Last night the final season of Lost began with a double episode premiere, garnering an average of 12.1 million viewers. The good news is that this is about 6% more than last season’s premiere, and it’s also the first time since Season 2 that a premiere has a larger audience than its precursor. The better news is that the audience growth over-indexed in the 18-49 demographic, attracting more than 10% than last season.

The problem is that comparing yesterday’s performance with last season is somewhat lax since new audience lows were marked for both the premiere and finale last year. The 11th episode of last season also garnered the smallest audience of any first-run Lost episode to date: 10.8 million during the 11th episode. This was a far cry from the performance of first half of Season 2 when Lost was attracting over 20 million viewers.

As I mentioned in a posting back in March 2009, Lost has “lost” its audience due to its complicated serialized plotline, a weakness which was exacerbated by a long hiatus in the middle of Season 3 as well the 2007 writer’s strike which delayed and shortened Season 4. Luckily this season seems to be free from any similar debilitations so the series might end up growing its audience over the course of its last season, which if it were to happen might yield a rumored Lost spin-0ff.

A article today in the Financial Times mentions how Apple is supposedly pressuring TV networks to cut their episode pricing in half, from $1.99 to $1. If true this indicates that Apple is not selling that much TV content on iTunes. While Apple doesn’t offer such information, it is known that Apple sold 15 million TV episodes in February 2006, 50 million in January 2007 and 200 million in October 2008. Using this data I projected in a post back in November 2009 that Apple should have sold around 86 million episodes by now.

Of course extrapolating this trend  is a huge assumption since iTunes membership has skyrocketed since 2007 and sales rates may have jumped soon after October 2008. However if that were the case Apple probably would have sent out some press releases in 2009 concerning TV episode sales and none were issued.

The bottom line is that Apple needs to rework its video strategy. Why should iTunes customers pay $1.99 for a one-hour TV episode when they can spend the same amount for a game that they can play hours with? Not unless they watch the episode several times a week will the two options equate and I think a good episode is worth watching around once every three months. In any case repeat viewing would require a user to store episodes (iTunes TV episodes take up half a gigabyte of drive space) resulting in another deterrent.

It is also possible that Apple’s current roster of video platforms (iMac, MacBook, iPod Classic, iTouch, iPhone, etc.) are not compelling enough for video watching due to portability in the case of the computers or due to screen size in the case of the portable devices. Tomorrow a new device is being presented by Apple which may usher in an ideal new vessel for consuming video. It may also persuade Apple’s TV production partners to go along with the new iTunes pricing plan.

James Cameron’s latest film Avatar has had yet another strong weekend at the box office, making $50.3 million and breaking the record for biggest four weekend gross, previously held by Cameron’s penultimate film Titanic.

Despite having not such a spectacular opening weekend, Avatar has maintained dropped off less than most movies and has already made more than $400 million, faster than any other movie except The Dark Knight in 2008. If Avatar continues along a similar pace it will overtake that movie and possibly become one the highest domestic grosser of all time.

A great deal of Avatar’s box office performance can be attributed to how many customers have decided to see the movie in 3-D Imax theaters, where tickets are significantly more expensive (40% more in my market). The more expensive Imax tickets have cushioned Avatar’s box office performance and constitute about 13% of weekend sales.

This is all proof that 3-D signficantly increases the value of video content. Other media companies have reached a similar conclusion and last week there were also many announcements last week of new 3-D initiatives:

• ESPN and Discovery Communications unveiled plans to launch the first 3-D networks, both of which would be partly subsidized by Sony.
• DirecTV announced also announced plans for a 3-D channel, although it would be pay-per-view and backed by Panasonic.
• Walt Disney Studios and Sony announced plans to release 3D movies on Blu-ray discs.

Although less than 1% of television sets in the United States can display 3-D content, expect to hear about more 3-D ventures in the near future, and to be wearing weird glasses in front of your television. Perhaps Ray-Ban will design some more stylish shades.

I wanted to follow up yesterday’s note on cable carriage fees by imagining a model that would determine such fees, at least partly, on the relative amount of audience that a channel attracts.

It occurred to me that such a model would be well suited for a digital subscription service, since it could faithfully measure the viewing audience for each channel on its lineup.  I decided to try and create such a model based on the parameters of the new TV subscription service that Apple is rumored to be developing. Supposedly Apple is offering broadcast networks a carriage fee of somewhere between $2 to $4 per subscriber while cable networks are being offered between $1 and $2 per subscriber. These top end of these fees run more than double what cable pays; a necessary compensation since the service will not carry advertising, eliminating a key revenue source for the networks, especially the broadcast nets.

Paying $4 per broadcast network would total $16 in programming costs to Apple. Also paying $2 per cable network with a 10 channel lineup would add on $20 in costs, totalling $36 per subscriber, well past the $30 price tage the service is rumored to have. Therefore, a viable business model for Apple’s service requires lower average carriage fees, but still needs an high upside to convince the networks to join.

An audience-based model that distributes fees according to viewership would allow for:

1. High ceilings for the carriage fees to the networks.
2. Fair compensation to networks for ad-based television viewing audiences cannabilized by Apple’s service
3. A lower total programming cost to Apple.

My proposal is to give each broadcast network a $2 base fee, with an additional $10 distributed among the four networks based on the share of viewing a subscriber gave to each one. Each network could have the possibility of reaching $4 per subscriber if they received 100% of the viewing for a given subscriber. A 25% viewing share would add $0.50. The following two examples demonstrate how it could work.

Continue reading Fee Model for Apple TV Subscription Service

This past week Time Warner Cable came close to dropping the Fox Network from its system due to a dispute concerning retransmission fees. In case you aren’t aware, cable companies like Time Warner and Comcast often pay cable programmers (at least those that opt out of must-carry regulation) for transmitting their channels on their systems. Also known as carriage fees, retransmission fees have become more important to networks given the recent drop in advertising. Fox had been asking for $1 per subscriber while Time Warner was offering only $0.30. SNL Kagan believes that they settled at $0.50 with a likely “increase over the life of the new agreement.”

Since most networks receive less than $0.50 per subscriber Fox’s deal seems pretty good. However once Fox’s large audience is accounted for, it seems that they should have gotten more than $0.50. Fox’s primetime audience is double that of ESPN but its carriage fee is less than a fifth. Using a ratio of carriage fees to primetime ratings points, Fox stands at 0.22, below most networks.

Negotiations between service providers and networks are closely guarded so it is very difficult to ascertain just how carriage deals are struck. Audience ratings are certainly not the only factor. ESPN attracts a lot of “hard-to-get male viewers, and even harder-to-get young male viewers” and its relatively high carriage fee is often justified because of this. Network bundling and company associations can also help boost fees. In any case it does seem that the difference in network carriage fees, in proportion to respective audiences, will lessen in the future.

Avatar, James Cameron’s new film, premiered to the public late last night. Since James Cameron’s last movie, Titanic, is currently the number one domestic grossing movie of all time, in the long term Avatar is expected to do well and a lot of articles are appearing that are trying to predict and compare its potential success. The Economist published a chart yesterday comparing the top domestic grossers, ranked by inflation-adjusted dollars as well as accounting for multiple theatrical releases. Under these parameters Titanic drops to the sixth position. The following graph lists the same movies, based on number of tickets sold instead of inflation-adjusted dollars, which is essentially the same metric.

Based on this information, it is arguable that Gone with the Wind was a more popular movie than Titanic based on this graph. Incidentally, for Avatar to match Titanic’s domestic performance it’s sales would have to be $900 million, well past the $533 million mark of last year’s top domestic grosser, The Dark Knight. Regardless, this wouldn’t be a balanced comparison since it doesn’t take into consideration a few factors.

First of all, media entertainment options are much more abundant than they were in 1939 and the potential for a mass hit which attracts the same numbers of individuals is much rarer today. While movies can be deemed to be blockbusters by today’s relative standards, they do not live up the moniker as determined by standards of Gone with the Wind, Ben Hur and Jaws.

Secondly, theatrical exhibition windows are much shorter now than in 1939 or even 1997. This is due to competition from more entertainment options, and in part due to pressures to push movies towards other release windows like home video and TV.

Lastly, and closely related to the second point, a movie’s success is not measured now by merely domestic box office performance. This was pretty much the only standard in 1939 but today blockbusters make as much revenues or more in international markets, as well as in ancillary areas such as home video and broadcast television rights. Titanic made $1.2 billion in home video sales and rentals, more than double its domestic theatrical sales.

Therefore while Avatar may not sell as many tickets in the U.S. as Gone with the Wind, or while it may not gross as much internationally as Titanic, it may still end up generating more business than either title based on home video revenues, video game sales and other secondary businesses. Unfortunately it is very hard to procure such detailed information so true performance comparison will ever be made, at least publicly.

The second installment of the “Twilight Saga,” New Moon, had an extremely successful opening last weekend, grossing $142,839,137 domestically, which is the the third highest weekend opening of all time. Unfortunately, the following weekend the movie made substantially less substantially less, only $42,870,031, a drop of over 70% which is much greater than what most movies experience. On average, for the top 100 grossing movies of 2008, titles dropped 50% on the second weekend. Out of the top 100 openings of all time, only New Moon has dropped over 70%. So how or why did New Moon lose its shine?

One factor is surely reviews. Looking at the top 100 second weekend drops it is clear that many of the movies were simply bad. Scathing reviews from critics and bad word of mouth from opening weekend customers can obviously deter people from seeing a movie. An approximation for this relationship can be seen by graphing a movie’s box office (BO) drop to its Rotten Tomatoes (RT) score, a well known index that  averages critics’ reviews into a simple average. Titles that mark above 60% are deemed ‘fresh’ while those below are ‘rotten.’ Taking the titles that had BO drops of over over 70%, in terms of average gross per theater, and plotting them against their RT scores yielded the following graph.

Continue reading New Moon drops big

Yesterday a deal was announced between Univision and YouTube whereas the U.S. Hispanic network would bring a “hefty stable of short- and long-form programming to YouTube.” While it was announced that this is “the first time any Univision programming is available on the Web outside of its own properties” it was not wholly correct since Univision’s programming has long been pirated on YouTube. Back in February TubeMogul estimated that this content drawing was over double any other U.S. network.

Number of views of clips from the 10 most-pirated shows on each major network
Network Views
Univision: 583,750,247*
Fox: 289,074,325
ABC: 260,299,418
CBS: 127,334,729
NBC: 120,890,835
Source: TubeMogul
*Includes Televisa content pirated from El Canal de las Estrellas

As I mentioned in a posting in February, the Univsion’s clip count is mostly attributable to Televisa content, specifically material copied from El Canal de las Estrellas, Mexico’s most popular TV network, which is owned by Televisa and where their telenovelas air months ahead of Univision. Similar to how different regional premieres have encouraged piracy in the movie industry, pirated telenovela clips have flooded YouTube to the delight of thousands of fans.

Continue reading The Wild World of Online Telenovelas

On Sunday night my favorite TV show Mad Men ended its third season. It was a terrific finale and I recommend watching it if you haven’t done so already. The episode’s initial airing had an average audience of 2.3 million, about 31% more than last season’s finale, and the highest audience the show has had since this season’s premiere that drew 2.8 million.

Continue reading Madder than Ever

Apple has an impressive position in the music market. Through its iTunes store, the company currently has a 69% share of the U.S. digital market and a 25% share of the total U.S. music market. Although iTunes has been formidable in defining the digital video market, it has yet to achieve the same success as in the music market. This is especially apparent when you compare music sales to video sales on an average user basis.

The iTunes store launched in early 2003 and by the end of the year it had almost 700,000 registered users. Since then it has greatly accelerated growth and now stands at around 100 million registered users. It seems that the launch of the iPhone and the iTouch attracted a wider range of consumers to iTunes, people who had not had accounts previously, and significantly expanded the iTunes customer base.

Continue reading Apple’s Video Challenge and Probable Success