release windows were hollywoods way of protecting movie distribution channels big news from Apple itunes and studios including warner brothers mark a change of tradition

Cracking Release Windows: Apple, WB Shift the Movie Industry

Seth Gilbert, 05-1-2008

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cracking window Apple announced this morning (press release) they will be getting select videos on iTunes the same day the films are released on DVD. That news is getting the headlines, and deservedly so, it’s a big story and coup for Steve Jobs and team, but there’s a bigger story locked within the soundbytes. It’s a story about Hollywood and a modernizing movie industry. It’s a coming of age film. It’s a story about distribution technology and profit margins, about the old guard accepting and embracing the new. If there were a trailer to watch, the voice over would talk about throwing stones through the leaded glass of old traditions. It might close: “Broken Windows, coming soon to the Internet theater nearest you.”

The “windows” in reference are release windows, the prescribed time gaps between which films are aired over different media. Traditionally, that meant scheduling would begin with theatrical release, then, after a nice time gap, been followed by home video sales (and, generally, rental release). After retailers got a head start, next, Video on Demand (VOD), Pay Per View services, and hospitality distributers (airlines and hotels) would get a chance. A couple months later, those windows would close and then pay-cable TV channels (HBO, Showtime, Starz etc) would get a period of broadcast exclusivity. Finally, eventually, basic cable and broadcast would join in.

The idea behind the windows was to segment the distribution channels and give each outlet a period of temporal exclusivity. The theory was that this would maximize each channels opportunity and prevent cannibalization among them. Delaying TV offerings, in hypothesized, would give advantage to retailers. Per-viewing VOD revenue split between studios and cable co’s would be maximized if there was no competing outlet showing the same programming on TV. Similarly, delaying free TV, would give pay TV operators an advantage. Each stage of time was meant to justify different premium licensing fee structures.

CHANGE COMES SLOW
One of the flaws of the traditional Window System has been its financial inefficiency. Studios spend fortunes promoting and hyping a new release but then a few weeks later when the next feature hits the big screen, those costs are sunk and marketing momentum is lost as the hibernation period before the next release begins. Instead of capitalizing on fan interest, the window system lets it idle. By the time second window opens, the marketing machine has to crank up again.

In December 2005, Disney’s Robert Iger called out this issue saying “[studios] could spend less money pushing the box office and get to the next window sooner where a movie has more perceived value to the consumer because it’s more fresh.” Allowing the gaps in the window system to remain, he argued, were unnecessarily wasteful.

The trouble was: change comes slow. Hollywood can be seen as the land of the deal, but Tinsel Town is also a relationship driven town. Actor to Agent, Talent to Studio, Studios to Distributors, Distributors to Theaters. Movies aren’t made in a garage or thrown together on a whim. Deals in Hollywood are traditionally wined and dined.

Even with home video sales representing a huge chunk of direct studio income (merchandising and promotional licensing revenue not included), even with DVD sales dwarfing the box office, studios have been either contractually unable, or unwilling, to change existing relationships with the different distribution constituents.

One example: shrinking the release windows before DVD, it’s been argued, would hurt theater chains. If people don’t have to wait as long, it’s said, they’ll be more patient, bypass the theaters and watch at home. Similarly, if VOD windows are adjusted, or cable TV companies get broadcast rights too early, the argument claims the retailers will lose out.

The studios have been stuck in between; caught between trying to maximize revenue and simultaneously look after the vendors who have lined their pockets for years. It’s like a contentious issue before Congress, all the groups are lobbying their agendas. The studios don’t want to take sides, as least without being able to defend their decision. And the only way to make the change and offend as few as possible? That was to produce evidence change was needed.

THE EXPERIMENTAL PHASE
In January 2006, famed filmmaker Steven Soderbergh released a small independent film called “Bubble.” On the same day, he broadcast it on HD Net. Just 4 days later, it was on DVD too.

Soderbergh, at the time, was riding high. “Out of Sight”, “Erin Brokovich”, “Traffic” and “Ocean’s Eleven” had cast him in the spotlight of Hollywood’s elite directors. “Traffic” had earned him a “Best Director” academy award. “Bubble” was a little film, only running in 32 theaters (only Mark Cuban’s Landmark Theaters chain showed it), but the test was something of a watershed event. In 2006, Soderbergh was not a no-name indie film maker. He was Hollywood A-List and he was bucking tradition.

In an interview, Wired magazine reporter Xeni Jardin asked him why he chose to experiment with distribution and try out a “day and date” schedule instead of using traditional windows. Part of the answer was simply because he could. Bubble was a small film, almost below the radar. Soderbergh also achieved his fame in Hollywood by doing things his way and letting the result speak for itself (his critically acclaimed Sex Lies and Videotape being an example).

Beside a rebellious streak, another larger reasons, was to try and preempt one of Hollywood’s biggest enemies: piracy. “Name any big little movie that’s come out in the last four years,” he said, and “It has been available in all formats on the day of release. It’s called piracy. Peter Jacksons Lord of the Rings, Ocean’s Eleven and Ocean’s Twelve – I saw them on Canal Street on opening day. Simultaneous release is already here. We’re just trying to gain control over it.”

Following Soderbergh, with financial reward and anti piracy measures justifying the trials, other Hollywood entities have toyed with breaking down the Window System too:

In February 2006, IFC and Comcast struck a deal to air two IFC produced independent films a month on Comcast’s On Demand service the same day the films were released in theaters.

IFC Entertainment President Jonathan Sehring said at the time that, "This agreement creates a national art house for independent film lovers across the country and ensures, for the first time, that first-run films will be made available theatrically and on demand simultaneously.” The effort was billed as groundbreaking but theater chains were vocally unhappy.

Despite that unrest, the pace, and nature, of release schedule experiments has accelerated since 2006. To quiet concerns, most have simply adjusted to focus more on the DVD Window rather than mess with Theatrical to DVD gap.

Warner Brothers has been especially active among studios testing things. For six months, starting in December 2006, Warner Bros. released DVDs and VOD on the same day to viewers in Denver and Pittsburgh. The result of that test with Comcast showed VOD rates up 50%, DVD sales up 10% and rentals down 2%. The day and date release method, it appeared, didn’t hurt the studios big earners. (Sell through being more important to bottom line than rental. And also, the window between theatrical release and DVD release was not changed so the test didn’t apply to theatrical box office draws).

In July, ’07, Warner’s extended the test nationally with a day and date release schedule for the Astronauts Wife. It apparently yielded similar result.

In Europe too, Warner Brother’s has pushed ahead. Earlier in April, WB UK cut the windows to negligible periods for several new releases. "Beowulf" and The "Assassination of Jesse James by the Coward Robert Ford" both premiered on Sky, Virgin, BT and Xbox Live outlets within 15 days of their DVD releases.

Warner Brother’s UK President Josh Berger explained the move saying consumers want “to see what they want, how, where and when they want it.”

Increasingly, other studios have shared that view. In December ’07, Paramount gave set top box on-demand service Vudu the go ahead to exclusively offer the “Bourne Ultimatum” as a day and date download. In March, Lions Gate announced plans to bundle iTunes ready digital files as bonus content on select DVDs sold starting this month.

THE APPLE ERA
Apple’s announcement this morning ushers in a new era for the studios, one where narrow release window experimentation seems to be shifting to massive day and date acceptance.

According to Apple’s press release, 20th Century Fox, Disney, Warner Brothers, Paramount, Universal Studios, Sony Pictures, Lions Gate, Image Entertainment and First Look Studios are all on board. Titles including hits like “Juno” and “There Will Be Blood,” are included. As new releases, they’ll be sold for $14.99 or rented for $3.99. Older back catalog content, including more than 1,500 other films (200 HD) in the iTunes library will sell for $9.99 and rent for $2.99

Gaining “Day and Date” is a significant win for Apple, especially given the breadth of studio partners. It should help boost video service at the iTunes store. That’s why it’s grabbed many of the day’s headlines. But an important note to remember is that Apple’s not the only beneficiary.

Wednesday, in an earnings conference call, Warner Brother’s announced the studio was removing the DVD window on all new titles (not just for Apple’s iTunes). CEO Jeff Bewkes pointed out that during the experimentation phase, sell through was up on DVD’s slightly. More importantly, however, margins were up dramatically. VOD “day and date” sales, he said, run margins of 60 to 70 percent. DVD sales compare at only 20 to 30 percent. “It’s about a three to one trade.”

Combined “day and date” advantages will push the on-demand business to become an increasingly large part of the industry’s future revenue stream. Research from UK service Screen Digest suggests that logic. A report they released in March claimed the sector might generate only $33m in incremental revenue this year through the US and major European markets. By 2012, it stands to be worth as much as $1.1billion in total consumer spending.

The facts are: Internet On-Demand services are efficient, they have higher margins, and they offer greater consumer flexibility. Unlike cable (with limited channels and time slots) , there’s no real limit to how many titles a store like iTunes could offer. For studios, “Day and Date” releases also stretch marketing budgets across and remove one of piracy’s stronger incentives, time. (If a movie isn’t legally available for months, an “I want it now” type of consumer has incentive to get it illegally. If the windows shrink and there is a legal option, that incentive is less relevant).

In his Wired interview, Soderbergh predicted in 5 years movies will go out in all formats. His psychic abilities may prove off base, Theatrical Windows may take a while to shrink (contractual issues being an issue), but it doesn’t look like his psychic talents are nonexistent either. The move to shrink DVD Windows to Day and Date is a first step, and it’s happening now. Coincidentally, it’s happening near iTunes 5th birthday too.

These changes are good for Apple, good for the movie studios, even better for movie fans. Movie rental services might have other opinions.

Metue.com

Cracking Release Windows: Apple, WB Shift the Movie Industry

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