SVOD and the Consumer Experience

SVOD services allow the consumer online access to motion picture and made-for-television content over a range of Internet-capable devices, including “smart” televisions, computer monitors, smartphones, tablets, video game consoles, and multimedia devices such as Apple TV, Google’s Chromecast, and Roku. SVOD services differ from video-on-demand (VOD) services, in that VOD offers à la carte access to specific content, either paid for directly by consumers or supported through inserted commercial ad spots, whereas SVOD offers a package of content to be viewed during a certain period (e.g., monthly) for a fee.

The three largest SVOD providers are Netflix, Amazon Prime Instant Video, and Hulu Plus—each with its own unique consumer experiences:

Netflix: Currently the largest SVOD service, it has more than 37 million paid subscribers in the United States (more than 54 million globally) as of the end of 2014.⁴ Consumers in the United States pay between $7.99 and $11.99 monthly to access recent releases and back-catalog motion pictures and television content licensed from major studios and television production companies, as well as original exclusive programming, such as House of Cards and Orange Is the New Black.⁵ Netflix does not insert commercial ad spots as part of its video streaming.

Amazon Prime Instant Video: As part of the Amazon Prime subscription, which costs $99 per year and includes a bundle of services,⁶ consumers can access licensed back-catalog motion pictures and television content, as well as original exclusive programming, such as Transparent. While Amazon Prime is reported to have roughly 40 million U.S. subscribers, it is estimated that only 70 percent of those subscribers, or 28 million U.S. households, actually stream video content.⁷ Amazon Prime does not insert commercial ad spots as part of its video streaming.

Hulu Plus: This service, which reportedly has more than six million subscribers,⁸ is mutually owned by 21st Century Fox, the Walt Disney Company, and Comcast-NBCUniversal.⁹ Consumers pay $7.99 per month to access recent television content, as well as back-catalog motion picture and television content. Hulu Plus inserts 80 commercial ad spots per month per average viewer as part of its video streaming. Ads on Hulu Plus cannot be fast-forwarded by consumers, like one could do if watching content via a digital video recorder (DVR).¹⁰

As part of the consumer experience, SVOD distributors make recommendations for other content to stream. For instance, Netflix uses an algorithm based in part on consumers’ streaming history compared to ratings of other Netflix members with similar tastes.

• SVOD distributors license output and back-catalog content from others, and commission their own exclusive made-for-television product, with recent deals including:
• Netflix paid $100 million for initial distribution rights to 26 episodes of House of Cards;¹¹
• Netflix paid $50 million for initial distribution rights to 13 episodes of Orange Is the New Black;
• Amazon paid $13 million for distribution rights to 13 episodes of Under the Dome, beginning four days after the live airing on CBS;
• Hulu Plus paid $180 million for distribution rights to all Seinfeld episodes;¹²
• Netflix paid $500,000 per episode for distribution rights to all Friends episodes;¹³
• Hulu Plus paid more than $80 million for distribution rights to all South Park episodes;¹⁴
• Hulu Plus licensed certain future series from cable channels within the AMC Networks umbrella, including a spinoff of The Walking Dead series;¹⁵ and
• Hulu Plus licensed past seasons and certain future series for various Turner cable networks, including TBS, TNT, Cartoon Network, and Adult Swim.¹⁶

In addition, certain networks offer their own subscription streaming services like HBO Now (for $14.99 per month, with access to motion pictures and HBO exclusive television content, and with no commercial ad spots¹⁷) and CBS All Access (for $5.99 per month, with access to the network’s recent episodes and back catalogs, and with limited commercial ad spots for the recent episodes¹⁸). Certain multichannel video programming distributors (MVPDs) have also started their own SVOD services, including Comcast, DIRECTV, DISH Network, and AT&T U-verse.

SVOD Grows in the U.S.

Consumer spending on SVOD has increased in recent years, and is expected to continue to increase. According to the Digital Entertainment Group (DEG), SVOD has grown from 5.4 percent of U.S. consumer home entertainment spending in 2011, up to 22.5 percent as of 2014 (see fig. 1).¹⁹

Figure 1. U.S. Consumer Home Entertainment Spending ($ in Millions)

The growth in SVOD consumer spending is corroborated by noted shifts in how consumers are accessing home entertainment content, even stretching the concept of what constitutes “home entertainment.” For example, according to Nielsen, people are spending less time watching television content as it is being broadcasted in designated time slots (sometimes called “linear” programming), preferring more often to spend time watching content on their smartphones and tablets, or otherwise on a time-shifted basis (see fig. 2).²⁰

Figure 2. Average Daily Viewing Time per Adult 18+

Even if one assumes that a sizeable portion of the video content being viewed on computers, smartphones, and tablets is of the short-form variety (e.g., YouTube clips), or sporting events, it is easy to envision how this shift supports consumers’ acceptance of the many ways to access SVOD content.

Another sign of continued support is in how consumers prefer to pay for online premium content. According to Morgan Stanley, consumers have shown an increased preference to use a paid subscription service for online access to movies and television shows (see figs. 3 and 4).²¹

Figure 3. Preferred Payment Method for Watching Online: Motion Pictures

Figure 4. Preferred Payment Method for Watching Online: Television Shows

Assuming that the broadband infrastructure in the United States can support it, it can be expected that SVOD’s market share of “home” entertainment will continue to grow, but by how much and by when the growth may ebb are unknowns at this point. For instance, it may be that consumers are currently taking advantage of SVOD to “binge watch” TV episodes they may have missed, or other back-catalog product. At some point in the future, SVOD may reach a stable point at which consumers will have interest in only newer content.²²

History supports this possibility. More than 15 years ago, when DVDs were first introduced, back-catalog titles received revenue bumps when newly released on DVD, signifying that consumers were eager to fill out their home libraries with the new format. But once DVDs had replaced VHS as the de facto consumer standard, and the extent of back-catalog DVD releases subsided, back-catalog sales returned to their normal decay curve.

Indeed, Netflix is already anticipating that original programming may represent 50 percent of its overall content acquisition costs in the future, up significantly from 15–20 percent of its 2014 content costs.

SVOD’s Impact on Ecosystem

As SVOD is expected to grow, what does that mean for the rest of home entertainment and television revenue? Does an increase in SVOD mean that other revenue streams will decline? There has been a recent decline in DVD and Blu-ray sales, but those declines have been mostly offset by increased digital and streaming revenue, including SVOD (see fig. 5).²³

Figure 5. U.S. Consumer Spending on Home Entertainment ($ in Millions)

Despite the advance of SVOD, U.S. consumer spending on home entertainment has declined by 2 percent since 2012, as compared to a 12 percent increase in gross domestic product (GDP) between 2011 and 2014 ($15.8 trillion vs. $17.7 trillion).²⁴

As for television revenue, can the additional SVOD license fees offset the potential reduction in advertising and retransmission fee revenue brought on by viewership migration? For now, the answer is somewhat mixed. According to Needham & Company, the U.S. television ecosystem is not in decline, despite the impact of digital platforms. Indeed, it estimated that revenue for the largest broadcast and cable television channel groups would increase by 14 percent between 2012 and 2014, outpacing the 12 percent growth in U.S. GDP as noted above.²⁵ As for U.S. advertising, television and digital ad spend was estimated to increase by 18 percent between 2012 and 2014, according to eMarketer.²⁶

However, a somewhat contrarian view is offered by Wolzien LLC, which estimates that the annual investment of $2.5 billion to acquire SVOD content is insufficient to make up for lost revenue by MVPDs from consumers that have chosen “cord cutting” (i.e., having broadcast and broadband access, but no cable/satellite/telco access). It is suggested that the SVOD companies need to invest more in content to offset potential downward pressure from the MVPDs as a result of cord cutting.²⁷

SVOD’s Impact on Content Value

Copyright holders and other stakeholders should both benefit from the competition between the SVOD distributors to acquire content, which they use to reduce churn among current subscribers, and perhaps more importantly, entice new subscribers. According to Trefis, Amazon is incentivized to heavily invest in streaming content to lure in new Prime subscribers, given that Prime customers purchase about twice as much e-commerce goods as non-Prime customers, and the margins from Prime customers are higher, despite their free two-day shipping membership benefits.²⁸

However, as alluded to earlier, these investments will likely shift toward acquisition of exclusive content, as opposed to nonexclusive new releases and back-catalog content. Indeed, according to Morgan Stanley, one of the assessed key value drivers for Netflix is its ability to differentiate from competitors by maintaining its levels of exclusive content.²⁹ Nevertheless, there will continue to be significant investment in nonexclusive content going forward, in new licensing deals and renewals of existing licenses.

From a copyright valuation perspective, there are a few questions to consider. First, how do these SVOD licenses affect the value of licenses for other exploitation windows, domestically and internationally? One would expect that the theoretical value attached to the other windows would lessen as a result of multiple SVOD viewings. However, there are enough people who still watch live TV, even those with SVOD access, such that these other windows will likely retain significant value—how much will depend on how measured viewership in these other windows is affected. Foreign television distribution deals may also be affected, especially to the extent that SVOD distributors, particularly Netflix and Amazon, expand their services to other territories. Assuming that SVOD distribution is secured, the growth of international SVOD may have an impact on the presales value a foreign territorial distributor might place on independent films, as exclusivity of their distribution rights might be threatened.

A second valuation question is: what residual value is retained with original content once its exclusive SVOD window expires? For instance, Netflix has exclusive rights to House of Cards for several years, after which the distribution rights revert back to the copyright holder, Media Rights Capital.³⁰ Given the groundbreaking success of this series, as well as the 64 percent of U.S. households who do not yet have access to Netflix,³¹ the resulting licenses stemming from opening up this exclusivity should be groundbreaking as well, at least in terms of providing guidance to how other exclusive content may be valued going forward.

A third valuation question is: what residual value may be derived from SVOD renewal licenses? Typically, there are significant decay curves when distribution rights are renewed in a certain window. However, as it relates to SVOD, the extent of such decay will likely depend on the actual and further anticipated growth of SVOD penetration, and other measured factors related to how (and how much) SVOD viewers consume content.

Potential SVOD Value Interpretation Issues

At the end of the day, copyright holders and other stakeholders will want to ensure that the appropriate value from these SVOD licenses accrue to the respective content, in accordance with their sometimes competing interests. There are a couple of issues where differences of opinion as to these values may arise and could lead to litigation.

The first potential issue is in how the proceeds from multiple-title, output/back-catalog licenses are allocated. Historically, the major film studios have allocated proceeds from domestic and foreign television licenses according to proprietary algorithms, where factors such as box office performance, age of the title, genre, and attached talent served as theoretical proxies for the comparative economic value of the various titles that ultimately drove the value of the license.³² It is conceivable that these allocation algorithms may need to evolve, or even be eschewed altogether, to account for the following:

• Relative importance of made-for-television content to SVOD audiences: As noted above, SVOD audiences are using their access to catch up on current and past TV series. This would theoretically skew the economic value of SVOD licenses, at least in the short-term, more toward made-for-television content, as compared to historical licenses that tended to favor motion pictures.
• Improvements in audience tracking: Because SVOD distributors are able to track their consumers’ streaming histories, license allocations may become a function of these collective histories, applied to the respective content licensed. This raises the question as to whether the current streaming histories fairly represent the comparative economic value of the titles in the historical deal or as a basis for how titles may be valued in the next renewal.

The second potential issue relates more to stakeholders, although copyright holders will likely also be impacted by its resolution: how SVOD revenue is classified as either television or home video. While each profit participation and guild residual contract is different, alternative classifications may result in variances in (1) the extent of net revenue subject to contingent compensation, and (2) the extent of distribution fees deducted from net revenue. While the resolution of this potential issue is beyond the scope of this article, one potential solution may be that SVOD becomes a separately negotiated revenue classification—given its anticipated continued growth and that any revenue cannibalization would likely come from both home video sales and other television licensing windows.

Endnotes

1. Nielsen Co., The Total Audience Report: Q4 2014 (Mar. 11, 2015) [hereinafter Nielsen Total Audience Report], available at http://ir.nielsen.com/files/doc_presentations/2015/total-audience-report-q4-2014.pdf.

2. Morgan Stanley Research, 5th Annual Streaming Video Survey: Part Two (Mar. 24, 2015) [hereinafter Morgan Stanley Streaming Video Survey].

3. Stakeholders include people or other entities that may be subject to receiving contractual profit participations and guild residuals from the exploitation of motion pictures and made-for-television content. While these rights do not convey ownership in the respective content copyright, these stakeholders share a common interest with copyright holders in the growth of the amounts paid for access to this content.

4. Netflix Inc., Annual Report (Form 10-K), at 18–19 (Jan. 29, 2015), Article no longer available.

5. See id. at 17; Netflix, https://www.netflix.com/ (last visited June 18, 2015).

6. In addition to access to the Instant Video service, Amazon Prime subscribers also receive free two-day shipping on most subscriber purchases and free access to music content and e-book rentals, among other benefits.

7. Patrick Seitz, Amazon Prime Now Tops Netflix in U.S. Subscribers, Investors.com (Jan. 27, 2015), http://news.investors.com/technology-click/012715-736533-amazon-prime-has-more-subscribers-than-netflix.htm.

8. Sarah Perez, Hulu, Now with 6 Million Subscribers, Will Make Some TV Episodes Free on Mobile, TechCrunch (Apr. 30, 2014), http://techcrunch.com/2014/04/30/hulu-now-with-6-million-subscribers-will-make-some-tv-episodes-free-on-mobile.

9. Brian Stelter, Hulu Owners Call Off Sale, Instead Pledging to Invest to Take On Rivals, N.Y. Times, July 12, 2013, http://www.nytimes.com/2013/07/13/business/media/owners-of-hulu-call-off-sale-and-plan-to-invest-750-million.html.

10. Claire Atkinson, Hulu CEO Mulls Cutting Number of Ads Run on Hulu Plus, N.Y. Post, Oct. 8, 2014, http://nypost.com/2014/10/08/hulu-ceo-mulls-cutting-number-of-ads-running-on-hulu-plus.

11. Laura Martin & Dan Medina, Martin’s Meditations: The Future of Video, Needham Insights, July 28, 2014, Article no longer available.

12. Cynthia Littleton, Hulu Sets Mammoth “Seinfeld” Licensing Deal,” Variety (Apr. 28, 2015), http://variety.com/2015/tv/news/hulu-seinfeld-licensing-160-million-1201483537.

13. Alice Vincent, Seinfeld Re-Runs Prove Too Pricey for Netflix, Telegraph (U.K.), Mar. 16, 2015, http://www.telegraph.co.uk/culture/netflix/11475397/Seinfeld-re-runs-prove-too-pricey-for-Netflix.html.

14. Daniel Lefferts, Hulu Gains Exclusive Rights to Stream “South Park,” Adweek (July 14, 2014), http://www.adweek.com/news/television/hulu-gains-exclusive-rights-stream-south-park-158900.

15. Andrew Wallenstein, NewFronts 2015: Hulu Snags “Walking Dead” Spinoff in AMC Output Deal, Variety (Apr. 29, 2015), http://variety.com/2015/digital/news/hulu-snags-walking-dead-spinoff-in-amc-output-deal-1201483566.

16. Todd Spangler, Hulu Pacts with Turner for Exclusive Rights to Cartoon, Adult Swim, TNT, TBS Shows, Variety (Apr. 23, 2015), http://variety.com/2015/digital/news/hulu-turner-cartoon-adult-swim-tnt-tbs-1201478327.

17. HBO Now, https://order.hbonow.com (last visited June 18, 2015).

18. CBS All Access, http://www.cbs.com/live-tv (last visited June 18, 2015).

19. The DEG Home Entertainment Reports Article no longer available.

20. Nielsen Total Audience Report, supra note 1, at 10.

21. Morgan Stanley Streaming Video Survey, supra note 2.

22. See Tom Wolzien, Chairman, Wolzien LLC, OTT: Trend, Bubble, Both?, Presentation for the 39th Annual UCLA Entertainment Symposium: Hollywood Over-the-Top (Mar. 13, 2015), Article no longer available.

23. See supra note 19.

24. See National Income and Product Accounts Tables: Table 1.1.5. Gross Domestic Product, Bureau of Econ. Analysis, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1&903=5 (expand “Section 1 – Domestic Product and Income”; then follow “Table 1.1.5. Gross Domestic Product (A) (Q)” hyperlink; then “Modify” to include 2011) (last revised May 29, 2015).

25. Martin & Medina, supra note 11.

26. Total US Ad Spending to See Largest Increase Since 2004, eMarketer (July 2, 2014), http://www.emarketer.com/Article/Total-US-Ad-Spending-See-Largest-Increase-Since-2004/1010982.

27. Wolzien, supra note 22.

28. Amazon.com, Trefis, http://www.trefis.com/stock/amzn/model/trefis?easyAccessToken=PROVIDER_c0f663352356827f87091d2164ed90f2cc253a52 (last updated June 1, 2015).

29. See Patrick Seitz, Netflix Stock Has Room to Run, Despite Recent Climb, Investors.com (Apr. 21, 2015), http://news.investors.com/technology-click/042115-748817-nflx-stock-gets-bullish-report-from-morgan-stanley.htm.

30. Martin & Medina, supra note 11.

31. See Nielsen Total Audience Report, supra note 1, at 5.

32. This approach is notably different from the straight-line allocation method rejected by a jury and the California Court of Appeals in Ladd v. Warner Bros. Entm’t, Inc., 110 Cal. Rptr. 3d 74 (Ct. App. 2010).