PROGRAMMING CONTENT AND THE MULTI-MEDIA WINDOWING MODEL

By any account, online content providers have brought forth a tremendous volume of available programming, both Internet-original and ‘aftermarket’ or ‘windowed’ (by which we mean movies and TV programs that originally appeared in theaters, on standard television, or on other video media).

There are compelling economic advantages to the multi-media windowing model of video media release, because it allows production investments to be spread over more than one medium (Owen and Wildman, 1992; Wildman, 2008). The windowing model of theatrical movie release is by far the most refined and complex. In outline, major Hollywood features are typically offered on Internet VOD for sale or rental a few months after their theatrical releases, at about the same time as they appear on VOD/PPV (pay-per-view) systems of MVPDs and are released to DVD and Blu-ray. Then several months later, they become available to monthly subscription cable networks and occa­sionally Netflix or other Internet subscription services. When that window ends, they are typically licensed to ad-supported cable networks, or sometimes broadcast networks or local stations.

The movie windowing model has been widely recognized as a method of inter­temporal price discrimination by which high- and low-value consumers are segmented by waiting time and transmission quality of the media (Waterman, 1985, 2005; Owen and Wildman, 1992).

Table 22.2 Total online content provider revenues for digital movies and TV programs, 2011

Source: SNL Kagan Research (2012b, p. 3).

Table 22.2 shows 2011 pricing and revenue estimates for online VOD and subscription sales published by SNL Kagan Research, a leading consultant in the field. As reflected by their VOD sales and rental prices, movies are relatively high-value products. They have online sale and rental prices in the same range as DVDs and the VOD systems of MVPDs with which they share the window - thus suggesting that they appeal to consumers within comparable willingness-to-pay categories.¹²

Bundled services such as monthly subscription premium cable networks and Netflix are less efficient for extracting money from high-value consumers with intense demand for particular programs, and thus usually have assigned time slots after VOD release.

A similar windowing model, though it involves fewer different media, has evolved for advertiser-supported, prime-time television programming (see Wildman, 2008 for an early analysis). Most of these programs are made available on advertiser-supported Internet services such as Hulu and CBS.com, but only after a delay of one day or more. For subscribers to Hulu Plus, this delay window is generally shorter, and the duration of availability is also much longer, often providing access to previous seasons of some shows. After a significant delay, many of these programs are then made available to Netflix or other online subscription services, often to hype a subsequent season of series programs and enable new fans to catch up on plot developments.

The series programming of the four major broadcast networks, which generally still attract the largest TV audiences offline, account for the majority of the direct TV program sales and rentals shown in Table 22.2. As suggested by their prices, TV programs

are relatively low-value products. Though not shown in Table 22.2, the broadcast net­works’ income from online distribution apparently comes mostly from advertising on Hulu and CBS Interactive.

It is difficult to tell how the television windowing system may evolve. A plausible general explanation for its current state is that advertisers pay higher net prices per viewer for standard television audiences, and the networks choose an array of delay times that maximize total revenues from these interdependent media. Some settling from the current period of experimentation is also likely. After a sufficient portion of viewers have migrated to online viewing as smart TVs and set-top boxes continue to diffuse, the special demographic targeting opportunities of online advertising may steadily increase their relative value, which could change the windowing patterns altogether.

The disproportionate share of total online video revenues held by subscription services (Table 22.2) reflects a rapid growth of this component since these data were first reported in 2008, when they accounted for only 15 percent of direct payments (SNL Kagan Research, 2012b). Rapid advances in streaming technology and bandwidth capacity since the late 2000s have enabled the growth of subscription. Meanwhile, program sales are still limited by lengthy download times, especially for theatrical films.

Though still evolving, the emerging pattern of higher revenues from subscription than a la carte transactions parallels a long-established historical pattern for cable television. Although PPV service began to be offered by cable in the mid-1980s, available data show that by 2006, when online video revenues were still negligible, cable subscribers spent approximately four times more money in total for monthly subscription channels (pri­marily movie-based services like HBO) than they did for all PPV or VOD (also primarily theatrical movie) purchases.¹³ PPV/VOD delivered by cable includes only ‘rentals’ (since download-to-own is not practical with cable technology), which handicaps comparison with the online market. However, consumer preference for monthly flat fee rates over a la carte transactions has a long history in other industries (Fishburn et al., 2000).

Online video content suppliers have also brought forth a vast supply of Internet­original programming, most of which is very cheaply produced and which surely accounts for much of the ‘long tail’. These programs include animation, short subjects and content similar to that introduced in the mid-1990s, and of course the billions of user-generated videos on YouTube, Vimeo, and similar. Most of Internet-original video entertainment programming could thus not be classified as professionally produced. Well-established sites including Netflix and Hulu have, however, more recently begun offering higher- quality original series programs.

Parallels can be made between the developing mix of online video entertainment programming and the early years of cable television. A 1986 content analysis of basic cable networks found 3 percent of dramatic format programming hours to be cable­original, and 97 percent to acquired broadcast programs or theatrical films (Waterman and Grant, 1991). Because of its architecture and low delivery costs, the Internet has greater potential than cable to reach niche audiences. It is already apparent, however, that online entertainment faces some of the same fundamental demand constraints that niche cable networks have faced. Other things being equal, a given video program that is focused toward a potential audience only half as large as that of another program must have double the willingness-to-pay among those viewers (or among advertisers who want to reach those viewers) in order to support the same production quality. The graveyards of audio-visual entertainment are littered with suppliers of original programming who underestimated this constraint.

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