The Impact of Online Video Distribution on the Global Market for Digital Content David Blackburn, Ph.D. Jeffrey A. Eisenach, Ph.D. Bruno Soria, Ph.D. March 2019 About the Authors Dr. Blackburn is a Director in NERA’s Communications, Media, and Internet Practice as well its Intellectual Property and Antitrust Practices. Among other issues, Dr. Blackburn’s work at NERA has focused on media production and distribution, and assessing the value of IP in music, television, and film. Dr. Blackburn has taught at the undergraduate level at Harvard University and Framingham State College, and at the graduate level at the Universidad Nacional de Tucumán in Argentina. Dr. Eisenach is a Managing Director and Co-Chair of NERA’s Communications, Media, and Internet Practice. He is also an Adjunct Professor at George Mason University Law School, where he teaches Regulated Industries, and a Visiting Scholar at the American Enterprise Institute, where he focuses on policies affecting the information technology sector, innovation, and entrepreneurship. Previously, Dr. Eisenach served in senior policy positions at the U.S. Federal Trade Commission and the White House Office of Management and Budget, and on the faculties of Harvard University’s Kennedy School of Government and Virginia Polytechnic Institute and State University. Dr. Soria is an Associate Director in NERA’s Communications, Media and Internet Practice. While at NERA, he has advised governments, telecommunications operators and media companies, including on convergent competition and the pricing of content. He is also Guest Professor at the University of Barcelona where he lectures on Telecommunications Economics and Regulation. Previously, he held executive positions in Telefónica and MCI Worldcom. He also worked as Project Leader at a leading management consulting firm. The authors are grateful to Corinne Candilis, Ryan Chan, Patrick McGervey and Gabriela Orsini for their assistance with this report, and to Facebook and Google for sponsorship. The views expressed are exclusively those of the authors and do not necessarily represent those of NERA Economic Consulting or any of the institutions with which they are affiliated. The Impact of Online Video Distribution on the Global Market for Digital Content Executive Summary This study examines the impact of online video distribution platforms (OVDs), defined as applications and services that distribute video over the Internet, on the market for video content. The evidence and analysis it presents demonstrate that OVDs have expanded the market for video content of all types, providing content producers with new ways to reach audiences and consumers with new ways to identify and consume the content of their choice. These findings suggest that proposals to impose regulations designed for traditional platforms like broadcast television on OVDs are both unnecessary and undesirable. As an alternative, regulators could consider modernizing, simplifying, and/or lightening regulations for incumbents to increase competition and increase further the availability of quality content to consumers. The study’s key findings include the following: OVDs are able to connect consumers with video content that most closely matches their tastes, including ethnic or niche content that would otherwise be unavailable or difficult to find. Their ability to do so is the result of both extensive catalogues and sophisticated “matching” capabilities. As a result, the content distributed by OVDs is culturally diverse. For example, of the top ten YouTube video channels (by views), two originate in India, and one each in Brazil, Russia, Sweden, Turkey and the United Kingdom, while three originate in the U.S. Increased demand for video content is leading to an increased supply of diverse video content, including both professionally-produced and user-generated content (UGC). OVDs are increasing demand for UGC – for example, in 2016 approximately 14.8 million Americans earned income totaling $5.9 billion from independent creations on online platforms, including Instagram, Twitch and YouTube. Meanwhile, the number of feature- length films produced worldwide grew by 11 percent from 2010 to 2015 (from 7,612 to 8,429). The growth in output is occurring in nearly every region. The number of video content production companies in the European Union (EU) grew by 28 percent between 2011 and 2015, while video content sector employment grew by seven percent. Estimated revenues for Indian film producers increased by 38 percent from 2013 to 2017 (from INR 125 billion to INR 173 billion). Spending on Canadian film and television production grew by 40 percent between 2011 and 2016 (from CAD 6.0 billion to CAD 8.4 billion). Generally accepted economic principles explain why OVDs have economic efficiency advantages compared with traditional video distribution platforms. By capturing economies of scale and scope, increasing the ability of consumers to discover and obtain content of their choice, and allowing content producers to reach larger numbers of interested viewers, OVDs increase economic welfare. Users value OVDs because the breadth of offerings allows them to find video content they wish to see, at any moment and from any connected device; content creators value OVD applications because of their large audiences and because they are easy and inexpensive to use; and, advertisers value them because the overlap between viewers and content creators generates an engaged audience to whom they can advertise their products and services. The more content OVD platforms can offer viewers, the greater the value to consumers. The upshot is that producers of all kinds of video content – professional or amateur, mainstream or niche – can reach more consumers, while consumers have access to content that more closely matches their tastes. The concern that the growth of OVDs comes at the expense of domestic content distributors and producers is not supported by data. Subscription Video On Demand (SVOD) subscribership is rising fastest in developing countries, often led by local firms. In India, for example, Star India’s Hotstar has more than 75 million monthly active subscribers, compared with 11 million for Amazon and five million for Netflix. Fears that viewing behavior would shift away from local content to foreign-produced video have also proven unfounded. The data show that production of traditional video content – i.e., professionally-produced feature films, documentaries and television programs – is increasing throughout the world. Both video content producers and amateur producers (Internet users) are producing more content and films, earning higher revenues, and employing more people – and this growth is expected to continue. Our analysis suggests that extending local content regulations designed for traditional video distributors to OVDs would hinder innovation and reduce choice for both consumers and producers of digital video. Such regulation would have the opposite of its intended effects, ultimately reducing both the quantity and the diversity of digital video content available to consumers. Contents I. INTRODUCTION ............................................................................................................... 1 II. THE ECONOMICS OF VIDEO DISTRIBUTION ............................................................................. 2 A. Economies of Scale and Scope ............................................................................. 2 B. Platform Markets and the Matching Problem ...................................................... 6 III. OVDS AND THE GROWING MARKET FOR VIDEO CONTENT ........................................................ 9 A. Growth in Video Consumption ........................................................................... 10 B. Global Growth in Video Production and Output ................................................. 18 IV. OVDS AND LOCAL CONTENT OBLIGATIONS ......................................................................... 35 A. Local Content Obligations on Traditional Broadcasters ...................................... 36 B. Proposals to Regulate Online Video ................................................................... 37 C. The Economics of Extending Local Content Regimes to OVDs ............................ 39 V. CONCLUSIONS .............................................................................................................. 42 APPENDIX A: INTERNATIONAL REGULATION OF BROADCASTING CONTENT APPENDIX B: INTERNATIONAL REGULATION OF ONLINE VIDEO CONTENT I. Introduction Video distribution platforms are “multi-sided” markets that create value by matching “upstream” (both amateur and professional) producers of video content with “downstream” consumers and, in many cases, with advertisers.1 Traditional platforms like movie theaters and broadcast television are limited in the amount of content they can display (i.e., one program at a time) and the size of the audience they can reach. Online video distributors (OVDs), defined here as any application or service that distributes video over the Internet, face neither limitation: They can offer “on demand” viewing of large video content libraries to anyone with a broadband Internet connection, anywhere in the world.2 As a result, OVDs have expanded dramatically both the upstream and downstream sides of video distribution markets. And, just as economic theory would predict, more consumers are watching more video content than ever before. Content variety has also increased;