Behind the Scenes with Vongo

 

Our massive, in-depth interview with the digital movie distribution service, Vongo on everything from the life cycle of your average movie, to Xbox 360 support and a word on the service on Sony‘s PlayStation 3.

Read the entire thing right after the jump!

Note: This interview was conducted during the first couple of months of the year, as a result some of the information contained within is already known, and some of the planned features have already been implemented.

Our massive, in-depth interview with the digital movie distribution service, Vongo on everything from the life cycle of your average movie, to Xbox 360 support and a word on the service on Sony‘s PlayStation 3.

Read the entire thing right after the jump!

Note: This interview was conducted during the first couple of months of the year, as a result some of the information contained within is already known, and some of the planned features have already been implemented.

QJ: A lot of people don’t understand what goes on behind the scenes when it comes to what movies can be put up on a downloadable movie service like Vongo, they wonder why the selection of movies available isn’t as vast as say Netflix’ mail delivery service, or why their favorite movies aren’t up there yet. Can you please give us a bit of insight on the process that dictates what movies go up? Especially with regard to studio contracts, waiting periods, etc.

 VONGO: There has been renewed focus and attention on the business of Hollywood with the rise of digital media and the digital download business. The advent of online movie/content distribution has been the driver in rediscovering and comprehending all aspects of the business. As you know, there is a misperception about online content availability (especially in the movie space) and unfortunately, a great deal of misinformation that only perpetuates the challenge in understanding the business drivers.

By way of introduction, in many respects think of the Internet/digital dissemination of movies as just an extension of the “traditional” television delivery of content. Starz is already in the business of aggregating, marketing, promoting, and delivering a premium movie experience for customers in their homes in the traditional pay TV broadcast arena. Many of the same business rules apply in this “new” form of distribution, and this is something with which we are naturally very familiar.

At the risk of a lengthy response, please allow me the opportunity to walk you and your readers through the “Life of a Movie.” While there are always exceptions to the rule, generally speaking major theatrical films in the US:

1) Go into theaters

2) 3-5 months later go to the home video window. This is where, for example, consumers may buy the DVD at a retailer, rent the DVD from Blockbuster or Netflix, and now (depending on the studio) purchase it by way of Electronic Sell-Through (EST) on sites hosted by a range of companies including Amazon, Apple, Movielink, CinemaNow, Walmart.com and others. Vongo expects to be in this space by the end of this year when the market matures some more.

3) 1-2 months after that, movies enter the PPV window where cable and satellite companies, Vongo, Movielink, CinemaNow, and others including Xbox Live Marketplace may offer a la carte transactional rentals. Typically -5 for a 24-hour rental of the movie. Once you start to view the movie, the clock starts ticking. You may watch as many times as you want within the 24 hours rental period. In addition, you only have a finite amount of time to view the movie once youÂ’ve purchased it – typically within thirty days from the initial download.  Tough consumer proposition, but all Internet PPV purveyors operate under the same rules as licensed by Hollywood studios.

4) About 3-5 months later (typically 10 months or so after theatrical release) movies enter the subscription pay TV window. This is the most important window for purposes of understanding the broadband download market and the most misunderstood.

This is the window that Starz, HBO, and Showtime operate in for their cable and satellite services – both the linearly programmed channels and for their related subscription VOD services, as well as the Starz movie download businesses, including Vongo. The window is typically 15-18 months in length and means that the respective pay TV provider has exclusive subscription rights to offer the film in question (more on that below) during that entire window.

Which movies go to which services? Major Hollywood studios cut robust long-term output deals with the pay TV networks guaranteeing them a consistent pipeline of film product in exchange for a lucrative/dependable revenue flow. This is a very important, yet under publicized, part of the overall financial equation to the studios. These agreements give the respective studios hundreds of millions of dollars in revenue per year from the pay TV networks and these master agreements generally last until some time in the next decade, though this varies studio to studio, deal to deal.

Because the pay networks pay large amounts to license these films over long periods of time, they get some control over other forms of exhibition. And, to maintain the value of their deals they also put restrictions on what forms of exhibition can occur prior to this window.  So, for example, free network television is not permitted before the pay window.  Only certain forms of Internet or electronic delivery are permitted.

In the case of Starz we get about a historical 40+% of Hollywood major output courtesy of deals with Disney (Disney, Touchstone, Miramax, Hollywood, Pixar) and Sony (Sony, Columbia, TriStar, Revolution), while HBO gets roughly the same thanks to its deals with Warner Bros., Fox, Universal, and DreamWorks. Recently, some big movie product has been licensed to Starz in the same window in specific one-off deals. Movies, such as The Illusionist and Grindhouse, which were not distributed by the major studios, also belong to Starz courtesy of smaller, non-output deals. Balance is either unlicensed (small percentage) or goes to Showtime, which primarily gets films from Paramount and Lionsgate.

So, for example, Starz (and thus Vongo) get all films from the Pirates of the Caribbean franchise (Disney) while the Harry Potter movies belong exclusively to HBO (Warner Bros.) when in the pay TV windows. While neither HBO nor Showtime have launched services such as Vongo, our general understanding from press reports is that HBO & ShowtimeÂ’s rights preclude anybody else from offering HBO & ShowtimeÂ’s pay TV movie content electronically in the form of a subscription. Clearly, this is the case for Starz and that is why Vongo is such a unique offering, because itÂ’s uniquely in the marketplace, leveraging the broad rights that we have licensed from the studios.

5) After this, a movie enters the ad-supported broadcast window. Studios may sell any respective film(s) to most any ad-supported outlet – broadcast networks or cable networks. This is a long window, typically of 4-5 years in length. Sometimes these deals are a package deal by the studio and the network, other times deals are title-by-title, film-by-film.

6) Generally, we are now up to 7-8 years after a film has been in the theaters and it then comes back to a second-run pay TV window. Starz/HBO/Showtime enjoy another 12-18 month exclusive run.

7) Then – 9-10 years after theatrical release – a movie enters its library window when anybody including the pay TV nets, the ad-supported nets, Netflix, Movielink, etc., may license the content. Starz Entertainment is one of the largest library purchasers in Hollywood and has deals with virtually every major studio – not just Disney and Sony. Some deals are short, some are long. Some are exclusive, some are not.

NetflixÂ’s much ballyhooed entry into streaming with digital delivery is relegated to this space for older content. These agreements are also typically done either in packages or title-by-title, film-by-film.

8) Whew! In a nutshell, not only is the reality of this 9-10 year wait for the library window important, the key with our rights is that even though we only have the right to exhibit during a portion of this time, nobody else may offer the output films at all during the entire 9-10 year set of windows. That is, nobody else may offer these until they enter the library window so long as you are talking about electronic distribution and a subscription business model. This is why companies such as Netflix are unable to currently transition the core of their hard goods subscription-by-mail business over to the Internet under the existing rights agreements.

QJ: What was it that prompted you to bring the Vongo service to Xbox 360 users?

VONGO: Customer feedback was the primary catalyst. By and large when most customers asked about the ability to burn their downloads on to a disc, itÂ’s not because they want to do something illegitimate with the content. They just want to view on the TV and burning a DVD had been the only easy way for the masses to bridge the PC to the TV.  Not any longer.

Thanks to Vongo software development work that we completed commensurate with the Vista launch, Windows Vista and Windows XP users can easily – meaning a very limited amount of configuration – enjoy Vongo content on the TV. Simply have your Xbox 360 or other media extender plugged into a home network with your PC. The movies and other downloaded content will all be there for ready access through the game platform.

The key here is that millions of gamers have made a conscious decision to add that device to the stack in the living room – primarily for gaming. However as an added benefit, they can also stream movies from their PC to the TV via their Xbox 360. It’s an added bonus that resonates magnificently with users and best of all, there is no extra charge on Vongo to do this and this does not even count as one of the three devices that you may register with your Vongo account.

QJ: How does Vongo transfer the titles from the PC to a connected Xbox 360 console?

VONGO: In essence, the engineering work that our tech folks – led by Ryc Brownrigg – completed put a shortcut of sorts for the Vongo content into the “My Videos” folder on the PC. This mirrored access to the content is what the Xbox 360 seeks out and offers you a stream of the content within your house from the PC to the television. The title is never actually transferred, but stays stored on the PC and is streamed to the console and played on the TV with equivalent video quality

QJ: Currently, you need a home network to run Vongo on your Xbox 360, are there any plans to implement a Vongo download service directly within the Xbox Live Marketplace?

VONGO: We have a terrific relationship with Microsoft on many levels and we certainly recognize the intrinsic appeal of working with the Xbox 360 group on the very idea you suggest. When you have made the investment in robust and exclusive content rights as we have, getting on as many platforms as possible is the ultimate end goal.

For a bit of related context, note that some folks directly hook up their PC to the TV (and thus mitigate the need for the Xbox 360).

QJ: Do you foresee competition with the newly launched Xbox Live Video Marketplace?

VONGO: They are much more complementary than competitive due to the aforementioned business and exclusive rights in subscription that we enjoy. Sure, Vongo offers PPV and will offer Electronic Sell-Through (EST) just as Xbox Live Marketplace, but the driver of our service is subscription where we are in a unique competitive position. Interestingly, one of the main early empirical findings of Vongo, is that subscribers purchase 2-3X more PPV content than VongoÂ’s PPV-only customer base.

This might seem counterintuitive at first, as you may ask why would someone purchase a PPV movie for when they have unlimited access to so much content unlimited for ? PPV does have a head start on subscription content chronologically too, but more than anything, subscription gets customers very familiar and comfortable with the platform at-large and the digital download paradigm. Subscription is a wonderful “storefront” for the transactional titles. This is where Vongo’s subscription paradigm expands the pie and is wonderfully complementary to the broader business.

QJ: How large are the file sizes for Vongo movies?

VONGO: Encoded at 1.3 Mbps. Typical feature film is about 1 GB. Files sizes are smaller for portable versions that go to portable media players. Files sizes for both, of course, correlate to length of the programming.

QJ: What will the image quality of Vongo movies be like when viewed on a TV screen?

VONGO: Close to a DVD. We believe that we have struck the optimal balance between file sizes and download times at this encode rate. Getting back to our expertise in the business of pay television, our video engineers do a terrific job at identifying imperfections and working with our studio providers when screening the master tapes. This allows us to have a beautiful looking product at these encode rates.

In fact, when launched in January 2006, we were at a 700kbs encode. Focus groups favored even faster download times, but when we launched and found that so many folks were connecting their PCs to the TVs directly and asking for higher quality downloads, we made the decision to be more forward-looking and ramp up the encodes to the superior 1.3 rate. Dare I say, even when blown up on a 57” plasma, the final product meets with satisfaction to even the most discerning set of eyes.

QJ: Considering the HD-Centric nature of the Xbox 360, are there any plans to roll out HD movies on the Vongo service?

VONGO: In time, yes. The business model is in question because of the extra delivery cost. Also, with movie file sizes being typically four to five times larger than standard definition users would also experience a significant increase in the download speed/time.

Secondly, there are rights questions specific to broadband that need to work themselves out when it comes to the underlying subscription service and the delivery of our movies in HD by subscription. For PPV and EST, the studios are just now dipping their toes in the water, but it would not surprise us if this only gets a push once the whole Blu-Ray and HD-DVD issue gets resolved first.

QJ: Is there going to be an extra charge for Xbox 360 users, or will they still enjoy the same 9. 99 USD subscription fee?

VONGO: No extra charge. Same 9. 99 USD subscription fee.

QJ: How quickly is the Vongo movie catalogue growing?

VONGO: When we launched in January 2006, we offered 1,000 total movie and video selections for 9. 99 USD. Come our 1-year anniversary, we offered 1,000 movies and 2,500 total video selections for the very same 9. 99 USD. Most of the growth came in the form of concerts, anime, and TV episodes, but a good chunk came in library movies and direct-to-video types of movies that we added.

The Long Tail truly exists and when you have a strong recommendation engine and lots of interesting/varied content, experimentation is part of the Vongo experience. The consumer paradigm is so different when you know that your bill is not going to increase every time you want to download and enjoy a movie.

Will we continue to grow at that rate? Unlikely, but the intent is to keep expanding the content base and value proposition. Vongo is a wonderful aggregator and destination for content owners and distributors everywhere.

QJ: Will the Live Starz stream feature be available to Xbox 360 users?

 VONGO: For most folks, no, but with one big exception.

What I have not discussed yet is the stunning and beautiful new Vista client that we announced for Windows Media Center with Microsoft at CES and launched on January 30 of this year.

The Vista Vongo client takes full advantage of the new, powerful Vista graphics ability and allows someone to enjoy the Vongo experience on the comfort of their couch with a simple remote control – only needing Up, Down, Left, Right, and Select functionality.

You may browse, navigate, download, and play your content through Vongo and never get off of your couch. Also, no extra charge for the Vongo subscriber.

You may do this by either directly hooking up your Vista PC to the TV, or if you have an Xbox 360 and a Vista and Media Center-enabled PC, you may enjoy the new Vongo TV experience through your Xbox 360. This includes the live Starz stream.

QJ: Will Xbox 360 compatibility require an Xbox 360 system update as well as a Vongo software update?

VONGO: It did and that was done through a Vongo software update that has already been pushed to our existing customers. New customers downloading the free Vongo client at www.vongo.com will get a version that contains everything they need to enjoy complete functionality

QJ: When will Vongo compatibility for the Xbox 360 go live?

VONGO: We went live on January 30, 2007

QJ: Is there any possibility this service might also be made compatible with other digital distribution platforms such as the PlayStation 3 or Apple’s iTV in the future?

VONGO: We wish to be on as many different platforms as possible. Apple has not embraced the subscription business for iTunes content as of yet. Apple is well aware of our desire to work with them and the ball is in their court. As to Sony, we have a deep and long relationship there, as they are one of our largest content partners. There are many possibilities that we see with Sony and the PS3 is clearly one of them.

Stay tuned and thanks!