uk digital discussion july, 2011. page 1 privileged and confidential for discussion purposes...

UK Digital Discussion

July, 2011

Privileged and Confidential

For Discussion Purposes

Executive Summary – Industry Trends

• As consumer behavior shifts and digital consumption increases, the windowing concept remains– Existing windowed distribution models are expected to remain in place, as titles are monetized most

strongly initially in sale and rental, and thereafter sold in exclusive packages that support channel or online distributor brands for subscription and ad-supported models

• However, new windows and business models are being added– For Hollywood studios, each existing consumer business model is expected to have an analogous

digital component (eg – ad-supported, subscription and transactions, both rental and sale)– New windows for VOD, and potentially EST, are being introduced to driver higher value

• The margins for these new models vary widely

• In this landscape, studios seek to emphasize and drive adoption of higher margin digital models



Executive Summary – Digital Marketplace and a Way Forward

• The UK market, similar to the US, is in the early stages of developing a vibrant, legal digital marketplace – Globally, digital transactional revenues already represent in excess of 25% of the home entertainment

business contribution, and this number is expected to increase rapidly– The UK marketplace today physically is characterized by a higher than normal mix of sales to rental

for films, and the early indicators online generally support digital ownership as a viable product

• Challenges in driving the sale of digital product today are four-fold– Encouraging consumers to own content, rather than rent or steal – Improving the digital product proposition– Driving the speed of adoption and movement of product online while managing incumbent businesses– Addressing bandwidth and infrastructure issues

• Ensuring a viable marketplace for digital downloads will require – Making the product digitally available at the right price, both SD and HD– Ensuring that incumbent players do not inhibit the development of the digital marketplace– Managing piracy appropriately – Supporting infrastructure development

Agenda

• Background – Industry Trends

• Consumer views on digital

• Current status and challenges to digital adoption

• Driving further adoption

page 4Privileged and Confidential


CONFIDENTIAL

Traditional windows

TheatricalHotel & Airline

DVD Sell-Through & Rental

PPV /VOD

Pay TV Pay TV Broadcast

+60 Days +90 Days +120 Days +1 year0 Days +180 Days

From CY1998 to CY2005, the industry’s window structure was generally stable, generating strong profits for studios during the growth period of

the DVD market

5

CONFIDENTIAL

Introduction of subscription/kiosk rental and EST


DVD Sell-through and Brick & Mortar Rental

PPV /VOD


Subscription Rental

Kiosk Rental

EST (Non-HBO Studios)

EST (HBO Studios) EST (HBO Studios)

+60 Days +90 Days +120 Days +1 year0 Days +180 Days

• Since 2005, subscription (Netflix) and kiosk (Redbox) rentals have come to market; combined with the economic downturn, these have eroded home video profits

• Electronic sell-through (EST) offers attractive margins; however, its growth has been slow relative to Netflix and Redbox

6

CONFIDENTIAL

Day & Date

Changes to traditional windows


DVD Sell-through and Brick & Mortar Rental

PPV /VOD


EST (Non-HBO Studios)

EST (HBO Studios) EST (HBO Studios)

+60 Days

+90 Days

+120 Days +1 year0 Days +180 Days

HomeTheater

+45Days

• Day-and-Date PPV/VOD: Titles released on VOD day-and-date with DVD street date

• Subscription/Kiosk Rental: Potential to delay films to 28 days after DVD street date

• Premium Home Theater: High priced, HD PPV/VOD product offered before DVD street date and traditional VOD

Subscription Rental

Kiosk Rental

Potential Delay

7

$ Contribution to Studios per Transaction by Business Model(Industry Average)

Source: Screen Digest, FutureSource, Morgan Stanley 04.30.10

Notes: SPHE margins generally in-line with industry averages with exception of Redbox where SPHE margin is ~$1.10 vs. industry kiosk average of $0.95

(1) Brick and mortar (B&M) margin represents a weighted average of traditional DVD and Blu-ray rental margins. Weighting based on number of total domestic 2009 rental units consumed by format (i.e., 95% traditional DVD, 5% Blu-ray) per Morgan Stanley 04.10.

Home Entertainment MarketImpact of Business Model Mix

$0.95 $1.15 $1.68 $2.71

$12.00

$15.00 $15.50

Kiosk Sub. Mail B&M VOD DVD BD EST

Sell-ThroughRental

(1)

New models have widely varying margins; success requires emphasizing and driving adoption of the “right” offerings

Digital

Digital

PRIVILEGED AND CONFIDENTIAL

10 Year Ultimate Gross Contribution by Window for FY10 Slate

% o

f G

ross

Co

ntr

ibu

tio

n10 Year Gross Contribution1, by WindowFY10 Theatrical Releases

6 weeks 2 wks 6 wks 16 weeks Theatrical + 32 weeks thru Yr 10

2 wks

$1.3 B (39%) $0.01 B (0%) $0.9 B (26%) $1.2 B (35%)

Notes: 1. Before marketing, amortization, and overhead2. Except for Netflix (subscription model)3. 71% of physical contribution occurs in the In-Home Transactional window

= $3.4 B

Exhibition In Home Transactions2 MultipleBusiness Models

Can this be made generic to industry?And what’s the tag line? Digital is still small?

Marketplace today: Consumer prices, Mix of transactions. US vs UK

SPHE 2005 A&U, SPHE 2011 A&UNote: Data based on New Release buying occasion in the last 6 months.

How many times did you watch…?

Agenda







Summary of Consumer Behavior



Do we need a lead-in or wrap-up on this section that explains the main points and tees –up both the challenges and solutions we’re about to outline?Is it meant to say:• Ownership still viable for multiple views• Online demand is growing• But increasing online demand requires:

• Increased connectivity• Increased storage• A better understanding of the cloud

Inherent viewing behaviors with purchased physical discs continue to support ownership of content as a means to enabling multiple title views

SPHE 2005 A&U, SPHE 2011 A&U

Watched Movie Bought – Yes/No

90%

10%

YesNo

92%

8%

2005 A&U 2011 A&U

Avg. # of times Watched

3.7 3.0

2005 A&U 2011 A&U

Note: Data based on New Release buying occasion in the last 6 months.


2010 2011

6% 6%

33%

19%

9%

24%

11% 13%1%

4%

40%35%

Live on TV

DVD/BD Recorder

DVR

Online

DVD/BD Collection

VOD/PPV

Base: Total HE respondents (2010 = 1976; 2011 = 2073)W4. On average, how many hours per week do you spend watching movies at home in each of the following ways?

12.0 16.1

Share of Movies Watched

• Subscription Streaming: (10%)• Free Online (not including

subscription svcs): (9%)• EST/Digital Rental Online: (5%)

Average hours of Movies watched

Hours watching movies is up in 2011. Online’s share nearly triples YoY.

Consumer acceptance of digital content continues to increase. Nearly one in three believe downloading movies will be easier, flexible and convenient within the next year.

Technology and Home Entertainment Attitudes% ‘Definitely Would Agree’ 6,7 Rating on 7-point scale

Base: Total HE Respondents - 2009 = 1998; 2010 = 1976; 2011 = 2073; A1. Now we have some questions about your general technology and home entertainment attitudes and behaviors. PA7. Listed below are some possible future scenarios in home entertainment. Please indicate when, if ever, each scenario might happen for you.

3D TV will be a big part of how I watch movies and TV shows at home

Streaming digital content will be the main way I watch movies/TV shows

Never leave house to buy/rent a movie

Download movies quickly/easily as music

Store movies in digital locker

I will buy a movie once and be able to watch it on any device

12%

26%

31%

38%

20%

33%

36%

37%

32%

38%

43%

43%

20%

13%

11%

9%

13%

11%

33%

23%

26%

14%

25%

14%

Currently/Within Next Year 1 to 5 Years 5 Years or More Never

Future Scenarios % Scenario will happen to me

I don’t need to have a disc to feel like...

11% 12%

21%

Watching a movie on my computer is just as ...

8%11%

18%2009 2010 2011

Less expensive than buying the movie on

DVD/BD

Access the movies directly from your

TV

Watch the digital movies on all of your

devices

If your computer directly connected

to your TV

If the digital movies were stored in a digital

locker

Better selection of dig-ital movies

27%

26%

25%

24%

21%

19%

Digital Purchasers

Motivators to purchase movies digitallyTop Mentions

Base: DV7 – Have not streamed/downloaded movie or TV show in past 6 months = 705; EST9 - Purchased movie digitally in past 6 months = 269.DV7. On another subject, earlier you said that you have not downloaded or streamed a movie/TV show in the past 6 months. Which, if any, of the following would encourage you purchase movies digitally?; EST9. Earlier you said that you purchased (INSERT MOVIE AMOUNT FROM DV1_1) movies digitally in the past 6 months. Which, if any, of the following would encourage you to purchase more movies digitally?

If they were less expensive than buying the movie on DVD/Blu-ray

If your computer was directly connected to your TV

If you could download the movies directly to your TV

If it took less time to download movies

If your computer's hard drive was bigger/had more space

If you could watch on all your devices

36%

30%

25%

21%

19%

14%

Digital Non-Purchasers

Improving value, connectivity and storage are top motivators to drive digital sales.

Consumers Under 35 are Most Interested in Moving Content to ‘The Cloud’ – Movies and TV Shows Among Top Items

18-24yrs old

25-34yrs old

35-49yrs old

50-64yrs old

65+yrs old

0

10

20

30

40

50

60

7062

58

43

30

20

Interest by AgeAverage Across All Content Types Content interested in storing in Cloud

among General Population….

Personal photos 50%

Personal e-mail 49%

Full length movies 49%

TV shows 47%

Documents for work/school 45%

Business/school e-mail 39%

Video games 38%

Home security settings/controls

33%

Source: GfK Custom Research North America: March 2011Q.5 How interested would you be in storing each of the following types of content online and then accessing it through some type of Cloud-Based service? Base: 1,000

18

Only 9% of Consumers Completely Understand ‘The Cloud’

Source: GfK Custom Research North America: March 2011Q.3 Before today, were you aware of the Cloud? Q.4 How well do you feel you understand the idea of the Cloud?Base (1,000)

9

28

13

49

Cloud Awareness

Aware - Completely understand

Aware - Generally understand

Aware - But do not understand

Not Aware

Agenda







UK mix slide own vs rent, maybe relative to other countries





Challenges in driving the sale of digital product today are four-fold

• Encouraging consumers to own content, when the online sale offer exists immediately adjacent to lower priced rental offers, and with subscription and ad-supported catalog content a click away. Illegal alternatives to new release and catalog product continue to evolve

• Improving the digital product proposition, especially for ownership, and ensuring that consumers understand the potential benefits of remote storage and access relative to the existing DVD/Bluray product

• Driving the speed of adoption and movement of product online, as traditional distributors (eg – retailers, pay tv networks) fight to defend their existing businesses. Sample pay tv contractual holdbacks include.– No VOD during pay tv window– Cap on EST transactions allowed during pay tv window– Floor for prices for EST during and ahead of pay tv window

• Addressing bandwidth and infrastructure issues– Tiered pricing and usage caps– Investment necessary to support online video



Retail and pirate offers• Apple page – sale next to rental• Pirate page – showing lots of new releases

First legal US in-home availability

Is there a simpler way to illustrate piracy?



Incumbent page – Transitioning to digital is challenging…• Retailer pressures on online sales• PayTV channel pressures



Infrastructure page• Limitations today

– Connected TVs– Bandwidth

• Consumer pressures from tiering and caps on usage• etc

Agenda









Ensuring a viable marketplace for digital downloads will require

• Making the product digitally available at the right price, for rental and sale. – HD product availability is especially critical– Day/date– Catalog product

• Improving the digital ownership proposition, leveraging technologies such as cloud storage– Ultraviolet points

• Ensuring that incumbent players do not overly inhibit the development of the digital marketplace

• Managing piracy appropriately • Supporting infrastructure investments and development

$12.50

$16.80

$10.40

$12.60

$10.20

$13.80

$8.00

$10.70

Currently paying

Would buy signif-icantly more

Consumers would buy more digital movies if they were about 20% cheaper. HD helps to enhance the value for NR and Catalog.

Base: EST10/EST11 – Purchased Digital Movie in Past 6 Months = 269.EST10. How much do you usually pay for each of the following types of digital movie purchases? EST11. What price would be attractive enough for you to buy significantly more of the following types of digital movies?

Digital Movie Pricing

New ReleaseStandard Definition

High Definition

CatalogStandard Definition

High Definition

29

In SPE’s own testing in the US, the ownership performance for titles with a wholesale discount in the first 2 weeks grew 50% compared to full-price titles

Day & Date Titles (2wks) with DBO of $5M Discount B.O ReleaseJUST_GO_WITH_IT_2011 YES $103M 6/6/11

MECHANIC_THE_2011 YES $29M 5/16/11

ROOMMATE_THE_2011 YES $37M 5/16/11

GREEN_HORNET_THE_2011 YES $83M 5/2/11COUNTRY_STRONG_2010 YES $20M 4/11/11TOURIST_THE_2010 YES $68M 3/21/11HOW_DO_YOU_KNOW_2010 YES $30M 3/21/11FASTER_2010 YES $23M 2/28/11

Day & Date Titles (2wks) with DBO of $5M Discount B.O ReleaseBURLESQUE_2010 NO $39M 2/28/11TAKERS_2010 NO $58M 1/17/11EAT_PRAY_LOVE_2010 NO $81M 11/22/10GROWN_UPS_2010 NO $162M 11/8/10

November 2010 – February 2011Full Price Titles

March 2011 – June 2011Discounted Titles

Bo

x O

ffice

Fa

cto

r

Full Price Titles (4)Nov-Feb 2011

1827

82

163

0

20

40

60

80

100

120

140

160

180

ESTBOF

ESTBOF

VODBOF

VODBOF

+50%

+99%

Discounted Titles (8)March-June 2011

Box Office Factor of Day-and-Date SPHE Titles (Nov 2010 – June 2011)in first 2 weeks from street date

Note: Box Office Factor (BOF) defined as unit sales divided by box office multiplied by 100,000Source: Sony Pictures Home Entertainment

Can we make this more generic?



UV slide• Ultraviolet benefits and consumer info



Conclusion

• The market is in a challenging point of its evolution– Consumers still coming up to speed on possibilities online– Actions by incumbents impacting strength of online alternatives– Infrastructure still developing– Piracy

• Opportunities exist to drive online transactions– Right pricing vs rental, and other alternatives (including piracy)– HD product offers– Day/date availabilty– Robust amount of catalog product – Ultraviolet and other cloud storage services– Appropriate policies with respect to piracy and illegal alternatives

• Studios, service providers and the government will need to work together to make a valuable digital marketplace a reality

• BACK-UP / ALTERNATIVE SLIDES BEYOND THIS PAGE



Maybe economics slide – bars. Value by product timing. Value digital vs physical? See next few, ideas…




Studio marketing drives title contribution

Typical Title: % Gross Contribution by Week Years 1-3 Post Theatrical Release

% G

ross

Co

ntr

ibu

tio

n

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 760%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Weeks6-16:

Piracy

Weeks 16-32:In Home

Transactions

Week 32-Year 3*:Multiple Models

Weeks

0-6:Exhibition

*Note: Only weeks 1-75 are shown; assumes weekly contributions remain constant from week 75+

Studio Marketing


SP

E G

ross

Pro

fit

Ho

me

En

tert

ain

men

t E

qu

ival

ent

Vie

w

SPE Gross Profit per Customer Transaction

Consumer paid transactional window value is supported by high contribution per view

• Title is the star, consumers are selecting individual titles, not aggregated service brands

• 60-100% of consumer spend to studio, vs. 30-40% for branded services

• Behaviors are both impulse and marketing driven

$14.95

$8.60

$2.70

$1.28 $0.92 $0.40

$0

$2

$4

$6

$8

$10

$12

$14

$16

Source: SPHE Internal Estimates

Customer View: Does not reflect aggregate value of wholesale deals

Convert physical rental to VOD

Convert rental to sell thru