Filmed Entertainment is distributed by out-of-home and in-home channels. Out-of-home includes cinemas, i.e. consumer spending at the box office. In-home comprises the home viewing of both physical and online films and shows.
In-home physical includes purchase or rental of videos, CDs and DVDs at video stores and other rental outlets as well as DVD-by-mail services.
In-home digital includes on-demand services that offer movies, TV programmes or other premium video content via TV subscription providers (e.g. cable, satellite and telco providers) or over-the-top (OTT)/streaming services (e.g. Netflix). Digital home video through TV subscription providers comprise spending on video-on-demand (VoD) and pay-per-view (PPV). Digital home video through OTT/streaming services comprise revenues from stand-alone services (such as Netflix) whose content is accessed via a broadband or wireless Internet connection and viewable on a PC, TV, tablet, smartphone or any other capable device that bypasses TV subscription providers. Further, these services are divided into transactional video demand (TVOD) and subscription video on demand (SVOD).
TVOD services (such as iTunes) deliver filmed entertainment content via the open Internet and do not require a subscription. SVOD services (such as Netflix) are also delivered over the open Internet, but require a subscription.
This segment does not include music videos or short clips. It also does not include ancillary revenues earned by cinemas, such as sales of snacks, beverages or accessories (e.g. 3D glasses).
The Swiss Filmed Entertainment Market
An average Swiss resident watches TV for just over 2 hours, i.e. 128 minutes, per day. Compared to 221 minutes in Germany or 282 in the United States, this may seem short. Still, it is a considerable amount of time, showing the importance of TV as a medium and filmed entertainment as content. Filmed Entertainment is also an industry in transition, shifting from physical to digital. Similar to the music industry, revenue is declining in physical channels, while digital ones are on the upswing.
Since 2010, revenues for physical home videos have fallen almost 60%. Sales and rentals have declined about equally. Meanwhile, revenues of digital channels are booming, rising 5-fold since 2010. In 2015 alone, revenues from filmed entertainment through TV subscription providers increased by almost 40%, over the top streaming revenues rose 220%. This remarkable growth was caused mainly by introduction of a major streaming service at the end of 2014, and by established TV providers’ introduction of flat-rate subscriptions.
Cinema has had its ups and downs in the last five years. In 2015, however, cinema delivered a growth of almost 13%. In comparison to the tendency seen in last years this is a very positive development. Presumably, this was driven by popularity of particular movies released in that year.
The remarkable growth in in-home digital and the upswing in cinema compensated, by almost a factor of 3, the decline in at-home physical video. So there was considerable growth for Swiss Filmed Entertainment at large.
September 2014 marked the introduction of Netflix, which changed the way Filmed Entertainment is distributed. For a monthly fee, users can watch any movie or series in an online database. Previously, streaming was minor, offered mainly by YouTube and illegal websites. The essential difference to old concepts is that this distribution model bypasses classic distribution channels, such as common TV ports. Further, it adds an alternative to known concepts of renting single movies from online databases.
Filmed Entertainment is distributed more and more via digital channels. Consumers can watch any chosen movie or series at any time, on basically every device wherever they want. Switzerland’s strong mobile broadband coverage provides the ideal fundament for streaming. However, people still worry about the relatively high volume (and cost) of mobile data when streaming on the go. Especially new high definition footage is very data intense. Flat rate contracts – which are becoming more common – should counter this fear. Additionally, new coding and streaming techniques might decrease data transfer rates.
Although streaming via a digital platform as a way of consuming digital videos is a rather new development it plays already a substantial role in the Swiss filmed entertainment market. Since the introduction of streaming to the Swiss market through the launch of Netflix in 2014, its market shares and revenues are growing at a tremendous pace. After only a year in the Swiss market, Netflix attracted roughly 250’000 subscribers. Competition here is still rather contained: international competitors like Amazon Prime are not yet present. However, as others enter and as classic TV providers broaden their offerings with flat rate models, competition will rise. Filmed entertainment is becoming more diverse, and pressure on all market participants will rise. At the same time, established TV providers are currently also able to grow in their digital segment, specifically the VOD part, mainly thanks to the introduction of flat-rate subscriptions. In 2015 UPC’s „My Prime“, a premium streaming service introduced in 2014, was greatly expanded. It now offers over 12'000 items to 265'000 customers. Similarly, Swisscom offers unlimited access to 11’000 movie titles for a monthly, fixed price since the launch of “Teleclub Play” in December 2014.
Further, players with smaller market shares like Hollystar, Teleboy and Apple TV contribute to market fragmentation. This is mitigated somewhat by Teleboy’s and Hollystar’s cooperation: since February 2015 Teleboy integrated Hollystar’s video-on-demand catalogue, encompassing over 5’000 movies.
Like music streaming, video streaming is likely to be a winner-takes-all market. Due to the characteristics defining digital business models, large players are in a favourable position, while small players are encouraged to stay in niches. Economies of scale, reach and scalability are crucial to success. Apple is theoretically in a good spot to integrate its streaming services. By bundling Apple Music and Apple TV, it could put itself in a dominant position. In addition, Netflix and other streaming providers threaten traditional TV networks. Still, aggressive acquisitions and fast growing user bases is not all. Quality of the content is also important.
As the graph illustrates, Netflix is now the third most successful network in Emmy nominations, beaten in only by HBO and FX. Netflix has established itself as a producer of quality content and might serve as prime example for other streaming services.
At-home digital video is undergoing fast paced, fundamental changes, with the distinction between distribution channels becoming blurred. For example, Facebook has integrated video (a form of filmed entertainment) into its news feeds. Even though Facebook does not offer TV in a classic sense, by introducing the “Live” feature, it brought new perspective to Filmed Entertainment. With “Live” users can record whatever they are doing and broadcast it immediately. As CEO Mark Zuckerberg comments, “Live is like having a TV camera in your pocket. Anyone with a phone now has the power to broadcast to anyone in the world. "Celebrities, politicians and athletes are using it to interact with their fans. It is only a small step further for Facebook to stream live sports, music or interviews. Facebook could become a sort of customizable TV. Given its 1.5 billion users worldwide (~3 million in Switzerland) Facebook has reach and the resulting power that classic TV networks can only dream of. Even well-established digital competitors like Periscope (an app that lets users broadcast live videos) might face an insurmountable opponent.
Without doubt, new technology based services such as Facebooks “Live” or Periscope offer great potential for innovations and provide the fundament for never seen before forms of interaction. At the same time, they bring along new challenge. Broadcasts of criminal activities or tragic events are new-media dilemmas yet to be solved.
The rise of streaming does not necessarily mean the fall of cinema revenues. Nonetheless, cinemas will be stretched to preserving 2015 growth rates in coming years. The popularity of particular movies plays a crucial role and can decide whether it is a successful year or not. Thus, Cinemas are strongly dependent on blockbusters being released regularly. Yearly admissions in Swiss cinemas, published by ProCinema, reveal that 2015’s ten most popular movies account for roughly a third of all admissions. The other 390 movies share the remaining two-thirds.
In 2015, Fast & Furious 7, Minions (3D) and Spectre – 007 (James Bond) were the three most popular. We expect another good year in 2017, with releases planned for Star Wars Episode VIII, Fast & Furious 8 and Wonder Woman. The same applies to 2018, with debuts of Avatar 2, Deadpool 2 or Toy Story 4. Despite the growing range of alternatives, 2015 showed that cinemas can add value and sustain visitor numbers.
Sales and rentals of physical content will keep declining. Owning a CD of your favourite band might provide additional value, but it is doubtful that the Blu-ray disc of a movie will convey the same surplus value. Thus, we assume that the retreat of physically distributed filmed entertainment will continue along the entire value chain. At the same time, Digital distribution channels are growing steadily and quickly. Especially OTT/streaming revenues are booming and expected to continue their ascent. TV providers have built a good base for the coming years with digital platforms and offers. Cinema sector is dependent on blockbusters and needs to continue expanding the experience and perceived value of a cinema visit in order to maintain the current growth rates.
Economies of scale are important in cinema. Being able to distribute licensing costs across several cinemas in various cities is a big advantage. In Switzerland, the three biggest cinema networks possess more than a third of the seats. The remaining two-thirds are divided among smaller networks and family-owned companies, all with market shares smaller than 5%. Presumably, this oligopoly will aggravate conditions for small players, and lead to consolidation.
In physical and digital at-home video, profound shifts are taking place. Formerly large, physical distributors will continue to lose significance as OTT/streaming providers attract more users. Established TV networks are being forced to increase their investments in digital. A transformation of the offer into this digital age is inevitable to withstand the competitive pressure of Netflix, Facebook, YouTube and so on in the coming years. A peculiarity of Swiss Filmed Entertainment is the absence of important international players. Neither Amazon Prime nor HBO are available in Switzerland. Entry of one of these big players could have significant impact on the Swiss market.
“Facebook Live” shows how social interaction can become filmed entertainment. Not only is it live, it is live interactive – viewers can share emotions directly with the person streaming, in real, immediate time. Thanks to live comments and reactions, the person streaming receives immediate feedback. Passive viewing becomes a dynamic exchange.
Switzerland’s fast Internet connectivity will allow video streaming to succeed. The high degree of mobility in combination with well-developed mobile broadband infrastructure and high saturation of mobile devices create high potential for streaming-providers.
Given the strong effect of economies of scale, we expect the Swiss market to keep consolidating resulting in dominance of few large cinema networks. Smaller cinemas will still be able to take niche positions. In general but especially in regards to revenue development, Swiss cinemas are strongly dependent on international blockbuster productions. Thus, also in future popularity of large movies is a key driver. Apart from that, Cinemas will increasingly try to enhance their customer experience. This might be helped by improving technology in movie production and projection/screens.
Switzerland lacks adequate protection of intellectual property rights. Many illegal providers have servers or even headquarters in Switzerland, as the strong privacy rules here make it difficult for rightful owners to monitor content distribution. If streaming prices can be kept at modest, streaming might substitute illegal consumption, thereby reducing piracy. If streaming providers are able to be up to date with new contents in their catalogues, the incentives to use illegal streaming sites might disappear further. In North America this has happened, as illegal file-sharing platforms such as BitTorrent see their market shares declining.
Companies such as Netflix and Amazon produce original content to make themselves competitive in television. Netflix earned some Emmy nominations for its original series, which is interesting from two perspectives. Making, rather than buying, boosts margins. And time-consuming, expensive licensing agreements are avoided. Moreover, with proprietary content, Netflix enjoys more flexibility in release dates and can benefit the most from the plethora of consumer data when creating own content. Netflix is able to tailor content exactly to preferences of its users. So, Netflix is doubling its self-produced content in 2016 from 16 to 31 films/shows.
Via Internet TV also small shows and productions are affordable. This approach has enabled shows and films to thrive on Netflix that might not have worked on traditional television. To compete with Netflix, other cable channels are starting to invest in their own programming. For instance, YouTube started its first four self-productions for their paid, ad-free channel ‘YouTube red’. This channel is not yet available in Switzerland though.
Filmed Entertainment is opening up to interactive niche content. YouTube and Twitch serve as platform for streaming private videos and playing video games with audiences. YouTube will soon launch of an app for users to live stream directly from their phones to their subscribers and to a wider audience. Facebooks “Live” viewers are able to share feedback directly with the person streaming. Meerkat and Periscope are livestreaming services that allow users to broadcast live events with their smartphones. And these services are simple: one click, one broadcast. A tweet automatically notifies followers or the public about the live stream. Anyone can tune in via the app or the web, and they can leave comments visible to the audience. How big the financial impact of these niches will be for the Swiss filmed entertainment market will be seen. We assume that the demand of “passive” watching will persist beside new forms of consuming filmed entertainment with dynamic exchange.
Earlier this year YouTube launched live streaming for 360-degree-videos. The technology is quite new. The combination with live streaming pushed the boundaries of filmed entertainment. Not only visuals are progressing, so are audios. In addition to the live 360-video YouTube also introduced spatial audio for on-demand YouTube videos. YouTube has more than a billion users and reaches more 18-49-year-olds than any cable network in the USA on its mobile app alone. On average, a mobile viewing session is more than 40 minutes – an amount that could turn out to be exceedingly precious in coming years.
Sport spectating is shifting from traditional broadcasting to online platforms. In May, BT (UK’s leading communications company) announced that football’s Champions League as well as the Europa League finals would be streamed on YouTube free of charge within the UK. Likewise, Twitter agreed to broadcast the US’s National Football League games online and for free. In a season, Twitter will stream 10 games to its 800 million users. Twitter bid against Verizon, Yahoo and Amazon to win these broadcasting rights. According to the BBC, Facebook was part of the bidding, but dropped out before the final round. In-game highlights and pre-game live Periscope broadcasts from players and teams have been introduced. This shows the potential that tech and social media giants have to disrupt Filmed Entertainment. Given the small size of this Swiss market, it is unclear how soon this development will reach Switzerland, but it surely will come. Nevertheless, such a change could have severe impact on the value chain within the Swiss market. Thus, it is an essential potential development to keep in mind.
Virtual reality is another major innovation that will change filmed entertainment. Major studios have started experimenting; the industry is taking it seriously. Virtual reality headset sales are forecast to reach 12.2 million in 2016. Today, gaming is the main outlet for virtual reality, but Filmed Entertainment will bring it to the masses. Especially in the cinema, this might be big. However, the physical experience is different to the traditional cinema. So it might not be competition for cinemas as much as a new medium. There are still technical hurdles: for example, motion sickness induced by some content; common filming techniques that are obsolete in 360-degree-presentation; handling the immense data needed for virtual reality film. Lastly, defining industry-wide standards will take time.
Comparison to Western Europe
In comparison to Western Europe, Switzerland’s 2015 performance was very good, mainly due to Netflix OTT/streaming that was introduced in 2014. Above-average cinema performance helped, too. In contrast, cinema across Western Europe was flat. Looking forward, streaming still holds great potential in Switzerland. Traditional TV distributors seem well prepared for the digital future. Thus, we expect the Swiss Filmed Entertainment to grow slightly faster than in Western Europe. The outlook in Western Europe is flat, because the shrinking physical sector that is not compensated by digital channels - at least not yet.