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French VoD Services Lagging: An Industrial Organization or a Policy Issue?

posted Nov 4, 2011, 10:21 AM by Julien Pillot   [ updated Nov 7, 2011, 9:48 AM ]

Dedicated to overturn the traditional video distribution industry as part of the digital convergence process, Video-on-Demand (VoD) and Subscription Video-on-Demand (SVoD) services are currently in the focus of a wide public consultation in France. With one of the most important growth rate in Europe (40% increase in turnover expected for 2011), the development of the French market is actually appealing to the whole sector-specific businesses, but it is prompting certain questions as well. In a very recent study, the French High Authority for Transmission of Creative Works and Copyright Protection on the Internet (Hadopi) gave reason to concerns already expressed in the December 2010 Hubac Report for the National Center of Cinematography and the moving image (CNC).

Limited and poorly differentiated catalogue of content, low attractiveness of subscription offers, piracy rates of feature films still important, inappropriate price mechanisms, limited interoperability among (rival) legal video downloading services… the Hadopi’s overview is actually mixed, to put it mildly. While the problems encountered in this emerging market are long-time identified, we are still waiting for true operational solutions. There is a need for in-depth thinking both on the business model of the sector and regulatory provisions limiting operators’ autonomy. Indeed, these sector-specific characteristics are significant hurdles likely to cripple development prospects of this promising market.

The business model adopted by the IPTV industry appears as the first challenge to overcome in order to guarantee a coherent and sustainable development of the market. The following scheme, which presents the revenue sharing along the value chain, highlights the difficulties faced by VoD editors to compete vigorously in the market.  

Following this scheme, legal downloading services’ editors earn almost €0.2 for every video generally billed to their customers… €4.99! Although VoD activities do not call for huge early-stage investments, the fact remains that too weak expected returns for editors hinder their profitability, unless they succeed in building up a loyal and regular customer base as quickly as possible. In this way, marketing and editorial content (“wrapping” of the product, SD and HD formats availability, optional audio channels …) – whose marginal costs are especially important – are usually minimized, which ends up in diminishing the visibility of independent VoD services. It is thus not surprising that dominant VOD services are those of incumbent operators, whether these of Orange and Free (representing together more than 56% of the French VoD market) or the one of CANAL + set up on exclusive agreements with producers in consideration for its unique expertise in promoting motion pictures. As a result, such situation not only decreases the appeal for independent VoD services, but also dampens third parties (seeking to minimize risks in offering movies with substantial commercial perspectives) to provide original content. In a nutshell, the French VoD business model is by no means consumers-friendly, both price-competition and rivalry in editorial content being almost non-existent.

As a second impediment to the straight development of VoD and SVoD services, current regulatory provisions relative to the media chronology sounds particularly unhelpful. In a word, the provision of movies follows a precise agenda established by a branch-agreement and adopted by Decree (entered into force in July 2009). In accordance with the French sequence of film distribution, VoD services are available at the earliest 4 months after a movie’s release for cinema showing, while SVoD services are only accessible after 36 months. Such legal constraints sound suboptimal, or even counterproductive. On the one hand, VoD services suffer from illegal downloading whose incentives are all higher as time is extended between cinema and VoD/DvD releases. Consequently, VoD services shall be available immediately afterwards theatrical exploitation (usually, 2 months) in order both to fill the current commercial void and to decrease private incentives to take advantage of illegal distribution instruments. On the other hand, as the last part of movies’ exploitation cycle (coming up to 14 months after free TV channels’ re-runs), SVoD services are unable to provide a catalogue of content that consumer is truly excited about. In reducing significantly the SVoD timetable, policymakers would correct a real nonsense, under which paying services are to some extent less attractive than free offers (advertising took apart).

Promising and in-line with the inexorable trend toward dematerialization of content, the French VoD market still needs to release itself from the structural brakes hindering its own development. It now appears essential for undertakings to put consumers back into the very core of their commercial strategies. With no real price-competition, homogeneous offers (scarce exclusivities took apart) and a quite ill-suited chronology of media, the vitality of this emerging market incurs the risk to fade away or, at least, to make lesser and slower progress than expected. Unless major new players such as Netflix, Apple or other connected-TV (also called Smart TV) manufacturers were likely to disrupt well-established market practices and positions, and thereby promoting a true (and consumer-friendly) competitive playing field.