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Warner launches films online first, before the DVD
Warner has just announced an online distribution experiment that has the potential to change the film distribution model for ever.
They will release their films online before they are released on physical DVDs in an affect to stem illegal downloads.
OK, the move is only being trialled in South Korea which benefits from extremely high broadband penetration and suffers from rampant piracy.
There are two major advantages for Warner:
- Higher margins. According to the Financial Times, online film margins for movie companies are close to 70%, compared with 20-25% for the distribution business.
- Increased revenues: Although Warner is perhaps optimistic if it thinks all the illegal downloaders will suddenly pay full price for the movies, by making legal versions of the movie available earlier than the DVD and easy to access, they have substantial revenue upside.
Warner commented that “the consumer does not have to spend any more money on the product”, which I guess is true if they were planning to buy the physical disc, but not if they were planning to pirate it. In the end, I don’t believe that the 70% margin is sustainable: if Warner really wants to hurt the illegal pirate market, it will need to reduce the price of legal downloads, and it has plenty of margin to give away.
Note: The FT comments that DVD sales generate $12 billion of revenue for studios annually and rentals another $7 billion. Adams Media Research suggest that digital downloads will grow to $4 billion annually over the next five years. Which is still only 20% of the physical equivalent. There is some way to go before digital distribution becomes the medium of choice for movie watchers.