For a few dollars more (VI)

Enabling Information Discovery

In early 2010, we observed how this kind of complimentary across release windows works while we were partnering with a major studio to help their decision-makers understand how broadcasting movies on pay-cable channels as HBO, Cinemax, and Showtime affected DVD sales of these movies.

People at both the pay-cable channels and the studios felt that pay-cable broadcasts would substitute for DVD purchases and for purchases through other sales channels. Indeed, HBO was so concerned about the degree to which digital sales channels (notably iTunes) might cannibalize HBO viewership (and therefore HBO subscriptions) that whenever HBO licensed movies from studios it required the studio to remove those movies from all other sales channels (notably cable pay-per-view and iTunes) during the HBO broadcast window. DVDs were the exception to this rule, primarily because it was impractical to require retailers to take the DVDs off the shelves once they had been shipped to retail stores.

The fact that DVDs remained available during the HBO broadcast window gave us an opportunity to measure the effect of the HBO broadcast on demand for DVDs. To do this, we gathered weekly DVD and theatrical sales data over the lifetime of 314 movies broadcast on the four major US pay-cable channels (HBO, Showtime, Cinemax, and Starz) from January 2008 through June 2010. Not surprisingly, “blockbuster” releases accounted for most of these sales. During the theatrical window, the top 10 percent of movies in our data captured 48 percent of all theatrical revenue, with the remaining 52 percent of revenue shared among the “obscure” titles – that is, all the movies in the bottom 90 percent. The data also showed that this popularity persisted nearly unchanged in the early DVD release window. The same movies that captured 48 percent of theatrical revenue also captured 48 percent of DVD revenue from the first month after release through the month before the movie was broadcast on pay-cable TV.

Why might a small number of movies dominate in the box office and early DVD release windows? It’s possible that there are only a small number of truly good movies, and the concentrated sales figures simply reflect this; or that consumers move in packs, choosing to consume what they see their friends consume. However, we believe the concentration in movie sales is also influenced by how movies are released. Because movies are initially released exclusively in theaters, and because theaters have a limited number of screens to display movies, consumers are only able to discover a relatively small number of movies in the theatrical window. And because studios tend to promote DVD releases on the basis of theatrical performance, this skewed discovery continues in the early DVD release window – as seen in the sales data described above.

However, our data also showed a dramatic change after movies were shown in the pay-cable window. The pay-cable broadcast caused a movie’s DVD sales to increase, but the increase was far larger among previously undiscovered movies – those in the so-called long tail. In the month after a pay-cable broadcast, sales of previously obscure titles increased to 65 percent of all sales (up from 52 percent in the preceding month). What might explain this shift?

Our data shows that pay-cable windows give consumers new opportunities to discover movies they hadn’t discovered in the theatrical window. Specifically, our analysis showed that by the time most blockbusters (those in the top quartile of theatrical sales) entered the HBO window, 89 percent of their potential customers already knew about them, and hence there was little room for DVD sales to increase as a result of the pay-cable broadcast. Almost everyone who was going to be interested in the movie had already discovered it.

However, for the least popular movies – those in the bottom quartile of sales – the story was quite different. Only 57 percent of would-be customers had discovered those movies by the time the movie entered the pay-cable broadcast window. The remaining 43 percent of the movie’s market had somehow missed out on discovering a movie that our data suggested they would enjoy. How did they miss out on these movies? One reason might be that these movies didn’t have mass-market appeal and therefore weren’t readily available in theaters. As we noted above, theaters can show only a certain number of movies at once, and to maximize their revenue will choose only movies that have broad market appeal. Because of this, some movies that will appeal to some customers are bound to slip through the cracks.