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25 Years of Digital Entertainment — Part Two: The Digital Stream

Media Play News is celebrating 25 years of digital entertainment with a two-part special report.

In part one, available here, we chronicle the development of the DVD, which launched this digital revolution, as well as its two successor discs, Blu-ray Disc and 4K Ultra HD.

In this, the second part, we trace the history of digital distribution, including electronic sellthrough, digital rental and streaming. This feature also is available on our podcast:

Beginnings

The digital distribution of movies and other filmed content always had a seductive appeal to Hollywood, even before the launch of DVD. The prospect of no manufacturing costs, no shipping expense and, perhaps best of all, no returns was like a utopian dream — sweetened, ever more so, by the fact that transactions could be conducted directly with the consumer. The studios could finally cut  out the middle man — which in the early days of home video actually consisted of two  middle men — wholesalers and retailers — both of which siphoned off profits the studios would much rather keep all to themselves.

A key part of DVD’s legacy is the mass digitization of film content that followed its March 1997 U.S. debut. Because the DVD audience was so hungry, the studios opened their vaults and digitized their libraries.

This opened the door for  more viewing versatility in the future, particularly as digital distribution took hold in two branches — transactional video-on-demand (TVOD) and streaming.

Cable on the March

Even in the glory days of the VHS videocassette, there was a precedent for movies and other filmed content being brought to consumer homes without a physical component: pay-per-view (PPV), which gave the rental business a good scare in the late 1980s and early ’90s.

The vision of PPV on the cable end originated in the late 1970s with Cube, a two-way interactive system introduced by Warner Amex Cable Communications, the cable TV joint venture of Warner Communications and American Express, in Columbus, Ohio. The first PPV cable channels in the United States appeared in 1985, with names such as Viewer’s Choice, Cable Video Store and Request TV. But PPV had one flaw that kept it from capturing the majority of consumers who had taken to renting videocassettes for their evening entertainment: the inability to offer on-demand viewing, with the option to pause, stop, go forward or go back. The best the cable companies could do was offer staggered starting times, but even then, viewers were not in control the way they were when watching a videocassette.

PPV channels such as Viewer’s Choice gained popularity in the 1980s and early ’90s, but were hampered by the inability for users to pause, go back or fast forward the way they could on VHS.

The concept of video-on-demand was an appealing one, not just to cable companies but also to the new “Baby Bell” telephone companies that had been established as a result of the 1982 antitrust breakup of AT&T. The challenge was how to squeeze a movie into the limited bandwidth of a copper cable, which was fine for a speech signal but woefully inadequate for a movie. VOD became possible only as a result of two major technological developments: MPEG video compression and the asymmetric digital subscriber line, a data communications technology that enables faster data transmission.

VOD development efforts picked up in the early 1990s, particularly after the Baby Bells were given the green light to provide video services, which previously had been forbidden under the Cable Communications Policy Act of 1984.

In 1991 the Time Warner New York City Cable Group in Queens, N.Y., launched the nation’s only 150-channel cable-TV system, a big jump from the 35 or so channels the typical cable households could receive. At the time the Los Angeles Times said the Time Warner project, “which is starting out slowly with 10,000 subscribers in two neighborhoods, is a model of what’s in store for the rest of the country.”

Former Warner Home Video president Warren Lieberfarb remembers the reaction. “It was the announcement of the 150-channel PPV system, with its PPV offerings that facilitated staggered starting times and gave consumers significantly more choice, that really triggered a very significant selloff in Blockbuster stock and caused Wayne Huizenga to try to find a buyer, as he saw the writing on the wall as to where the future of transmitted distribution was going,” he says. (In 1994 Huizenga did, in fact, sell Blockbuster to Viacom Inc.)

In October 1992 Bell Atlantic announced a VOD trial in northwestern Virginia. The following January, The Washington Post reported that Blockbuster Entertainment Corp., at the time the biggest video rental chain, was talking to Bell Atlantic about providing movies to the new service. Blockbuster, The Post said, “apparently has decided to join the upcoming ‘video-on-demand’ revolution in television rather than fight it.”

Tele-Communications Inc. (TCI), the country’s largest cable television company, also was experimenting with VOD. “Video Retailers Troubled by TCI, Carolco PPV Venture,” screamed a front-page headline in Billboard’s May 6, 1993, issue about a new deal between the cable giant and the film company. “I can’t imagine any sane executive in Hollywood wanting to tamper with its main revenue source,” Blockbuster senior programming VP Ron Castell told the trade. He noted that while home video generated $4.1 billion in revenue in 1992, PPV (the terms back then were often interchangeable) brought in less than $100 million.

Mike Fidler, who in the early 1990s was working for Pioneer Electronics, says the cable companies were particularly aggressive in developing VOD capabilities.

“The major cable companies were developing advanced technologies for higher bandwidth to bring more on-demand content, with better quality and real-time delivery, to drive new revenue as well as compete with the anticipated arrival of telcos in their space,” he says.

But the promise of VOD never quite materialized. The cable companies were also in a race with satellite providers to expand their channels — and grow their bundles. The telcos didn’t have the “last mile” into the broad consumer market that the cable companies had, and they were focused on moving into the mobile and internet markets. And the home video and consumer electronics industries were enamored with something called the DVD.

Mike Dunn (at the January 2017 CES).

“The studios were focused on DVD, which was exploding beyond belief,” says Mike Dunn, who at the time was a senior marketing executive at 20th Century Fox Home Video. “At the same time, to the cable companies, [VOD] was this orphan stepchild that didn’t have enough penetration and demand at the time to make it worthwhile. It was just a small niche business.”

DVD was such a cash cow that it was perched atop the sequential distribution system the studios had implemented to maximize post-theatrical revenue. This “window” strategy saw new theatrical releases come to DVD first, and to every other distribution channel, including VOD, weeks or even months later.

“You had the whole retail community — between Walmart and Target and Best Buy and Amazon — on the run,” Dunn says. “DVD became the hot retail product, and given the investment of retail we had a window on VOD to give DVD an edge.”

Studios Dabble in Digital Delivery

Concerns over illegal digital distribution finally got Hollywood’s attention. Studios had seen what had happened to the record industry. Because CDs were not encrypted, they could easily be copied and shared via a computer and the internet. And when the record companies responded to a slowdown in CD sales by hiking list prices and killing the single, which cost the same to manufacture as a full CD album, angry consumers took to the emerging internet and began swapping digital song files on sites such as Napster.
Ben Feingold, president of home entertainment for what is now Sony Pictures from 1994 to 2006, says he and his fellow home video executives feared that with greater bandwidth capacity the same thing could happen to movies, but were told by the Motion Picture Association of America (MPAA) “that we had to have a platform of our own or we couldn’t sue the pirates,” Feingold recalls.

Sony and Warner agreed to lead a multi-studio consortium to finance and commercialize a digital distribution venture that became known as Movielink. Four studios — all the majors, except Disney and Fox — put up $35 million to fund the project, which with Justice Department approval launched in November 2002. It allowed video files to be formatted to be compatible with both the Real Video player and the Microsoft media player.

The new service, however, didn’t make much noise, nor did a similar venture, CinemaNow, that been established earlier by a group that included Lionsgate and Microsoft.

In 2003 the Walt Disney Co. launched MovieBeam, a VOD service in which movies were sent wirelessly into subscriber homes through unused Public Broadcasting Service (PBS) station frequencies. The movies were then downloaded onto a hard drive inside a set-top box that consumers had to purchase for around $150. This box was connected to MovieBeam servers by telephone lines so that consumers could be charged each time they “rented” a movie ($1.99 for catalog, up to $4.99 for new releases). MovieBeam, too, failed to catch on, as retailers had a hard time explaining how it worked to their customers. Besides, DVD was booming.

Beginnings of Digital Ownership

It was only in the middle 2000s, when the furious growth of DVD at last began to subside, that the studios revved up their commitment to VOD — and as they had in the early days of VHS, they focused their efforts on sales rather than rentals through what they called “electronic sellthrough,” or EST.

The first EST platform, from Starz, was Vongo, which debuted in January 2006. Vongo was a movie download service in which subscribers, for $10 a month, could download as many movies as they wanted to, playable only on computers or portable devices that ran Microsoft’s Media Player. Sony agreed to provide the new service with movies.

In April 2006, Sony Pictures and five other major studios — MGM, Paramount, 20th Century Fox, Universal Pictures and Warner Bros. — began to sell digital copies of their movies on MovieLink and CinemaNow. Multichannel News noted at the time, “The purchase price is higher than what DVDs sell for in store, with Movielink executives citing the download convenience and multi-PC access for the roughly $10 in price difference.”

A month later, a skeptical Washington Post observed, “There’s never been a better time to get movies online — as long as you’re paying NetFlix (sic), Amazon or some other company to ship a DVD to you. If you want to download the movie, however, you’re going to be frustrated. Still. Three years after Apple’s iTunes Music Store brought online music sales to life, the movie industry continues to treat Web distribution as an experiment it can tinker with at its leisure. The latest belated addition to the movie-download market is the ability to purchase movies instead of just renting them. … If you must obtain a movie in the next few hours but can’t leave your house or have anybody else pick up the flick, these two Windows-only stores might work. Otherwise, it’s unclear who would bother with them: They stock far too few movies, charge too much for them, offer them at a quality inferior to any DVD and grossly restrict your use of these purchases.”

Apple CEO Steve Jobs (shown here at the March 2010 Academy Awards) is credited with jump-starting the electronic sellthrough business by urging studios to sell movies on iTunes. (Photo by Jaguar PS/Shutterstock)

Credit the late Steve Jobs, the celebrated co-founder of Apple, with jumpstarting the EST business in the wake of Apple’s October 2005 launch of the fifth-generation iPod, the first to play videos. The only drawback: No content.

That would soon change. Feingold recalls that before the video iPod launched, he received a frantic phone call from Jobs: “He called me on his Blackberry, and he said, ‘Feingold. This is Jobs. You have to get here ’cause I need movies from Sony.’ So I flew up to San Francisco, met with him, he showed me the prototype and I told him I felt Creative Zen was better and he ended up buying the patents for Creative Zen. He had already launched the iTunes store, but only with songs, and when I met with him he said he didn’t believe in rental. I told him it doesn’t matter what he thinks because people like rental because it’s cheap and they have no money, and at the time rental was 85% of all [VOD] transactions.”

In September 2006, Apple began selling Disney movies on its iTunes music store, with an initial allotment of 75 titles, including Pirates of the Caribbean and Cars. Jobs personally announced the deal and promised that new films would be available online for just $12.99 on the same day as their arrival on DVD.

“Here we go again! First music, then TV shows, and now movies,” Jobs said in an Apple press release announcing the deal. “In less than one year we’ve grown from offering just five TV shows to offering over 220 TV shows, and we hope to do the same with movies. iTunes is selling over 1 million videos a week, and we hope to match this with movies in less than a year.”

Things progressed rapidly over the next two years. Other studios followed Disney onto Apple iTunes. Paramount signed on in January 2007, followed by Lionsgate in February and MGM in April. At the end of the year Apple Insider reported that 20th Century Fox also would make its films available on Apple iTunes — and not just for sale, but also for rent. The publication noted that the deal wouldn’t be officially announced until after the holidays so as not to interfere with DVD sales. Also, other studios were concerned that supporting Apple would lead to the same type of market dominance in the digital distribution of movies that Apple had achieved with music.

In the meantime, Sony Pictures, Universal Studios and Warner Bros. had already started distributing movies on rival services that had sprung up from Walmart Stores and Amazon.com, which had launched its own Amazon Unbox movie downloading platform in September 2006, at the same time as Apple. (Unbox was later rebranded as Amazon Video on Demand but was subsequently scrapped in favor of Amazon Instant Video, the precursor to today’s Prime Video, which offers both subscription and transactional VOD).

By May 2008 all three studios were also providing Apple iTunes with new movies on the same day as the DVD release. Time Warner’s then-CEO, Jeff Bewkes, also said Warner Bros. would begin releasing the majority of its titles on cable VOD, also on the same day as the DVD.

During his keynote address at Macworld 2008, Jobs announced the launch of movie rentals in the iTunes store, like EST releases available on the same day as the DVD.

Netflix in the Stream

While Apple was making headlines with its digital movie distribution efforts, Netflix was quietly making plans to distribute movies electronically as well, although in a different way. After finishing 2006 with 6.3 million subscribers to its DVD-by-mail rental service, the company on January 16, 2007, introduced a streaming service, called “Watch Now,” that allowed subscribers to instantly watch movies and TV shows on their personal computers. “Watch Now” started out with just 1,000 titles, ranging from vintage classics such as Casablanca to cult and foreign films as well as miniseries. The service was free to subscribers of the company’s then $5.99-a-month disc plan, although they were limited to just six hours of streaming per month.

CEO Reed Hastings told Forbes at the time, “DVDs sell for about $16 each, and a lot of companies, like Apple and Amazon, focused on that ‘download-to-own’ number in their online video strategies. That involves files, complex applications. … We focused on convenience and simplicity.”
Streaming soon became even more convenient and simple when viewership was extended from the PC to the TV through a Roku set-top box and, before long, other streaming devices, including Blu-ray Disc players.

One of the earliest Netflix streaming sites, circa 2010 (Media Play News archive).

Netflix’s streaming business grew slowly at first, but accelerated when the company began introducing newer and higher-profile movies from the major studios, which were stung by slowing DVD sales and the failure of Blu-ray Disc to be a similarly big business. In October 2008 Netflix announced an agreement with Starz to make about 2,500 movies and concerts available for instant streaming. Earlier in the year, Starz had signed three-year movie output deals with Sony and Disney, and separate library deals with Warner Bros., MGM and Universal. Those deals included Vongo, which Starz shuttered in August, two months before the Netflix deal.

A Wired story from the following year elaborates the significance of the Netflix-Starz deal: “Each studio usually signs with just one pay channel; all Warner Bros. movies appear only on HBO, while Sony’s go to Starz. After a few months, the pay-TV networks hand off their rights to broadcasters and ad-supported cable stations. A few years later, the premium channels get the films back, giving them exclusive rights to air them. The windowing system can keep films locked up for years. … Unless [Reed] Hastings and [chief content officer] Ted Sarandos could find a way around the windowing system, it would be a challenge to show any major movies that had been released in the recent past. Then they discovered a loophole: Why couldn’t Starz sell Netflix the right to air its movies. … The studios were stunned. ‘This is the last thing you want,’ moaned one studio executive. ‘More eyeballs with no incremental revenue.’”

Any “moaning” didn’t last long. In January 2010 Warner Bros. Home Entertainment cut a deal with Netflix to make new DVD and Blu-ray Disc titles available to Netflix disc-rental subscribers after a 28-day window. “At the same time, a renewed and expanded license for Warner Bros. streaming content will allow Netflix to offer its members more movies they can watch instantly,” the press release stated, almost as an aside. Similar deals with 20th Century Fox and Universal followed in April.

Then, in August 2010, Netflix announced it would pay nearly $1 billion during the next five years for streaming rights to movies from Paramount, Lionsgate and MGM just 90 days after they appeared on the Epix pay-TV movie channel, a joint venture between the three studios. The Associated Press observed at the time that the agreement “marks another breakthrough in Netflix’s bid to stock its online streaming library with more-compelling material, so it can keep its subscription service relevant as more households order entertainment through high-speed Internet connections. The online streaming push also helps the company reduce its postage bill for mailing DVDs to its 15 million subscribers. … Analysts believe the influx of newer movies will enable Netflix to maintain its rapid growth of the past two years, lifting its earnings even higher despite the hefty licensing fees.”

In November 2010 Netflix launched a streaming-only plan in the United States, two months after starting a similar plan in Canada.

What many saw as Netflix’s biggest prize came in December 2012, when it inked a multiyear licensing agreement with The Walt Disney Co. that would make it the exclusive U.S. subscription television service for first-run live-action and animated feature films, beginning in 2016. The deal also included immediate access to Disney classics such as Dumbo, Pocahontas and Alice in Wonderland, with high-profile direct-to-video releases also on board beginning in 2013. Netflix stock immediately jumped 14% on the news.

Ben Feingold in 2004 (Media Play News archive).

Feingold says he believes the rush to sell movies to Netflix was a bad idea. Not only did it devalue films by including them on an all-you-can-watch subscription platform, but it also enabled Netflix to grow stronger at the studios’ expense.

“People were shortsighted,” Feingold says. “When you work at a large public company and you have a bunch of bombs or a bad quarter, there’s a lot of pressure from the finance people to make your number. So somebody comes along and offers to plug a hole, so they do it and worry about the future later. But you should never let short-term profits affect your strategy.”

Warren Lieberfarb, Warner Home Video president from 1982 to 2002, maintains that licensing product to Netflix “would ultimately prove to be cannibalistic to the linear cable networks, pay-cable networks, ad-supported cable networks, and broadcast television networks that were owned by these same studios’ parent companies. And those networks were the largest sources of profits for the media conglomerates. The studios were creating a behemoth that years later they would try to copy, but in the interim they were threatening their own cable and broadcast interests.”

The push for newer, better movies paid off. In 2012, streaming brought in an estimated $2.34 billion, up 45.8% from the prior year and nearly twice the revenue generated just two years earlier. But by then, Netflix was no longer the only game in town. In June 2010, Hulu, a joint venture between News Corp, NBC Universal and the Walt Disney Co. to aggregate recent episodes from their respective television networks for free showing over the internet, launched a subscription streaming service, called Hulu Plus, that featured full seasons of TV shows. Then, in February 2012, Amazon launched a free streaming service for Amazon Prime subscribers while continuing to offer transactional rentals and sales through the Amazon Video Store.

Studios Push Digital Ownership

Meanwhile, studios continued to pursue their dream of selling movies digitally rather than physically, with no manufacturing or shipping costs and no returns. First they added digital copies to Blu-ray Discs and DVDs; then they began giving digital releases an early window, generally two weeks before the disc. Sony Pictures kicked things off in October 2011 with Bad Teacher, followed by 30 Minutes or Less in November. “The studio liked the results,” Deadline reported at the time. “Sony says total digital revenues were 24% higher than comparable films released the same day as discs.”

To further goose digital movie sales, five of the six major studios banded together to support UltraViolet, an initiative to provide disc buyers with a digital rights “locker” that enabled consumers to play back their purchased content on participating retailer sites. UltraViolet, launched in the fall of 2011, allowed consumers to access their purchased content anytime, anywhere, on a wide variety of devices, from smartphones to tablets.

UltraViolet was an attempt by studios to boost digital movie sales by providing consumers with a digital rights “locker” that would let them play back their purchased content on participating retailer sites. It was hampered by the lack of key digital retailers Apple, Amazon and Google and was ultimately shut down in 2019. (Media Play News archive)

Even so, EST grew slowly, in part because of the split between Disney and the other studios. Disney launched its own digital locker in February 2014, called Disney Movies Anywhere. UltraViolet stumbled along for several more years, hampered by the lack of key digital retailers Apple, Amazon and Google, before being shut down in 2019. By then, another digital locker had emerged: Movies Anywhere, an outgrowth of Disney Movies Anywhere. But, again, studio support was not unanimous; this time the holdouts were, and remain, Paramount and Lionsgate.

Observers say pricing was a key factor as well: Consumers had grown accustomed to lower prices for digital content through e-books and music, and yet digital movies were priced equal to, or higher than, a DVD or Blu-ray Disc.

Studio efforts to grow digital sales as well as rentals — a business model that by then was being called “transactional video on demand,” or TVOD — were aided by the emergence of several other high-profile “digital retailers.”

One of the first was Microsoft, which launched its video service in 2006, the same year as Apple and Amazon. “The tech-savvy gamers of the Xbox 360 quickly adapted to the instant accessibility of movies with the Xbox Video Store in 2006; this gamer audience helped fuel the business and understanding of digital distribution at a time when TVs were not as smart and broadband penetration was starting to reach a larger audience,” says Pedro Gutierrez, business and marketing category lead for entertainment, consumer applications and advertising at Microsoft.

Then came Vudu, which in 2009 became the first VOD service to sell downloads of high-definition movies. A year later Vudu was acquired by Walmart, whose own attempts to begin selling movies digitally in 2007 had failed due to the popularity of iTunes.

Others followed, including Google Play in February 2012; FandangoNow, an offshoot of the popular Fandango movie ticket service, in 2016; and Redbox On Demand in December 2017.

Redbox, best known for its fleet of 40,000 bright-red disc-rental kiosks, launched a digital movie store in December 2017. The company has since mounted an ambitious digital transformation and now offers streaming as well as free live TV.

On the cable side, one of the biggest developments was the November 2013 announcement by cable titan Comcast Corp. that it planned to start selling movies via set-top boxes and its Xfinity TV website. At the time Radio+Television Business Report noted that “the move … shouldn’t be difficult since movie studios are actively looking for ways to increase digital sales as customers continue to move away from DVD purchases.” Comcast achieved modest success because it promoted the sale and rental of movies and provided an on-screen program guide.

In 2012, according to estimates from DEG: The Digital Entertainment Group, digital rentals generated just under $2 billion in consumer spending, while digital purchases, or EST, brought in $811 million. Together, that’s more than consumers spent on streaming. But five years later, in 2017, digital rentals and sales, combined, generated an estimated $4.1 billion — less than half the $9.6 billion generated by subscription streaming.

Streaming Soars

A lot had happened on the streaming end in those five years. Netflix accelerated its international expansion efforts, which had begun in Canada in 2010; by 2017, the streamer had a presence in 190 countries. The Harvard Business Review notes, “How did it expand so quickly? First, it didn’t enter all markets at once. It started slowly, in countries that were similar to its U.S. home market. Using what it learned in these markets, it expanded to a few dozen countries by 2015, and then continued learning and growing from there.” At the January 2016 CES, Netflix announced a major international expansion into some 130 new territories, including most countries in Africa. “That marks a substantial increase in the size of Netflix’s global network, which previously spanned 60 countries in North America, Latin America, Europe, and in the Pacific,” the Los Angeles Times noted at the time. “Now, Netflix has services in more than 190 countries, including Russia, India, South Korea and Saudi Arabia.”

Netflix’s global growth strategy was rooted in localism. The company developed programming that would appeal to specific countries and regions, and invested heavily in local-language options for both dubbing and subtitling.

Netflix also took technology into account and deployed dedicated servers for streaming in countries where broadband capacity wasn’t up to snuff.

In addition, Netflix shifted its domestic strategy from relying on Hollywood movies to producing and acquiring its own content, beginning with “Lilyhammer” in 2012. A year later came “House of Cards,” the first original web series to snag major Emmy nominations, and then the much-lauded “Orange Is the New Black.” In 2016, Netflix released 126 original movies and shows, and the following year announced its intent to have original content account for half its programming menu — at a cost of $8 billion.

“It’s the old adage that content is king,” Mike Fidler observes. “As Netflix became more powerful with their subscription universe, it became essential for them to develop their own content and to go beyond Hollywood movies to international programs and serial programming with less dependence on first-run movies.”

This year, Netflix is expected to spend $18 billion on original content, with a 2022 pipeline consisting of 68 feature films and just under 400 original series.

Success invariably breeds envy, so it was no surprise that as Netflix grew, so did talk of high-profile competition beyond Amazon Prime Video, whose size no one really knows for sure because subscriptions include free shipping from the parent company, and Hulu, whose focus has always been on TV product. November 2019 saw the launch of streaming services Disney+ by The Walt Disney Co., and Apple TV+, a streamer from Apple.

Pandemic Push

Then, just as people began talking about “streaming wars,” came the pandemic. The World Health Organization’s March 2020 declaration of a worldwide COVID-19 health crisis triggered a surge in streaming, with theaters shuttered and people told to stay home. Restrictions loosened, then tightened again at the end of the year with a second wave of the virus. WarnerMedia had a captive audience for the May 2020 launch of HBO Max, as did NBC Universal for the July 2020 debut of Peacock. The streaming business got another big boost in December when WarnerMedia announced it would release its entire 2021 slate of 17 high-profile feature films simultaneously in theaters and on HBO Max, an initiative it began on Christmas Day 2020 with Wonder Woman 1984.

Consumer spending on streaming had already been climbing, from an estimated $12.9 billion in 2018 to $15.9 billion in 2019. But 2020 saw the biggest gain yet, a whopping 37.2% increase to $21.2 billion, or 70% of total consumer spending on home entertainment, according to estimates from the DEG.

For the transactional business, both physical and digital, the pandemic proved a double-edged sword. On the one hand, homebound consumers were hungry for entertainment, which is why they flocked to streaming. But on the other, the closure of movie theaters prompted studios to postpone major new theatrical releases or hand them off early to their SVOD subsidiaries.

And while the pandemic did make premium video-on-demand a reality, with studios premiering the movies they didn’t hold back to home viewers at a higher purchase or rental price, the revenues generated by PVOD weren’t credited to home entertainment. “Our estimate is there’s $1 billion of consumer spend that’s not captured in the numbers that you’re presenting,” Universal Pictures Home Entertainment president Michael Bonner said in an August 2021 DEG presentation in which the trade group announced its first-half home entertainment spending estimates.

Still, DEG estimated significant gains for the digital side of the transactional business in 2020, with consumer spending on digital rentals up 18.3% to $2.3 billion and spending on digital purchases up 16% to nearly $3 billion.

In the following year, 2021, DEG estimated that transactional digital sales and rentals, stung by a continued lack of product and early windows for streaming services, fell 21% to a combined total of $4.19 billion.

Streaming, meanwhile, posted another 20% gain in consumer spending to an estimated $25.3 billion, or 80% of the home entertainment spending total. Netflix finished the year with a global subscriber count of 222 million, 75 million of them in the United States and Canada, while Disney+ in its latest earning release said it had nearly 130 million subscribers worldwide, 42.9 million of them in North America. (Apple TV+ proved to be a nonstarter, although on a January 2022 earnings call Apple CEO Tim Cook, while providing no numbers, said the whole intent was “to give storytellers a place to tell original stories.”)

HBO Max, combined with its linear sibling, HBO, ended 2021 with 73.8 million subscribers, more than 46 million of them domestic. Peacock in January 2022 announced it had 9 million paid subscribers at the end of 2021 and that it would double its budget for original content to $3 billion in the new year.

The competition intensified in 2021, with the January launch of Discovery+ and the March debut of Paramount+. Both services ended the year with respective subscriber counts of 22 million and 32.8 million.

And yet the streaming business is not without its challenges. In industry circles there’s more and more talk of streaming fatigue, as the costs of stacking multiple subscriptions rise. (A TiVo study last year found the average consumer is spending $142.20 a month on high-speed internet and SVOD — more than the average $100 cable bill.) And there’s a relatively new kid in town, ad-supported VOD, that takes away some of the sticker shock in return for commercials — just like broadcast TV. Some services are discounted; others are completely free. And some don’t even require subscriptions. Those that present television content online are known as free ad-supported TV, or FAST.

Redbox, the company known for its more than 40,000 bright-red kiosks offering DVD and Blu-ray Disc rentals, is in the midst of a digital transformation focused on streaming. Redbox CEO Galen Smith says the resurgence of home entertainment after the lean pandemic years has so far been dramatic.

“It’s a great time for entertainment, with people coming back to theaters and studios releasing more, and bigger, movies again,” he says. “On our end, we want Redbox to be a full-service entertainment destination for everyone.”

A ‘Layer Cake’ of Viewing

What does the future have in store for digital entertainment? Most observers see consolidation ahead for SVOD services — already, the newly minted Warner Bros. Discovery has announced plans to combine HBO Max with Discovery+ — and continued growth for AVOD, with TVOD holding its own as more content enters the distribution channel.

Redbox’s Smith says he thinks that given the current economic conditions, including inflation and rising gas prices, consumers will begin cutting back on their SVOD services and attrition rates will rise.

“They will sign up for months when programming they’re interested in will be available, and cancel after watching. It’s going to be an interesting year given all these factors. I think you’ll see consumers seeking cost-conscious entertainment options that include free options like AVOD and FAST services, as well as inexpensive new movie rentals like those at our Redbox kiosks.”

Ben Feingold, the former Sony Pictures Home Entertainment president, says he believes AVOD is the wave of the future. “Free movies for people — it’s crack for the consumer,” he says. “And with all the ad revenues sliding off cable, AVOD will continue to grow. One of the ways AVOD works is you can data mine and find your audience set a lot easier, so there’s opportunity in niches.”

Paramount Home Entertainment president Bob Buchi’s perspective: “The entertainment industry has flourished over time through a strategy of windowing that serves to maximize the revenue throughout the lifecycle of a title and provides consumers with a variety of viewing options that best fits their lifestyle. With the proof of these last 25 years, we can be assured of the power of the theatrical experience and that entertainment at home will continue to evolve and that multiple formats, both transactional and subscription, can and will continue to coexist and thrive.”

Microsoft’s Pedro Gutierrez agrees. “The only certainty for the future is the continued need to provide consumers with the choice of how they want to view their desired entertainment,” he says. “There is an opportunity for SVOD, AVOD and EST/VOD to coexist, which will result in varied growth and consumer shifts amongst the three service types. Entertainment enthusiasts will subscribe to the SVODs that have their favorite content, AVOD gives the consumer a more limited yet free access to content, and EST provides consumers with the ability to build their always-accessible film library.”

Jim Wuthrich, head of content distribution for WarnerMedia, agrees that choice is the No. 1 factor. “Think of it as a layer cake rather than replacement — each new service is additive to the options of viewing,” he says. “Some services may get squeezed, but they don’t go away. Subscriptions are here to stay and will continue to fuel more of the content industry. But we will also see increased uptake of hybrid services such as HBO Max that combines a lower subscription fee with advertising. Purely ‘free’ services (AVOD/FAST) will continue to attract audiences as viewers migrate from traditional pay-TV bundles. EST and TVOD provide an a-la-carte option and serve the purpose of collecting and sampling. Together, along with the physical disc, terrestrial TV, cable and satellite, the video options lead to more viewing — and a tastier cake.”

And what does Warren Lieberfarb, the man most responsible for the digital revolution through his push for DVD 25 years ago, have to say about all this?

Consolidation among streamers is pretty much assured, he says, given the high cost of producing original content and maintaining a steady flow of current expensive, quality product. “Attracting new subscribers and retaining existing subscribers — minimizing churn — requires high-quality, audience-satisfying new productions,” he says. “This is akin to an ‘arms race’ for audience attraction and retention.”

As for AVOD, he’s not so sure. “Consumers have shown a willingness to pay for commercial-free content for over 50 years through commercial-free cable, VHS, DVD, Blu-ray Disc and streaming,” he says. “Commercial-free movies and TV shows are a highly engaging entertainment experience, and one I believe consumers will continue to be willing to pay for.”

One thought on “25 Years of Digital Entertainment — Part Two: The Digital Stream”

  1. This boomer was freed to fast forward through commercials (via the VCR) and leapfrog commercials (via the DVR), so I feel that the clock is being turned back with streaming video’s non-skippable commercials.

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