Content creators and owners have typically had two goals: maximizing the value of their content, as well as the number of consumers who enjoy it. For decades, the video industry achieved this through a rigid system of windowing – which, for all of the criticism it received, was supported by three core truths about the business. First, no direct-to-consumer offerings were really possible. An intermediary (such as a TV network or exhibitor) was almost always required to get content in front of audiences. Maximizing revenues and viewership through intermediaries, however, meant that content owners had to pay attention to how the needs of would-be buyers varied. In television, a given network might require signature primetime content, while others wanted schedule fillers or cheap daytime reruns. As a result, content was sold according to its recency (or stage in the lifecycle) – the newer the content, the more expensive the rights and implicitly, the more valuable the timeslot. Secondly, there were physical distribution constraints that made it tough to release multiple current versions of a television network or video (let alone an experience) concurrently. Given finite channel space and broadcast spectrum, it would have been impractical to release a “Premium” and “Lite” versions of an individual TV network, for example. Even weekly episode releases, perhaps the most detested of today’s linear television norms, were a reflection of delivery limitations. If audiences can’t reliably sit down from 5:00 to 11:00 pm in a single night or every night of the week from 7:00-8:00pm, binge distribution would actually harm the viewing experience. Finally, media has traditionally been a “scale game”, which meant it was critical to find a way to distribute content to every potential viewer. Eventually.
Digital has, of course, changed all of this. Direct-to-consumer is now possible. Almost all distribution constraints have been released. Niche media, meanwhile, not only works, but can be highly profitable. In aggregate, these trends have eroded much of the basis of windowing (one could argue “text” isn’t “text” when it comes to hardcover, softcover and mass market paperback, but that doesn’t quite translate in “e-ink”). Why the strategy remains is simple: it’s an operational business preference of the major media companies – even if it often comes at the expense of the consumer. But if there’s one thing that digital loathes and destroys, it’s exactly that juxtaposition. Binge releases may be tough for content owners, but traditional window are rather offensive to audiences in the digital age. ABC knows exactly what audiences want to watch after Scandal ends at 9PM on Thursdays: more Scandal. But instead, the network serves up How to Get Away with Murder and tells viewers to come back in 167 hours if they want the next (already complete) episode of Scandal. And with more content available than ever before this type of hoop-jumping will only lose viewers.
But without windowing, how does a content owner optimize revenues?
Keep Crushing It
The answer isn’t entirely different, but it does have significant operational and philosophical consequences for Big Media. Rather than optimize based on “time” after release, value should be maximized through obsessive customer discrimination – extracting value according to an individual viewer’s attachment to or desires for a given piece content. Not only has this never been its focus, the video media business has never really needed to invest in this type of strategy. Yes, there were deluxe DVDs, but they provided limited incremental value and mostly cheated consumers into re-buying content. Certain demographics were worth more on television, but they generated largely similar CPMs and virtually identical affiliate fees. The rest of the entertainment business, meanwhile, has always been about customer discrimination (see concerts and sports). The best example, however, is the digital gaming space.
In 2015, Candy Crush generated $2B in revenue with an average base of 338M monthly unique players. However, only 2.1% of these players actually generated revenues, as the game is both free-to-play (meaning you only need spend if you want to) and ad-free. And in general, the top decile of paying players generate more than half of total revenues. If this holds for Candy Crush, this would mean that the top 0.2% of players (or only 738,000 of 338M) generated at least $1B in revenue for the company last year, or $1,400 each.
Digital gaming does this for a reason. It’s too hard to get a player (i.e. drive an install), too easy to lose them and there’s too much competition for time/engagement. As a result, the industry has moved away from paid apps and towards free-to-play with an obsessive behind-the-scenes focus on pulling every incremental cent out of any customer that could be convinced to part with it.
To survive in the post-window era, the video industry needs to adapt to a similar model. This doesn’t mean require giving away your core content away for free, but if a superfan wants to spend $100 or even $1,000 on your content, you need to find a way to let them do so. Not every fan is equally passionate and not every fan should be monetized the same way, at the same rate and through the same channels. That’s why IP is so valuable – it tremendously expands the opportunities to monetize (if you own all rights, that is). When the Fantastic Beasts and Where to Find Them spurs additional Harry Potter sales and merchandise, how much will Warner Bros. benefit? Disney, meanwhile, excels at capturing value according to the extent of each fan’s interests and needs.
However, this shift is about more than just finding ways to enable more spend. It also means understanding the difference between a “hits-driven” business model and a “whale customer” one. Under the latter strategy, a content owner or distributor is focused on driving the right customers deeper and deeper into the funnel – not making sure everyone is paying a flat rate deemed “fair” for their content or focusing on four quadrant hits. As an example, many leading digital video brands tolerate a large AVOD layer that generates limited revenues but are nevertheless strategically critical. For one, the typical freemium SVOD business converts 1-2% of “free” users monthly. Secondly, there will always be times during a year where a service’s content offering won’t be “enough” for any given subscriber. Maybe they binged everything they wanted to watch, or perhaps their favorite series are currently on hiatus. Keeping them on the service increases the likelihood of re-activation, while depressing the (often brutal) cost of re-acquisition and sustains their contributions to a community. This latter point is particularly significant. For smaller services, creating a tight-knit community and culture is critical to their ability to become more than just a “niche offering” or licensing arbitrage play. What’s more, they allow operators to enhance audience value without material added cost. Finally, these subscribers can always generate revenue through merchandise and ancillary offerings. They may not pay for video content, but they may pay for experiences, physical goods and other media products. This isn’t to say that the AVOD layer will have all the content of the SVOD offering, but it’s wrong to think of a free layer as just one-time trial.
The upfront nature of content production costs and low marginal cost of distribution has always meant that no matter how small the target audience is, value maximization requires the maximization of total views. That won’t change in the post-window era, nor will the idea that different views and viewers are of unequal value. What will change is the timing and the experience. Because television networks offered functionally identical products – a linear feed, programmed at the half hour around conventional parts of the day and delivered through a cable box – licensors couldn’t sell their early window rights to multiple competitors’ networks within the same window (let alone for different prices). It’s this fact that made the concept of exclusivity so sacrosanct in the media business.
Like most media axioms, this too will crumble in the years to come. The video ecosystem can no longer count on a universal access point for video content (the cable box), rely on flat monetization across subscribers (affiliate fees) or that idea that viewers will simply stumble upon on your content (channel surfing). As a result, maximizing views means being where all your prospective viewers are. Part and parcel with variable willingness to pay is variable accessways; not everyone will come to your front porch (no matter how much you prefer it). The key, then, lies in two capabilities. First, to find a reason to convince those that might come to your O&O, to do so. And second, how/why different distributors (say Facebook v. a curator v. a dedicated SVOD service) can capture different value/consumers (and thus remit different sums to licencors). Different users will pay for different things – sometimes community, other times content and even for interactivity (think Twitch). In film, we will (eventually) see this with “Premium Video On Demand”, which will enable audiences to watch Day-and-Date film releases from the convenience of their own home (and at significantly higher price points).
There’s a tendency to view these strategies as applying to only the weaker content owners or sub-scale distribution services. Certainly, a successful scale feed is in a privileged position – but even the likes of Netflix and HBO see the benefits in multi-model distribution. Netflix has re-licensed its original series Narcos (and other Spanish-language original content) to Univision in order to drive added exposure, while much of HBO’s original library (including series still airing) is on Amazon Prime Video (and John Oliver is posted to YouTube each week). While this may look like classic windowing of older seasons, there’s a key difference. Both retained their rights to their content, even though it’s still in the first window. And given their on-demand offerings, they not only continue to offer that same content, but do so more easily and more conveniently than those they sold it to. That’s new and crucial.
At the same time, the television industry needs to move into areas where they’ve typically had no role and might enhance the experience: the theater. Imagine seeing Game of Thrones’ Hardhome or Battle of the Bastards on the big screen – or even an NFL playoff game. Serialized television has not only supplanted film as the most engaging storytelling medium, it’s also stealing its stars and creative talent – and now rivaling its cinematography, too. Never before has TV been more deserving of the theatrical experience. This opportunity won’t be huge, nor will it work for a plethora of theaters (mostly those in dense cities or with dine-in offerings), but it can create a lucrative new revenue stream for all parties. How many people, after all, typically go the movies Sunday night? And how else will the exhibitor business restore growth to their long-stagnant industry?
This leads into other, non-television opportunities.
Embracing Theater-Based Discrimination
Though the average American attends fewer than four films per year, their willingness to pay for individual films various tremendously (say The Force Awakens or The Hunger Games – e.g. the undeterred opening weekend attendees of Suicide Squad). Similarly, where a filmgoer sits, when they see a film and how it’s delivered or experienced (i.e. screen size, definition, time after release, time of day, seat size) all affect the “value” of the theatrical experience. This creates a critical opportunity for experimentation – and one virtually every other media business has thoroughly exploited. That said, there have been tests. In 2013, Paramount sold a $50 ‘superticket’ to World War Z that allowed purchasers to attend a screening of the film three days before its public release and included a digital copy of the film after its release on video. A few months later, Paramount tweaked this offer for Anchorman 2. For $33, fans would see an advance screening of the film, receive an alternate version of the original Anchorman, a pre-ordered digital copy of Anchorman 2 and a $5 confectionary voucher. Not only did this enable Paramount to monetize a costless asset (digital film rights), it began normalizing the idea of variable pricing among the most obsessive of film goers. Unfortunately, there’s been little creativity since industry-wide.
Studios and theater chains have been reluctant to disrupt prices because of the inherent chaos involved with the shift. Not only would take time for new price points or tiers to equilibrate, executives are afraid of the implications of price on film positioning. Is a less expensive film worse or just niche? How will an extra dollar – or five – impact customer satisfaction and willingness-to-recommend? Theater operators are particularly afraid that increased ticket prices (55% of which they pay out to the distributor) will cannibalize higher margin concession revenue (of which they share nothing). Of course, almost every other consumer media segment deploys variable pricing. Moreover, consumers have not only embraced tiering, but also accepted routine re-tiering – whether that’s an app, song download or Netflix subscription. Yet, introducing a new pricing scheme is far more disruptive than modulating an existing one. All of these concerns are valid – but the industry will need to do more than fret impossibilities if it hopes to sustain growth despite declining ticket volumes and ever-increasing competition.
Bundling offers a similar opportunity for customer discrimination. A film studio, for example, can sell a discounted bundle that includes a theater ticket, video game and 6-month comic subscription – or offer theatrical discounts with the individual purchase of those same products. This will come at the expense of margin, but it also allows studios to directly market to its most likely customers (many of whom would otherwise wait until the film was available on SVOD, build a customer relationship or extract greater overall value. In addition, it can be used to drive additional content or product discovery.
Ultimately, this shift may seem only slight. “Windowing was a model of price discrimination for consumers”, a critic might argue, “only it was delivered via B2B sales models”. Yet, this form of discrimination was characterized by its imprecision, bluntness and limitations. And as direct-to-consumer proliferates, the new model of customer discrimination will include three significant differences. First, it will include a significant number of free (or essentially free) media viewers. Secondly, this “windowing 2.0” model exists for a consumer-focused reason (variable consumer interest) not physical constraints or operational preferences. Thirdly, it will be overwhelmingly focused on moving subscribers through the monetization funnel, which requires a very different set of skills and capabilities. Not only will robust subscriber acquisition teams be needed, media companies will need to continually tweak their content and how they package, price and deliver it. Without (weekly) windowing, how do you constantly engage with and excite your customers? How do you re-engage deactivated/unsubscribed users? How do you keep a service feeling “new”? These are all new skills and questions facing Big Media and it also requires an entirely new release schedule. Netflix, for example, plans a major release every two weeks – the typical fall/winter premier or summer blockbuster strategy of Hollywood won’t cut it. In addition, we’ll only see IP and franchising become even more important in the un-windowed era. Not only do they never “end”, they provide far more monetization opportunities (e.g. products, audiobooks) and therefore more opportunities to extract value from fans.
Most crucially, the customer discrimination model requires a focus on the full customer lifecycle – not just direct-to-consumer or targeted advertising. Today every film marketing campaign starts from square one. Fox, for example, has made nine films in the X-Men franchise. Though these films no doubt shared much of the same ticket buyers, each one included a brand new (typically) 100M+ marketing campaign. Not only does this need to change (in 1980, distributors spent 19 cents for every $1 in box office revenue, in 2014 it was 55 cents), content owners need to get at knowing who also buys a comic, or a toy – as well as when, why, for how much and where. Customer lifecycle intelligence, however, isn’t sufficient. Organizational structures must also be streamlined. You can’t have creative, marketing and distribution siloed, pursuing their own P&Ls to often counterproductive ends. Everyone needs to pull in the same direction and row together. There is no handoff from one to the other to the other. All need to be engaged at all times. Just like paid and unpaid audiences alike.
Matthew Ball leads Strategy & Originals at REDEF.