Executive Briefings

Entertainment Supply Chains Are Going Digital -- But Not Completely

Digital technology is growing in leaps and bounds, but supply-chain managers will still have to cope with physical product for years to come, experts say.

All supply chains go through changes, as they struggle to adjust to shifting patterns of sourcing and customer tastes. But how many worry about disappearing altogether?

The big concern for purveyors of entertainment content - movies, TV shows, video games and the like - is whether their products will continue to exist in physical form. Digital delivery, while still in its infancy, is developing quickly, and promises to become the preferred option for many consumers in the very near future. Whether that means an early end to CDs, DVDs and video cartridges is another matter entirely.

No part of the entertainment supply chain has been untouched by digital techniques. Start with the production end, where artists deploy ever-smaller cameras and a wide array of special effects to create images that were impossible or prohibitively expensive using analog technology. At the same time, platforms for accessing content are multiplying at a dizzying rate. Consumers can view movies on any number of devices today, from giant flat-screen systems to smartphones. Throw in the internet, and you have a complete pipeline for entertainment that eliminates - in theory, at least - the plastic boxes and iridescent disks that used to be the sole means of conveying the latest Hollywood blockbuster or multi-level video game.

There's no denying the impact of digital technology. According to the Digital Entertainment Group (DEG), consumer spending on digital distribution, including video on demand, exceeded that for Blu-ray disks in the first half of 2010, topping the $1bn mark for the first time. And this despite a near-doubling of disk shipments during that period, to more than 77million units.

By most accounts, the trend will continue. PricewaterhouseCoopers LLP forecasts a 78-percent growth rate for digitally distributed media between 2009 and 2013. Moreover, the firm predicts, digital will represent 78 percent of the overall growth of the global market for entertainment. Over that period, however, traditional media will still account for 69 percent of actual revenues. So expectations for the demise of physical supply chains would appear to be premature.

In the short term, there's a huge disparity between income from the two methods of delivering entertainment content. At the end of 2009, online video yielded $700m in revenues, according to Alison Casey, head of global content with Futuresource. That compares with between $15bn and $17bn for packaged media. "We're at a very early stage in the market," she points out.

Technology has a way of getting ahead of the typical consumer, who is in no hurry to discard a familiar format. DVDs offer a high level of portability that isn't matched by digital pipelines, notes Chuck Parker, president of the Digital Content Delivery Division of Technicolor. "Consumers are completely used to the concept that they own a piece of content," he says. "They can take it anywhere."

On the digital side, by contrast, providers still must work out a number of logistical issues, including a consistent standard of quality for streaming content over the internet, and making digital downloads easy. Most computer users lack the bandwidth to download an entire movie within a reasonable period of time. And downloads can't yet match physical disks - especially those in the Blu-ray format - for high-definition image quality.

"I think bandwidth will solve itself over time," says Parker. "Consumers will pay more to have higher bandwidth in their homes." But there are still issues of compatibility across platforms to be solved. And the growing popularity of home entertainment systems, with large screens and top-notch sound, means that digital will be playing catch-up with Blu-ray for the next few years.

Dual Supply Chains

For supply-chain managers, the situation translates into the necessity of maintaining two distinctly different systems for delivery of product to the consumer. In actuality, there is substantial overlap between those two pipelines, says John Quinn, executive vice president of worldwide operations with Warner Bros. Interactive Entertainment. They share key aspects of pre-production, image correction and marketing. The differences arise when it comes to packaging (or lack of it) and distribution.

With digital, the biggest issue from a technological standpoint is "how to make that seamless, easy transition for [consumers], regardless of where they choose to view the product," says Quinn. Yet another unresolved question is the best business model for delivering content. Should movies be sold outright, or on a subscription basis? How can providers ensure that their product isn't widely available to the public for free, as is the case with so much music today?

The music industry suffered the disadvantage of being the first to grapple with the challenges of the digital age. Movie and TV show providers have had more time to think about how to get product into consumers' hands while minimizing piracy. Yet despite the ease of churning out pirated DVDs, it's even easier to do so with digital files. "Once you get it online," says Quinn, "you can crack the DRM [digital rights management] and it becomes very accessible to a worldwide audience."

Blake White, entertainment technology director with PricewaterhouseCoopers, says digital content providers must balance the need for security with that of serving the customer. "You can lock media in a vault, and have zero monetization," he says. "Or the reverse extreme." Entertainment distributors need to learn from the example of the music business and not fight the consumer - an attitude that creates an even greater incentive for piracy, White says.

Digital and physical media will survive side by side because consumers access entertainment for a variety of purposes, says John Barrett, director of research with Parks Associates. Watching broadcast TV, they are often tied to specific times for viewing (notwithstanding the popularity of TiVo and similar recording systems). DVDs are watched at times chosen by the consumer. Barrett says viewers watch with differing levels of attention, depending on their choice of platform. The challenge for providers is to fill in all of the possible gaps, from traditional DVDs to content that will be viewed on laptops, airplanes, MP3 players and cellphones. Each calls for a different level of quality.

Kiosk services such as Redbox are breathing new life into DVDs, with top titles made readily available at multiple locations for an extremely low price. In fact, says Barrett, Redbox is proving more of a threat to traditional retail rental and sales outlets than electronic channels. "One of the things we're learning," he adds, "is that DVDs have a lot of staying power."

The Problem of Standards

The biggest issues confronting entertainment supply chains are essentially invisible to the consumer. They center around the issue of production standards, says John Crosier, director of global operations and supply chain with Warner Bros. Digital Distribution. All DVDs sold within a given region are manufactured according to the same standards. "You take one master and press [it] a million times for a DVD," notes Crosier.

The standards for digital files, by contrast, are non-existent; they differ according to platform and provider. "Each partner almost has a unique digital supply chain.... It takes a person to manually create that file and deliver it to each customer," says Crosier.

"Consumers are spoiled by the DVD/Blu-ray experience," says Morgan Fiumi, senior vice president and chief operating officer of Deluxe Digital Studios. "They can play it on any manufactured device, and it will work. The problem with digital is that there are no standards. If I buy a file from an e-tailer, iTunes, Amazon.com or Xbox LIVE, I cannot watch that on any  device."

Similar issues arise further down the chain of distribution. Physical product contains a barcode that is universally accepted by retailers, notes White. In the digital world, the adoption of standards for universal identifiers lags far behind. "There's no industry-accepted equivalent of a FedEx receipt," he says.

Things get even more complicated when a studio or distributor is selling product internationally, he says. Physical DVDs often contain subtitles for multiple languages, a feature that has yet to be matched by many digital files. Yet another reason why digitally accessed entertainment accounts for such a small fraction of revenues today. As Fiumi says: "It's really about the value proposition to the consumer."

Casey of Futuresource sees a long period of co-existence between digital and physical disks. "In five years," she predicts, "packaged media will still totally dominate. In 10 years, it will still be really strong. If you go beyond 15 years, who knows?"

Futuresource hopes to get a clearer picture from a research study that it's currently undertaking in partnership with analysts who track the physical entertainment supply chain, Casey says. Through conversations with disk replicators, distributors, retailers and studios, the firm expects to understand more about the relative economics of digital and physical. It's also looking into the environmental consequences of the two options. In theory, a digital supply chain should have a much smaller carbon footprint, in that it requires no packaging and expends no fuel from physical distribution.

The Challenge of Forecasting

There's one aspect of entertainment supply chains that won't change as they go digital: the difficulty of forecasting demand. Movie studios have a hard enough time deciding which projects to greenlight for production. Now add to that a myriad of options that accompanies a movie beyond its engagement in theaters. It's not unusual for a studio to manage 9,000 ship-to locations in the domestic market alone, says Doug Reinart, vice president of global accounts with Technicolor. A major theatrical release can have as many as 15 SKU variants, including single- and double-disk packages, special editions, director's cut and Blu-ray version. Even local weather can be a factor in retail sales, notes Reinart. Now consider that the lion's share of a DVD's sales occurs in the first few weeks of release, and the margin of error becomes extremely narrow.

In these belt-tightening times, extra inventory isn't the answer. Distributors must have "the ability to read and react within one day's notice to [demand at] any location," says Reinart.

Some of those challenges should be mitigated as the industry shifts the bulk of its sales from physical to digital. But the managers of entertainment supply chains will have to possess expertise in both areas for the foreseeable future. Quinn recalls a memo that he received from his supervisors back in 1983, rejecting an expansion of the studio's rental sales force because of an expectation that the industry would be mostly digital within five to six years.

Industry experts aren't making the same mistake today. "I think there will be a lot of physical goods around for quite some time," he says.

Resource Links:

Deluxe Digital Studios, www.bydeluxe.com
Digital Entertainment Group, www.degonline.org
Futuresource, www.futuresource-consulting.com
Parks Associates, www.parksassociates.com
PricewaterhouseCoopers, www.pwc.com
Technicolor, www.technicolor.com
Warner Bros. Digital Distribution, www.warnerbros.com
Warner Bros. Interactive Entertainment, www.wbie.com

All supply chains go through changes, as they struggle to adjust to shifting patterns of sourcing and customer tastes. But how many worry about disappearing altogether?

The big concern for purveyors of entertainment content - movies, TV shows, video games and the like - is whether their products will continue to exist in physical form. Digital delivery, while still in its infancy, is developing quickly, and promises to become the preferred option for many consumers in the very near future. Whether that means an early end to CDs, DVDs and video cartridges is another matter entirely.

No part of the entertainment supply chain has been untouched by digital techniques. Start with the production end, where artists deploy ever-smaller cameras and a wide array of special effects to create images that were impossible or prohibitively expensive using analog technology. At the same time, platforms for accessing content are multiplying at a dizzying rate. Consumers can view movies on any number of devices today, from giant flat-screen systems to smartphones. Throw in the internet, and you have a complete pipeline for entertainment that eliminates - in theory, at least - the plastic boxes and iridescent disks that used to be the sole means of conveying the latest Hollywood blockbuster or multi-level video game.

There's no denying the impact of digital technology. According to the Digital Entertainment Group (DEG), consumer spending on digital distribution, including video on demand, exceeded that for Blu-ray disks in the first half of 2010, topping the $1bn mark for the first time. And this despite a near-doubling of disk shipments during that period, to more than 77million units.

By most accounts, the trend will continue. PricewaterhouseCoopers LLP forecasts a 78-percent growth rate for digitally distributed media between 2009 and 2013. Moreover, the firm predicts, digital will represent 78 percent of the overall growth of the global market for entertainment. Over that period, however, traditional media will still account for 69 percent of actual revenues. So expectations for the demise of physical supply chains would appear to be premature.

In the short term, there's a huge disparity between income from the two methods of delivering entertainment content. At the end of 2009, online video yielded $700m in revenues, according to Alison Casey, head of global content with Futuresource. That compares with between $15bn and $17bn for packaged media. "We're at a very early stage in the market," she points out.

Technology has a way of getting ahead of the typical consumer, who is in no hurry to discard a familiar format. DVDs offer a high level of portability that isn't matched by digital pipelines, notes Chuck Parker, president of the Digital Content Delivery Division of Technicolor. "Consumers are completely used to the concept that they own a piece of content," he says. "They can take it anywhere."

On the digital side, by contrast, providers still must work out a number of logistical issues, including a consistent standard of quality for streaming content over the internet, and making digital downloads easy. Most computer users lack the bandwidth to download an entire movie within a reasonable period of time. And downloads can't yet match physical disks - especially those in the Blu-ray format - for high-definition image quality.

"I think bandwidth will solve itself over time," says Parker. "Consumers will pay more to have higher bandwidth in their homes." But there are still issues of compatibility across platforms to be solved. And the growing popularity of home entertainment systems, with large screens and top-notch sound, means that digital will be playing catch-up with Blu-ray for the next few years.

Dual Supply Chains

For supply-chain managers, the situation translates into the necessity of maintaining two distinctly different systems for delivery of product to the consumer. In actuality, there is substantial overlap between those two pipelines, says John Quinn, executive vice president of worldwide operations with Warner Bros. Interactive Entertainment. They share key aspects of pre-production, image correction and marketing. The differences arise when it comes to packaging (or lack of it) and distribution.

With digital, the biggest issue from a technological standpoint is "how to make that seamless, easy transition for [consumers], regardless of where they choose to view the product," says Quinn. Yet another unresolved question is the best business model for delivering content. Should movies be sold outright, or on a subscription basis? How can providers ensure that their product isn't widely available to the public for free, as is the case with so much music today?

The music industry suffered the disadvantage of being the first to grapple with the challenges of the digital age. Movie and TV show providers have had more time to think about how to get product into consumers' hands while minimizing piracy. Yet despite the ease of churning out pirated DVDs, it's even easier to do so with digital files. "Once you get it online," says Quinn, "you can crack the DRM [digital rights management] and it becomes very accessible to a worldwide audience."

Blake White, entertainment technology director with PricewaterhouseCoopers, says digital content providers must balance the need for security with that of serving the customer. "You can lock media in a vault, and have zero monetization," he says. "Or the reverse extreme." Entertainment distributors need to learn from the example of the music business and not fight the consumer - an attitude that creates an even greater incentive for piracy, White says.

Digital and physical media will survive side by side because consumers access entertainment for a variety of purposes, says John Barrett, director of research with Parks Associates. Watching broadcast TV, they are often tied to specific times for viewing (notwithstanding the popularity of TiVo and similar recording systems). DVDs are watched at times chosen by the consumer. Barrett says viewers watch with differing levels of attention, depending on their choice of platform. The challenge for providers is to fill in all of the possible gaps, from traditional DVDs to content that will be viewed on laptops, airplanes, MP3 players and cellphones. Each calls for a different level of quality.

Kiosk services such as Redbox are breathing new life into DVDs, with top titles made readily available at multiple locations for an extremely low price. In fact, says Barrett, Redbox is proving more of a threat to traditional retail rental and sales outlets than electronic channels. "One of the things we're learning," he adds, "is that DVDs have a lot of staying power."

The Problem of Standards

The biggest issues confronting entertainment supply chains are essentially invisible to the consumer. They center around the issue of production standards, says John Crosier, director of global operations and supply chain with Warner Bros. Digital Distribution. All DVDs sold within a given region are manufactured according to the same standards. "You take one master and press [it] a million times for a DVD," notes Crosier.

The standards for digital files, by contrast, are non-existent; they differ according to platform and provider. "Each partner almost has a unique digital supply chain.... It takes a person to manually create that file and deliver it to each customer," says Crosier.

"Consumers are spoiled by the DVD/Blu-ray experience," says Morgan Fiumi, senior vice president and chief operating officer of Deluxe Digital Studios. "They can play it on any manufactured device, and it will work. The problem with digital is that there are no standards. If I buy a file from an e-tailer, iTunes, Amazon.com or Xbox LIVE, I cannot watch that on any  device."

Similar issues arise further down the chain of distribution. Physical product contains a barcode that is universally accepted by retailers, notes White. In the digital world, the adoption of standards for universal identifiers lags far behind. "There's no industry-accepted equivalent of a FedEx receipt," he says.

Things get even more complicated when a studio or distributor is selling product internationally, he says. Physical DVDs often contain subtitles for multiple languages, a feature that has yet to be matched by many digital files. Yet another reason why digitally accessed entertainment accounts for such a small fraction of revenues today. As Fiumi says: "It's really about the value proposition to the consumer."

Casey of Futuresource sees a long period of co-existence between digital and physical disks. "In five years," she predicts, "packaged media will still totally dominate. In 10 years, it will still be really strong. If you go beyond 15 years, who knows?"

Futuresource hopes to get a clearer picture from a research study that it's currently undertaking in partnership with analysts who track the physical entertainment supply chain, Casey says. Through conversations with disk replicators, distributors, retailers and studios, the firm expects to understand more about the relative economics of digital and physical. It's also looking into the environmental consequences of the two options. In theory, a digital supply chain should have a much smaller carbon footprint, in that it requires no packaging and expends no fuel from physical distribution.

The Challenge of Forecasting

There's one aspect of entertainment supply chains that won't change as they go digital: the difficulty of forecasting demand. Movie studios have a hard enough time deciding which projects to greenlight for production. Now add to that a myriad of options that accompanies a movie beyond its engagement in theaters. It's not unusual for a studio to manage 9,000 ship-to locations in the domestic market alone, says Doug Reinart, vice president of global accounts with Technicolor. A major theatrical release can have as many as 15 SKU variants, including single- and double-disk packages, special editions, director's cut and Blu-ray version. Even local weather can be a factor in retail sales, notes Reinart. Now consider that the lion's share of a DVD's sales occurs in the first few weeks of release, and the margin of error becomes extremely narrow.

In these belt-tightening times, extra inventory isn't the answer. Distributors must have "the ability to read and react within one day's notice to [demand at] any location," says Reinart.

Some of those challenges should be mitigated as the industry shifts the bulk of its sales from physical to digital. But the managers of entertainment supply chains will have to possess expertise in both areas for the foreseeable future. Quinn recalls a memo that he received from his supervisors back in 1983, rejecting an expansion of the studio's rental sales force because of an expectation that the industry would be mostly digital within five to six years.

Industry experts aren't making the same mistake today. "I think there will be a lot of physical goods around for quite some time," he says.

Resource Links:

Deluxe Digital Studios, www.bydeluxe.com
Digital Entertainment Group, www.degonline.org
Futuresource, www.futuresource-consulting.com
Parks Associates, www.parksassociates.com
PricewaterhouseCoopers, www.pwc.com
Technicolor, www.technicolor.com
Warner Bros. Digital Distribution, www.warnerbros.com
Warner Bros. Interactive Entertainment, www.wbie.com