For Broadcast March 15, 2012

Indies are set to cash in this year as on-demand rivals such as Lovefilm, Netflix and Hulu try to outbid each other for content. But how long will this bonanza last.

For independent producers, this year marks the emergence of VoD as a serious source of income.

Rumblings of an explosion of interest in VoD have been building for the past 18 months, but now producers, pay-TV operators, broadcasters, TV analysts and online service providers agree that this type of audience viewing is coming into its own, driven by competing VoD services and the growing number of connected TVs, games consoles and other devices that allow on-demand access to streamed TV and film content, both on-the-go and on the big, home TV screen.

IHS Screen Digest forecasts there will be 21 million ‘active connected’ living-room devices, including TVs and games consoles, in the UK this year, and by 2015 this could rise to 44.8 million. Another 9 million connected tablets and e-readers are expected to be sold by the end of this year, growing to 15.7 million by 2015.

The recent arrival of US online video giant Netflix in the UK has sparked a marketing and rights acquisition war with Amazon-owned rival Lovefilm as each battles to build a subscription VoD service. Free promotions, TV and online ads and billboards in the tube have flooded the UK market; advertising sources expect both services to invest an estimated £30m in UK marketing this year, plus hundreds of millions more on securing programming rights.

Netflix’s Reed Hastings plans to spend “a couple of billion dollars” on new content deals, including Hollywood studios and recent TV output, suggesting he has BSkyB in his sights too. Hence Sky’s plans for a rival online offer separate from its existing Sky TV service.

This rivalry means a lot more money for UK indies, at least in the short term, and brings online video viewing in the UK into focus even as the clock ticks down to the launch of YouView, which is set to integrate VoD and linear TV for the mass market.

But what impact is VoD’s small-but-growing share of overall TV viewing having on the value of VoD rights? Virgin Media says its VoD service receives more than 90 million VoD views a month, including BBC iPlayer and ITV Player. Plans are in motion to open its platform to other over-the-top providers such as Netflix and Lovefilm.

Views on Channel 4’s online 4oD service increased by 15% last year – 429 million views in total across all platforms including Virgin Media, YouTube and its own website. Currently, 25% of its views are via tablets, games consoles and smartphones. “We have seen this growing over the past year but really in the past few months, as portability has become more important and tablets, primarily iPads, have grown,” says C4 commercial and business development manager Sarah Rose.

“The opportunity in VoD has been recognised by rights holders like us and by the broadcasters, and there is a growing fight over who controls the rights going forward,” says Zodiak Rights chief executive Matthew Frank. “Until last year, these rights, including VoD, download-to-own and streaming, were just bundled in and no one took much notice of them. Now our lawyers are redrafting our contracts so we can slice and dice our rights much more.”

Price hikes

Frank notes a “substantial” increase in VoD rights fees since Netflix decided to launch a UK version of a service that in the US has nearly 25 million subscribers.

He has also seen a jump in prices from the US, where Hulu – the online streaming service owned by NBC Universal, News Corp and Disney – has become a lot more interested in British content after having success with UK series including the BBC sitcom Whites, Sky comedy Spy, ITV2’s The Only Way Is Essex and E4’s Misfits, the latter of which has a life-of-series deal with Hulu that includes both a minimum guarantee on a licence fee and a revenue share after that.

Hulu is ramping up its programme acquisition budget for 2012 to $500m (£320.2m) and UK producers have found that the online service is willing to sign exclusive deals and pay licensing fees that are “not far short of pay-TV broadcast rights,” says Frank. In effect, Hulu is competing with US cable networks in licensing British programming.

Indeed, Hulu’s appetite for exclusive programming has been increasing over the past 18 months as the service looks to differentiate itself from broadcasters’ catch-up TV services. According to Comscore figures, Hulu is already bigger in terms of the total hours of online viewing and minutes-per-viewer than broadcast catch-up services from NBC, Turner and Viacom. This helps explain why the site, which reports more than

1.5 million paying subscribers and many more who view the content with advertising, grew revenues by 60% to $430m (£275m) in 2011.

US sales

UK shows are in big demand by Hulu because the online service has “figured out that offering distinctive UK content is a differentiator for it,” says Justin Judd of iRights, who helps UK indies sell their content into the US.

TOWIE’s launch late last year is a case in point. The show became an online sensation after it was promoted by Hulu and featured in a story in the New York Times. For TOWIE owner All3Media, Hulu is providing a more lucrative way to sell into the US, where there was little appetite from cable TV channels for the show.

Like iTunes, Hulu also provides a direct route to consumers. Because it gives shows their first US airing, Hulu wants to promote and schedule them in a similar way to an over-the-air broadcaster; US viewers get Skins episodically on Hulu two weeks after it airs on E4.

“We’re on the phone now three times a week with Hulu talking about what we’re launching and promoting and scheduling,” says All3Media commercial director Andy Taylor.

The US market likes box-set dramas and comedies; a series of programmes that can be promoted as exclusive to Hulu that viewers can “binge” on.

Other UK shows have also cut through by using Hulu as a starting point to get a US broadcast airing. BBC3’s quirky puppet show Mongrels aired exclusively on Hulu last December – the BBC has decided not to renew it in the UK, but ABC is rumoured to be looking at a US version.

In both territories, drama and comedy are the most valuable for online VoD services, says Frank. In the UK, drama and comedy series can command £7,000-8,000 per hour; Zodiak’s four-year licence fee for Being Human is “very large,” says Frank. Meanwhile, documentaries can fetch £3,000-4,000 per hour.

“We are getting approached left, right and centre for the content and that just says one thing to me: demand is big and supply is relatively small. That is great for us,” says Frank.

One rival to Netflix is Blinkbox, the Tesco-owned streaming movie and TV service that focuses on new film releases more than archive TV content. Chief executive Michael Comish observes: “There is essentially a land grab going on where Lovefilm and Netflix are paying uneconomically high rates to increase their content offers.”

He calculates that the cost of streaming rights for UK TV content has gone up almost 10-fold since Netflix entered the market.

IHS Screen Digest head of broadband Richard Broughton agrees that there has been a big price hike for UK VoD content but thinks it could be a limited offer. “I think there is a two-year window where indie producers in the UK will receive extraordinary sums for programming that Netflix and Lovefilm will fight over for dominance, but after that normal pricing will return.”

For the moment, it’s good to have VoD rights to sell. The business model for Netflix and Lovefilm is not yet proven and the UK may prove to be a tough market to crack. But for those companies with streaming rights for their content, there seem to be buyers aplenty ready to write big cheques.