this period, suggest that subsequent release through VOD services may inadvertently reap the rewards of these marketing efforts (Tryon 2013).

As the cinema industry appears to be in a state of transition it may be useful to cinema owners to look at the bigger picture in terms of where future revenue streams may come from. The findings of this study may provide useful insights and suggestions as to where this may arise

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Chapter Two LITERATURE REVIEW 2.1 Introduction

Information for the literature review has been sourced from;
 Previous academic studies undertaken in the area of growth/decline of cinema going and factors which affect this

 Reports by the cinema industry and online content providers  Government policy specifically related to the areas of big screen film promotion and broadband network policy

 Books relating to the topic such as “The Long Tail” by Chris Anderson and “On
Demand Culture” by Chuck Tryon

 Reputable news sources will also be consulted due to the current nature of the topic

The prospect that cinemas have an uncertain future is by no means a new phenomenon. Silver and Mc Donnell (2007) put forward this premise in Are Movie Theatres Doomed. They argue that the cinema industry has held a monopolist competitive advantage since its foundation a century ago and since then have had this advantage threatened from the introduction of radio and TV in the 1920’s and 1950’s to more recent introductions such as home cinema, Pay TV, DVD rentals and VOD.

Prior to the introduction of the 1948 US anti-trust ruling Hollywood film companies not only produced movies but also owned the theatre chains where movies were screened (Epstein 2005). In 2004 Epstein reported that the breakdown of revenues for new movie releases were thus;

 Cinema box office revenue 30%

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 Video Sales revenue
40%

30%
 TV markets revenue
Movie studios now use movie releases to establish the brand, focusing more on profits further down the value chain such as TV and DVD markets, merchandising, music soundtracks and book tie ins (Epstein 2005).

In 2005 the US cinema industry blamed a number of issues for the dramatic decline in box office revenues with factors such as poor production line ups and substitute offerings such as larger home TV screens, DVDs, High Definition TV, video games and internet surfing (Silver and Mc Donnell 2007).

The value proposition that a night out at the cinema has been weakened by factors such as admission price, snacks, parking and opportunity costs (Silver and Mc Donnell 2007). Further to this differentiation is weak due to the smaller size of cinema screens in comparison to large screen TVs.

Typically the release of a new title, or “window”, follows a sequential pattern with cinema being the first window, premium TV the second, followed by release in the home video market and the fifth window is free to air television (Fithian 2013). Movies are also released in a staggered fashion with general release in the US coming prior to release in other countries. Fithian (2013) further argues that this has allowed the cinema industry to maximise potential revenue over the years however these windows are shrinking. Furthermore it has allowed online piracy to take hold as movies become available to download in countries outside of the US in less than one week.

The idea of simultaneous release has been mooted by the movie industry as a means to reducing online piracy and maximising revenue per releases. Initial research has shown that this would increase studio revenues by up to 60%. However the likely impact on cinemas would be a 50% decrease in revenue. According to the president of the National Association of Theatre Owners (NATO), “simultaneous release is a death threat for the movie theatre industry” (Fithian 2013).

Silver and Mc Donnell (2007) argue the case for the widespread introduction of IMAX screens into cinemas to combat the threat posed by the multitude of substitute products and

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the unwillingness of the cinema industry to embrace change in the industry. IMAX screens are curved thus encompass the entire peripheral eyesight span of the viewer. They can be up to 100 feet in length and offer the customer an immersive experience. IMAX has the ability to set a clear point of differentiation between the cinema experience and home viewing.

With an average cost of $1.6 million (cost of IMAX screen and system plus retrofit) it is clear that only a few cinema operators will be able to afford that level of investment (Silver and Mc Donnell (2007). At the time of writing there was only one IMAX cinema in Ireland (imax.com 2013).

2.2 Video on Demand

Video on demand is “a system that allows users to select and watch video content of their choice on their TVs or computers” (Techopedia 2013). Users can select from a choice of audio-visual content which is then transmitted via Real Time Streaming Protocol (RTSP).

There are a host of VOD service providers in Ireland including UPC, Volta, iTunes, XboxLive, Mubi and Netflix, the latter of which with 20 million subscribers worldwide has the potential to cause most disruption to the cinema industry.

A look at the global picture reveals that Netflix is the most popular VOD subscription based provider and has 48 million customers for its monthly based service in more than 40 countries (Reuters 2013). The US alone has 35.7 million of those subscribers and the company has ambitious plans to roll out its service globally to include six more European countries in late 2014.

Provisional results from the European Audio-Visual Observatory show that cinema attendance in Europe is down by 4.1%. However emerging Eastern European accession countries have shown rises in attendance of up to 6% (2013). Overall admission levels increased in only 8 out of the 26 territories.

The graph below shows provisional attendance figures (millions) for the period 2004 – 2013.

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Figure 1. Cinema Attendance in Europe 2004 - 2013
Source – European Audio-visual Observatory (2014)

It will be interesting to track these rates over the next five years vis a vis VOD subscription rates throughout the European Union. This may give a clearer indication as to the effect of VOD on cinema attendance as opposed to the possible influence of economic recession factors effecting cinema attendance.

According to Wu (2013) the US viewer consumes, on average, five hours of TV every day, a number that has risen since the 1990s whilst averaging only about 45 minutes of Internetstreaming video per week. Internet streaming is set to increase as Netflix target the entire TV viewing population with the ability to distribute content based on individual preferences and not just the mass market like the cinema model. Netflix have also begun producing original programming which has cost them hundreds of millions of dollars to date (Wu 2013).

A recent YouGov survey of the UK market Majority of TV Viewing now “On - Demand” for

1 in 4 Brits revealed that 26% of viewers watch TV through on demand services as opposed to traditional linear TV. Further to this owners of Smart TVs, those TVs connected to the internet, watch 35% of their weekly TV using on demand services (YouGov 2012).

The introduction of VOD into the Irish market has shifted the dynamic of consumer viewing behaviour. Consumers are no longer shackled to cinema and TV scheduling, giving them a greater degree of choice in terms of when and how they access entertainment content. The Sunday Business Post (July 22^nd 2013) reported that Netflix has over 70,000 subscriptions in

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Ireland, citing UPC’s 50 megabyte per second download speeds as integral to the rate of growth (2013). Further to this Comreg (2013) reported that there were 1.68 million active internet subscriptions in Ireland at the end of March 2013. This allows VOD service providers plenty of scope to grow market share.

The development of the Irish broadband infrastructure and the rolling out of 4G services will allow favourable conditions for growth in the VOD services space. Currently service providers are battling it out to increase market share by offering faster download speeds and higher data allowances (RTE 2013).