Film's monopoly problem with digital
Not before time, the new year started with some promising news about selling films online. For the first time, the annual decline in DVD and Blu-ray sales in the US has been outstripped by the growth in digital sales, rentals and subscriptions. Home entertainment rose 0.7% in 2013 (PDF source). $6.5bn – over a third of total consumer spending – came from digital rental, retail and subscriptions, with download-to-own rising a hefty 48% on 2012. The figures don’t even include subscriptions bundled with other services (like a cable company’s deal with Netflix) or advertising-supported VOD like Hulu or YouTube.
Of course, a chunk of this growth has been for television and traditional film, and the biggest beneficiaries continue to be the studios and large rights owners. For independents – as Scott Harris detailed in his frank description of the struggles self-distributing Being Ginger – digital distribution is typically a lot of work for limited gains. Why is this?
Indeed, why – unlike many other industries – does the small, agile film producer not have a bigger advantage online over the studio giants? If film behaved like publishing, software development or countless other industries, then being a small, low-overhead, low-budget independent outfit would offer a significant upside over being a major film studio. Standard network effects online have consistently empowered the garage-based agile and innovative players, who not only compete with, but out-sell ‘legacy’ businesses in their industry. Dropping out of university to run Netribution full-time 14 years ago with a friend, we experienced this too: with no budget and limited knowledge or contacts, we briefly became a leading website for indie film in the UK, beating Screen International in page views and even Variety in Google ranking for the term ‘film industry’.
Yet within independent film production and sales, despite having available the tools for global self-distribution and direct marketing to audiences, the only noticeable growth for small incumbents has arguably only been within YouTube, for advertising-funded video. So while the App Store has helped indie game and software developers make billions collectively selling their apps, iTunes hasn’t had the same effect for indie filmmakers (with a few very rare exceptions such as the Polish Brothers’ no-budget For Lovers Only which made over $500,000 on iTunes).
Decentralisation supports independence
In trying to untangle the cause of this, it seems a key factor has to lie within the nature of the technology involved. HTML, powering the web, is open and easy for anyone to play with, so far as with text and images. Publishing, blogging, web stores and so forth are relatively straightforward to achieve on your own website, and HTML was designed from the start to support both text and images. Running your own TV channel or film distribution service requires much more bandwidth, software and skills (with video supported natively by HTML only more recently) so it’s easier and cheaper to use a centralised service that takes care of it all. Likewise, social networks offering a single login or sites storing your credit card details: the basic architecture of the web doesn't handle secure payments or user identity consistently, so proprietary companies like Facebook or PayPal can come to dominate those sectors. Any web page can link to any other, but you can only friend people within the same social network, or watch films within the same subscription service.
Systems that let you embed your video on your own website offer a level of decentralisation: the film can play on your website. While VOD services such as Distrify, BrightCove or Kaltura don’t try to divert audience traffic to their own central portal, YouTube, Netflix, iTunes and Vimeo do – and they’re the biggest players. Within platforms, software developers creating for the iPhone or Android are at a level playing field with the existing giants like Electronic Arts or Microsoft. As all have the same access to the technology behind the phone, no-one has a tech advantage for the platform. Everyone must learn how to use the new platform best – from its screen size to the interface. This makes all players largely equal when it comes to releasing their software, unlike a music or film release on iTunes where a big marketing and production budget still holds a huge advantage.
What this means on the web is that when the supporting technology is ubiquitous, things can be easily decentralised – and blogs, newspapers or web shops are effectively equals online. This creates lots of competition across not only websites but tools for creation, servers, browsers, portals, aggregators, platforms and so on. This decentralisation, supported by common and normally open tech standards, lets indie producers and entrepreneurs act on an equal footing with major players, giving an unconstrained movement of traffic between them – a kind of ‘free market of information’. Sites that depend on a social graph or rich video services have more complex, often proprietary functionality and interfaces unique to their platform, becoming more valuable the more users they have; which in turn decreases the value of competing platforms.
So we tend to see a single dominant player emerge to monopolise their market. YouTube dominates ad-supported video; Vimeo dominates filmmaker-funded video; iTunes rules transactional VOD; Netflix leads subscription VOD. Amazon Instant Video and Love Film, Hulu and Hulu Plus, BlinkBox – they all have a place, but broadly, as with eBay, Paypal, Facebook, Google and most other categories, a single player dominates their specialism. In turn, the entry requirements for new competitors – even if it is someone with the best prices, a brilliant new interface to find films or a perfect recommendation system – are incredibly high.
The Open Video Movement sought to address this with a set of common standards for video based on HTML5 and open codecs which aimed to extend the web’s decentralised ‘free market’ of text and images to video; i.e. to give those offering video the same freedoms and interoperability as those running a blog. This only went so far – much, it would seem, because technology companies’ desire to become monopoly players was well met by a film industry demanding digital rights management (DRM) on content and happy to sign exclusive rights deals with single services for a large up-front advance; which strengthened well-financed services.
Rather than being the revolutionary gatekeeper-free space many of us were talking about 14 years ago, digital video is becoming far more monopolised than physical media. With DVDs there is room for a near infinite mix of TV sets, DVD manufacturers, shops, wholesalers, warehouses, distributors, and rights holders – a structure with at least some level of competition at all levels. But online we’ve shifted much closer to the deadly single-player approach of the Edison Trust and MPPC. Rather than a vast, diverse ecosystem we’re seeing one or two heavily vertically-integrated companies installed on your TV sets at the point of delivery and operating the entire infrastructure right back to buying rights from producers.
A weaker bargaining position
All of this leaves the independent film industry in a difficult bargaining position with the digital services on whose revenues we depend. It’s not like retail where the distributor can set a wholesale price and let the shop chose how to sell it and with what sort of markup. The main services dictate price and have such dominance few can choose to ignore them.
From the Bill Hicks Story case study we get an idea of how digital can work: cable VOD made over half of all revenues; iTunes rentals and downloads-to-own took around 10 per cent; and subscription VOD under a quarter, while windowing was vital. They offered one price for VOD ($6.99) during the theatrical run, another price after the DVD, delaying SVOD (subscription-VOD) and AVOD (advertising-VOD).
Transactional VOD can also be disruptive: Distrify has been able to sell many more copies of a £10 one-actor short-film from an unknown director (Sea Wall) than a much cheaper Terry Gilliam short film, both featured in the Guardian. But we also know that for SVOD, Amazon Prime Instant Video pays $0.10 per view of a feature and Hulu Plus $0.185 (Roger Jackson on Ted Hope's blog), meaning it would take over 100 views to equal the sale of a single DVD, or 250,000 views to equal a $25.000 TV broadcast fee.
The problem is arguably worse in digital music services where it takes around 312,000 plays on Pandora or 47,680 on Spotify to earn an artist the same profit as a single physical album sale. The issue isn't just that these services aren't making enough money to redistribute, but that the services don’t differentiate between the quality, age or value of tracks when paying royalties, allowing music labels to dominate the long tail with back-catalogue, and publishers to profit from tens of thousands of cheap covers. The nine tracks from Thom Yorke’s Atoms for Peace album Amok earned the same royalty as millions of tracks that have long been sitting in archives.
And this is perhaps the biggest problem around new technology-driven digital services. For all the excitement that people like myself had about the long tail. it’s proven remarkably easy for large rights holders to flood it with their own back-catalogue. Both advertising-driven spaces like YouTube and subscription services like Netflix or Spotify have created a market that incentivises quantity over quality.
An Oscar-winning short with millions of views on YouTube won’t be able to match the advertising income of a few dozen streams of people playing video games on a popular Machinima channel. Releasing 15 minutes a year of the best quality video loses out to someone creating an hour a day of super low-cost video targeted at a well-defined marketing demographic. YouTube is of course unmatched for testing, finding and building an audience, which can translate well into crowdfunding campaigns (Video Game High School and Feminist Frequency being good examples). And YouTube is expected to make over $6 billion from advertising in 2013 – over half of which goes to creators, channel networks and rights holders. Still, as a revenue source for high-production-value, slow-turnout film in itself, it currently seems a dead end.
In the traditional film and television world it’s impossible to imagine an established artist like Thom Yorke being paid the same as a newcomer or a 50-year-old library clip. Of course there’s something liberating about that level of democratisation for newcomers. However, the most profitable acts on Spotify are the millions of tracks of library and archive owned by major rightsholders. Rather than being an enabler, the flatness in payment structure is failing to support a new generation of creation.
It’s not an insolvable problem – paying a higher price for licences when music or video is new, and lowering the price over time, could still be done computationally and would be closer to the traditional rights model for music and film. Radiohead’s producer Nigel Godrich has called for just that – but to little response.
And this is the key problem with the rise of these monopolies: the more powerful the platforms become as they shape into ‘the only game in town’ for their sector, the more musicians and filmmakers are left with no leverage to demand a better rights model from them as the services have complete power over pricing and terms. YouTube takes a bigger cut in ad commission from creators than Apple; Apple can ban apps it doesn’t like from some 250 million iPhones; Netflix pays a flat fee so you make as much money whether your film is watched once or ten million times; while Amazon can demand a 65 per cent royalty on Kindle books costing over $10 because they practically own millions of devices. So while there are an increasing number of successful models for making money with video online, in the scramble to adapt, and with an industry resistance to open video, we’ve ended up with a structure that echoes the all-powerful MPPC/Edison Trust.
Over four blog posts, I’ve now spelt out what I’d describe as the main challenges facing indie film:
- attention scarcity: an increase at the supply-end in films and a decrease at the demand-end of attention (amidst the rise of social media and video games) hasn’t been matched with a change in the sale price and arguably presents a bigger challenge than piracy;
- user-unfriendliness: a lack of legitimate availability amidst a background of easy piracy;
- closed systems: a misguided response to piracy through DRM and litigation that has empowered tech monopolies;
- tech monopolies: the risk of a market with more powerful and centralised gatekeepers than Hollywood ever knew, and one that incentivises quantity over quality,
For many filmmakers these might seem obscure, dry, structural issues, and for so long the concern for many of us has simply been to prove to investors that digital distribution works and can be profitable: that there’s a bigger story online than piracy. With the levels of online sales now making up for the decline in physical revenues (against an expanding global theatrical market), the worry now would seem to be: who are our new digital overlords, and how much will they ever care about independent filmmaking?
We seem to be in the process of replacing the once all-powerful seven film studios with barely two or three technology-focused gatekeepers. Indies risk becoming increasingly marginalised and irrelevant to these giants, in a world where for Apple or Google selling films is a tiny part of their business – and making films is almost none of it.
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David Street commented 2014-01-27 16:30:03 +0000Valuable analysis of the current state of the market for micro indies film/content production.
Setting the problems out will hopefully help us find a way through to the bright successful future we would all like.
Thank you for all the research.