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Tough times for standalone online services

by Sarah Johnson

In the fast-moving world of online media the past few weeks have seen a number of interesting moves in the transactional online content space, including digital video store launches from the likes of Tesco (in the UK), Vodafone (Germany) and Microsoft’s Xbox (Spain and Italy); set-top box roll out from Blockbuster and Sonic Solutions’ acquisition of CinemaNow.

But as new digital content services launch at a dizzying rate, how many will be around in 12 months’ time? How many will actually generate significant profits from the sale of digitally-distributed movies and TV shows?

The likely answer to the latter question is, to put it bluntly, none. For the vast majority of digital video stores sales volumes are small; with the exception of sport, consumers just won’t pay to watch video on the PC screen. Low sales volumes are compounded by tiny retailer margins on each transaction, with the lion’s share of the revenue eaten up by wholesale prices.

Even by 2012 Screen Digest estimates that, for transactional online movies, combined retailer margins across Western Europe will total just €50m. Given that Apple will capture most of the market and that there are currently over 80 online movie stores operating in these 16 territories the long-term future of standalone digital video service providers is surely unviable under these conditions.

The economic realities of operating a digital video store were drawn into sharp relief by the recent acquisition of CinemaNow by Sonic Solutions. In a typical quarter CinemaNow has been generating revenues of $1.0m-$1.2m but its quarterly costs were in the region of $1.0m-$1.5m. Digital videos look destined to become a loss leader, in much the same way that DVDs are for supermarkets today. An online store can serve as a ‘value-add’, complementing and driving another arm of a company’s business (hardware sales, pay TV subscriptions. etc) but it is unlikely to be a sustainable business on its own.

The use of online content as a supplement to an existing revenue stream bears a strong resemblance to the emerging situation in the broadband access market. Here again we see a business that is fast becoming unsustainable as a standalone proposition but which helps drive a separate primary product.

Mobile operators and Pay TV providers amongst others are moving into the broadband access market, bundling broadband with their core products at little or no additional cost. As a result standalone ISPs are seeing their margins shrink as competition forces them to lower their prices at a time when data traffic is
surging.

As the sale of both broadband access and broadband content rapidly become ‘value-add’ propositions, will any of the multitude of standalone service providers in either market survive? The broadband access market is already undergoing substantial consolidation as smaller ISPs are acquired by their larger rivals, most of whom are typically either incumbents or offer broadband to consumers as a ‘value-add.’

Transactional online content markets are also likely to see a handful of major services controlling the entire sector. Acquisitions will occur (such as Blockbuster buying Movielink, Sonic acquiring CinemaNow) but smaller players are likely to fall by the wayside and quietly close as ‘value-add’ economics provide the driving force behind yet another aspect of the broadband sector.

Contact: www.screendigest.com

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