Video On Demand in Europe

Article  by  Heritiana RANAIVOSON  •  Published 16.11.2010  •  Updated 02.12.2010
How digital technology is turning the audiovisual industry upside down.

Summary

Introduction

Having been announced for years [+] NoteEllis already wrote in 2001 that “VOD [had] been pursued, thought about and championed for more than two decades”,(Ellis, L. (2001), Definitive broadband, Littleton, CO: Genuine Article Press,p.V-2). X [1] Video On Demand (VOD) at last seems ready to establish itself as a major means of accessing audiovisual content. Most consumers seem ready for such an innovation. Consumers are now spending more and more time on the Internet. As the growth of fixed and mobile broadband across the European Union (EU) is set to continue, more and more consumers will be able to access internet-based VOD services. Furthermore, in digital environments, access to content and its portability become increasingly important. Users increasingly expect access to content wherever and whenever they are. Finally, while television still continues to dominate home entertainment, technology is bringing internet-based VOD closer to the television set, e.g. game consoles are increasingly VOD enabled.
 
For all of these reasons, the audiovisual industry is increasingly interested in VOD. The term itself encompasses various kinds of services. According to the Audiovisual Media Services Directive (2007/65/EC),““on-demand audiovisual media service” (i.e. a non-linear audiovisual media service) means an audiovisual media service provided by a media service provider for the viewing of programs at the moment chosen by the user and at their individual request on the basis of a catalogue of programs selected by the media service provider” (Article 1 (g), AVMSD).
 
The two main points here are first that VOD services are non-linear (as opposed to broadcasting, for which there is programming). Secondly, VOD services are dematerialised, i.e. there is no physical support (as opposed to DVD). VOD services may include catch-up services, i.e. services provided by TV broadcasters allowing consumers to watch broadcasts for a few days following the initial broadcast on television, generally for free. On the other hand, this does not include sites that provide User Generated Content (e.g. YouTube, Dailymotion) since here, content is supposedly not selected by the service provider. Nor does it includeNear Video On Demand (NVOD), a television system in which multiple channels are used to show the same piece of content at staggered start times. In the EU NVOD is still dominant compared to, but tends to be replaced by, VOD.

VOD services can be categorised according to a few features:
  • the nature of the VOD service provider (Broadcaster/Infrastructure Provider/Equipment Manufacturer/Pure VOD Player)
  • the delivery platform (Internet/Internet Protocol Television/Digital Terrestrial Television/Cable/Satellite)
  • the revenue model (Pay as you Go/Subscription/Advertising-based)
  • the terms of use (Download to Own/Rental, including Streaming)
I will first describe the state of the EU VOD market, and then analyze the opportunities and challenges related to VOD for new and especially traditional players of the audiovisual industry, with a particular focus on the issue of release window systems.
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State of the VOD market in the EU

For the moment, it is impossible to get a comprehensive view of the EU VOD market. From the supply point of view, a few studies provide figures on the number of VOD services and service providers, which tend to be contradictory [+] NoteThis is notably the case for the IFTA survey and the EAO study.X [2]. There is no systematic data on the number of titles made available. To my knowledge, only Screen Digest provides data on VOD consumption. These are aggregated at the national level and do not include revenues derived from the internet. Therefore, the following figures should be considered with caution.
 
From 2006 to 2008, the EU VOD market increased dramatically (by 250% according to Screen Digest). Moreover it is expected to be multiplied by four in 2013, whereas the audiovisual market as a whole is expected to grow to €115 billion by 2013. However the VOD market still represented less than 1% of the overall audiovisual industry’s turnover in 2008 (€644 million versus €96 billion) [+] NoteData on the audiovisual market, source: PWC (2009); on the VOD market, source: Screen Digest.X [3].
 
The EU Audiovisual market
 

Source: PricewaterhouseCoopers (2009)

Significant differences exist across EU Member States although VOD remains minor when compared to the rest of the audiovisual markets, as is the case in Belgium, where revenues derived from VOD represent 1.79% of all revenues derived from the audiovisual system but figures are far lower for all other EU countries. This shows that the VOD market is still in its infancy.
 
All studies agree on the fact that the total number of VOD service providers and services in the EU grew from 2004 to 2008, and continues to grow (EAO, 2009; IFTA, 2009). On a related note, more and more titles are made available for the consumers.
 
There are substantial differences between countries in terms of the number of VOD service providers and services:
  • Countries with the greatest number of both either have a large population (e.g. France) or a high income per capita (e.g. the Netherlands)
  • This number also reflects the proliferation of digital technologies in a Member State. The markets with the greatest number of VOD service providers thus also have the highest penetration of broadband Internet, with the exceptions of Spain (medium penetration but great number of providers) and Luxembourg (high penetration but low number of providers). Similarly, the countries that have the highest penetration of digital television also have the greatest number of providers.
 
The nature of the VOD service providers that are present in a country differs according to a country’s profile:
  • Emerging VOD markets are generally dominated by firms that own or manage physical infrastructures, i.e. by telecommunications, cable and satellite operators. This is the case in the Czech Republic (e.g. the international cable operator Liberty Global) and Bulgaria (e.g. the telecommunications company Vestitel BG).
  • In intermediate markets the broadcasters play a greater role, such as in Hungary (e.g. the commercial television channel RTL Klub) or Austria (e.g. the public service German television channel ZDF).
  • In the most developed markets, however, more pure VOD players or hardware manufacturers are present, such as in France (e.g. Glowria – now Video Futur). In some cases these players can even be the most numerous in the market, as is the case in the Netherlands.
In most countries, the Internet is the VOD delivery platform that is used by the greatest number of VOD service providers. One reason for this may be that market entrance on the Internet is far easier than on any other platform. On the other hand, it is generally estimated that revenues derived from Internet-based VOD (excluding IPTV) represent only around 10% of all revenues derived from VOD [+] Note9.3% in France in 2008, source: CNC; 5.4% in the UK for films (including NVOD), source: UK Film Council; 11.8% in the US, source: EAO.X [4].
 
Rental revenue models are chosen by the majority of VOD services in Europe, which makes these services resemble dematerialised video stores. On the other hand, according to Screen Digest, subscription-based revenue models have recently become more successful in the EU than rental and electronic sell-through taken together (€283 million vs. €261 million in 2008). There can, however, be significant differences between countries in the relative importance of either one or the other revenue model (there is no reliable data on revenues derived from advertising).
 
All this would seem to lead to the conclusion that VOD markets should expand in the coming years, notably towards IPTV and subscription. However, the VOD market is still in its infancy, and as such, is somewhat unstable, making it difficult to predict its future development. It should definitely impact the audiovisual system at the EU level, however.
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How VOD has already intensified competition within EU audiovisual markets

VOD can be considered as a source of new revenue streams, which taps into as yet underexploited consumer practices. VOD can be viewed first as another step in the process of satisfying consumers’ desire for increasingly flexible consumption of audiovisual content. Arguably a device such as the VHS recorder already allowed time shifting long before digital arrived. However, digital technologies allowed for even more flexibility with digital video recorder (e.g. TiVo, launched in 1999), digital place-shifting services (e.g. Slingbox, launched in 2005).
 
Not only is VOD more flexible, it is also likely to reduce delivery (i.e. prints, transports, freight) and storage costs. Thanks to dematerialization, it promises to solve the problem of scarcity in relation to shelf space and delivery of physical versions.
 
Finally, through relevant search and recommendation systems, VOD may help consumers make their choice among all available audiovisual content. Conversely, such systems and other devices (e.g. social networks) might help VOD service providers better target the consumers. This will not necessarily substitute existing marketing strategies and reduce marketing costs, but rather supplement them. However, this can help build markets for less mainstream contents. Thus the VOD service Babelgum uses a team of ‘curators’ to attract consumers and build communities around independent films.
 
However VOD is also likely to deeply modify the competitive field in the whole EU audiovisual system. The emergence of the VOD market has elicited 3 kinds of reactions:
  • For some players, the main consequence is a reduction of their revenues. This is notably the case for cinema operators and players in the video industry (e.g. DVD manufacturers). Similarly, national distributors (and sales agents whose current business models are dependent on minimum guarantees from distributors) are interested in maintaining their overall revenues from theatres, broadcasting and DVD/BluRay, and seem reluctant to support VOD so long as it may reduce existing revenues rather than create new returns. On the other side, some distributors are now venturing into VOD within their traditional territories.
  • A typical reaction on behalf of established players in the audiovisual system is to enter the VOD market to complement their existing offer. The trade-off is between losing money due to the development of VOD (which will go on regardless of whether they take part in it or not), on the one hand, and investing in VOD, relying on their assets as established players, on the other hand. Thus European audiovisual producers are relying on pre-finance, which makes them dependent on contributions from established players. However some of them see VOD as an opportunity to bypass intermediary players and increase their revenue share in the long term. Broadcasters are keen to promote their brands, notably via catch-up services. VOD available through subscription may endanger pay TV but public service broadcasters might consider making their commissioned content available on a pan-European basis.
  • Finally, several players are entering the VOD market without being active (yet?) in the rest of the EU audiovisual system [+] NoteThis includes US players that are heading – or considering heading – towards the EU VOD market (e.g. Netflix, Hulu).X [5]. This includes equipment manufacturers (e.g. Apple with iTunes, Microsoft with the Xbox) and infrastructure providers (e.g. telecommunication operators). A major difference between these and the other players is that VOD services are generally used to increase the usage of specific distribution systems or end-devices – notably since VOD alone is not profitable. Most of these new players have so far not participated in financing audiovisual creation and therefore do not share all of the risks associated with content production.
A fast roll out of VOD is also inhibited by uncertainties linked to how to finance audiovisual production, should VOD become dominant in the audiovisual system. Actually distributors and broadcasters are traditionally important pre-financers of audiovisual production, and they have little incentive to enter the VOD market as long as returns in VOD are marginal. The VOD market is still too limited to incite VOD service providers to significantly enter into production finance to get exclusive works. As a result, for the moment, there can only be a few works designed exclusively for VOD.
 
Promising new revenue streams VOD attracts established and new players in the audiovisual field. This has an impact on the regulatory frame that currently supports the audiovisual system. A particular instance is the one of the release windows system.
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Why VOD raises issues concerning release windows

The release windows system, which applies to cinema movies, is an important feature of the audiovisual industry. It currently organizes the way cinema movies are made available to consumers. These movies may be accessed through various forms. Every one of these forms is categorized as a version, and the existence of different versions for the same content allows movie suppliers to price discriminate, i.e. to charge consumers for different prices to access the same content. The main version markets for movies in the EU are theatre, DVD, VOD (with differences according to the revenue model and the terms of use), Pay-Per-View, Pay TV and Free TV. Every version is provided exclusivity for a limited time period – generally through agreements at the industry level, more rarely by law (partially in France and in Germany).
 
The position, duration and chronology of different release windows differs across territories due to local audience preferences, different technological infrastructures, consumer spending on different content versions and the historical development of audiovisual regulations in each country. This is supposed to allow every version to be as profitable as possible so that the revenues derived by the right holders from the whole exploitation are as high as possible.
 
As the number of content versions increases, the duration and chronology of release windows are changing. The length of the windows actually influences every version market in at least two ways [+] NoteThe contradictory effects are illustrated in Bomsel et al. (2009). X [6]:
  • Shorter windows may lead to more competition between players in successive version markets, e.g. a shorter theatrical window might incite consumers to wait for the film to be available on VOD or DVD. This is the Cannibalization effect.
  • On the other hand, longer windows might lead to people forgetting about the film. In other words the investments made to market and promote the film for the theatrical release benefit other windows. This is the Perishability effect. Such an effect might be supplemented by the existence of piracy, which might reduce revenues derived from video (notably by being preferred by all consumers who do not want to wait for the video release when the film is available on the Internet).
Right holders (e.g. a distributor for a territory) take such effects into account when they negotiate the way the release dates on the successive version markets. One extreme solution, which is generally fought off by cinema operators and not allowed in every EU country, consists in day-and-date release, i.e. the release of content for VOD on the same day as the theatre release. To prevent such resistance by cinema operators, some rights holders are experimenting with ‘reverse windows’ in which films – sometimes parts of films – are released on VOD at an early stage, after which they close down to protect the other windows (e.g. in 2009 Europacorp’s Home and Memento’s Amreeka).
 
Overall, one can observe that DVD, VOD (Pay as you Go) and Pay-TV windows are scheduled earlier across Europe than they used to be. In many countries, the VOD (Pay as you Go) window is gradually shifting to approximately 4 months after theatrical release, day-and-date with DVD releases. This can be interpreted either as a way to better take consumer preferences into account or as a victory of VOD players at the expense of theatre operators.
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Conclusion

According to Screen Digest, VOD turnover in the EU is expected to be multiplied by four from 2008 to 2013, reaching €2.2 billion. This dramatic increase should further turn the audiovisual industry upside down. The VOD market is however in its infancy, which makes it difficult to make any prediction as for the impact of VOD on the audiovisual system.
 
It is particularly difficult to foresee which actors will most benefit from the development of VOD. Broadcasters may benefit from the fact that they generally buy VOD rights in addition to the rights they already buy to broadcast. Telecommunication operators have a direct access to consumers. As such, they could include VOD services with internet services. Equipment manufacturers might wish to subsidize VOD while benefiting through profitable hardware (like Apple did with iTunes and iPods).
 
A related issue is the impact of the development of VOD on the EU audiovisual market as a whole. The European audiovisual industry is at the moment highly fragmented. Every national audiovisual market in the EU has grown depending on a number of factors particular to each market. The industry’s structure in terms of production and distribution is a reflection of each market’s size, its regulation, its technological infrastructure and cultural references of its audience. From an industrial point of view, this is a limitation to strategies at the European level: establishing a successful VOD service that would indiscriminately serve all EU consumers seems almost impossible in the coming years.
 
Digital technologies also theoretically allow a greater circulation of EU audiovisual content all across Europe. This is obviously desirable from the point of view of cultural diversity, considering that such circulation is very limited for the moment. However, in order to be reached, such an aim would necessitate the removal of several legal and institutional limitations. Most of all, greater freedom would not necessarily mean greater consumption. Persuade consumers to watch content that is neither American nor local is the greatest challenge for all promoters of European audiovisual creation.
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Selected References

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  • 1. Ellis already wrote in 2001 that “VOD [had] been pursued, thought about and championed for more than two decades”,(Ellis, L. (2001), Definitive broadband, Littleton, CO: Genuine Article Press,p.V-2).
  • 2. This is notably the case for the IFTA survey and the EAO study.
  • 3. Data on the audiovisual market, source: PWC (2009); on the VOD market, source: Screen Digest.
  • 4. 9.3% in France in 2008, source: CNC; 5.4% in the UK for films (including NVOD), source: UK Film Council; 11.8% in the US, source: EAO.
  • 5. This includes US players that are heading – or considering heading – towards the EU VOD market (e.g. Netflix, Hulu).
  • 6. The contradictory effects are illustrated in Bomsel et al. (2009).
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