‘How Movie Studios Exploit Video on Demand Services’

Opinion

The best way for Hollywood to defeat piracy is by making content available, legally. To further this effort dozens of video on demand services have been launched throughout the world. However, not all of these services are happy with how the major studios treat them, and today we hear why.

moviesThe account below comes from an employee of a mid-sized video on demand (VOD) service in Europe.

To avoid repercussions from the major studios the author prefers to remain anonymous.

Exploitation On Demand

Every once in a while wrongdoings are reported by whistleblowers. Motives are often political and have worldwide consequences. Today, we’re addressing a much more down to earth topic. We don’t pretend for a second that we’re changing the world but instead we’re shining light on what we consider to be wrongful practices destroying an industry.

Our case is business centered, yet the industry we’re denouncing has damaged its fair share of individual liberties and has violated countless numbers of ethical principles. We’re talking about the Major Movie Studios.

For quite some time we’ve been working with “Major Studios” such as Warner Bros, Walt Disney, Universal, Sony, 20th Century Fox and Paramount. We would like to refer to it as collaboration, but unfortunately it’s really been a one way street thus far. Money transits and the final destination is the Majors’ pockets

We’ve been operating a video on demand service (VOD) for quite some time now, trying to make the best out of it. Eventually we grew tired of being shaken down at every turn and now feel it’s time to share the limitations that come with a deal in the “legit distribution” system. This may not be breaking news to some of you, yet we feel it’s important for people to understand how operating within the constraints imposed by the Majors works.

While observing the latest productions coming out from Hollywood studios (Fast & Furious 7, Avengers, Transformers 4, Dumb and Dumber 2, Taken 3) you may have noticed that this industry is not very risk savvy, to say the least. In fact it hates risk.

In recent years the studios’ strategy has been to buy rights to bestselling or comic books, plus games and kids toys to feed the public with a new episode every year.

Another risk minimizing strategy is to pre-sell cinema-distribution rights in certain territories to finance film making. By this mechanism a film is basically paid for before it gets made.

This system works for cinema distribution and was exported for home entertainment, where it affects our business. For a video on demand (VOD) operator to distribute any given catalogue, it must pay “Minimum Guarantees (MG’s)” to the studio. This allows one to exploit the catalogue. Mind you, you don’t get to choose what you pay for. That would be too simple.

Output deals are the norm and in essence they mean you need to take every licensed film as part of a single deal. If you want the latest blockbuster, you must also take the latest winner of the Golden Raspberry awards, and take our word for it, there are some pretty unworthy films in there. These Minimum Guarantees are quoted in millions of dollars per deal, and as a result VOD services like ourselves have to operate on very small profit margins.

On top of MG’s, distributors must also agree to pay revenue shares. Should the sales top the Minimum Guarantee on a given year the rev share kicks in. Revenue shares are usually in the studio’s favor (between 70% and 50% depending on whether we’re speaking of recent releases or old ones).

If a given platform manages to recoup its costs it must also share its future revenue with the Rights Holder, while providing the majority of the value chain involved in a streaming service: Storage, streaming costs, platform development, DRM licenses and geoblocking tools.

In the meantime, studios provide a license that costs them virtually nothing and they take the lion’s share of the deal for it. And we haven’t even started on release windows yet. Windows? If you thought that paying a fortune for a film allowed you to exploit it forever, think again. Usually the window for a film is 90 days.

You got that right: platforms have 90 days to pay for a Minimum Guarantee if they expect to turn a profit on a film. And keep in mind most of the profit just gets funneled back to the studios anyway with the revenue share clause. After that a title simply gets pulled off their catalogues to allow for Pay-TV and linear TV distribution. The title can come back in the catalogue after 12 to 18 months, given of course that it’s properly paid for.

This may seem like a lot to process, and it is, yet it’s just the tip of the iceberg. We will probably write a follow-up to this article as these people are not acting as if they were selling entertainment; they’re behaving like they’re selling enriched uranium!

Facilities that host servers on which films are kept have to be equipped as if they were a bank. If studio’s are looking to diversify they should consider giving Fort Knox consultancy services on security matters. More on that soon…

We love films and originally started a VOD business hoping to provide a legit solution that would entertain millions. How will we ever be successful while we have to operate on such stiff policies? Well we won’t.

It’s no wonder that streaming and P2P services are thriving: Majors’ constraints imposed on people who are trying to abide by their standards are just disabling anyone trying to be competitive enough and offer a comprehensive catalogue at a decent cost to the public.

Until this framework changes no one will ever. With their own policies, the major movie studios are sawing at the branch on which they sit . They probably realize it to some extent. But they certainly don’t care enough to do something about it.

Surely this is because piracy is not hurting them as much as they want us to believe. By cutting some slack to their partners they would have concrete tools to cut down piracy. They’re simply too comfortable to consider that as an option.

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