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Hollywood changes its distribution model-but only in Korea for now

Wednesday, October 15, 2008

Warner Brothers Entertainment will release its films online in South Korea before they are released in the country on DVD, in a major break from the established Hollywood distribution model which could lead to a big increase in movie downloads. The film studio, which is part of Time Warner, has targeted South Korea because it has very high broadband penetration. It hopes that releasing films online first will cut down on the very high levels of DVD piracy in South Korea.

Warner Brothers Home Entertainment Group said that Korea used to be a very robust video market but that they have been hit very hard by piracy. Warner hopes to turn the market around and legitimise it by making this change. If the move is successful, Warners will target other countries. In particular, it is considering bringing forward the online release of films in China, potentially the world’s largest home entertainment market.  DVD piracy is rife in China and distribution in the country is expensive and time-consuming.

Warner Bros should reap additional benefits by bringing forward the release of films online. Profit margins on digital rentals and sales are higher than they are with physical DVDs. Revenues from DVD sales and rentals have underpinned the film industry over the past 10 years. DVD sales generate about $12bn a year, while rentals generate $7bn. Studios typically take 20-25 per cent of the money from a rental but if the film is rented in digital form the share is closer to 70 per cent.  The downloading of film and TV content online is forecast to generate about $4bn annually in the next five years, according to Adams Media Research.

The South Korean experiment could have significant repercussions for the US, the largest theatrical and home entertainment market. However, US broadband penetration still lags behind other countries, so it is unlikely that the studios will release films online first in the US for some time yet.