A Window into Film. Industry Perspectives and Insights April Industry: Media & Entertainment Subsector: Movies. Key Metrics:

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1 Industry Perspectives and Insights April 2011 A Window into Film Analysis of the evolution of movie consumption through the lens of search and opportunities for studios to better engage audiences The changes in movie consumption over the past few years have led to an evolution in the way content producers create and distribute content. As a result, we re now seeing an exciting level of experimentation on the part of the studios to streamline theatrical film slates and alter traditional release windows. In home entertainment, studios are contemplating the creation of a new premium VOD window that would make film content available for rent days after its theatrical release. An analysis of search activity supports the viability of a new 60-day window. Strategies to drive the theatrical business have been at play for the past several years, the success of which is evident in movie search activity. Initiatives to streamline films slates as well as invest in proven concepts and franchises have translated into significantly higher searches per movie title and searches per moviegoer. That said, there remains significant opportunity to further engage movie audiences online. Emerging trends in search indicate moviegoers are more deliberate about the movies they consume and use online channels to gather information. We see missed opportunity to capture potential moviegoers. Our analysis indicates that consumers searching for a movie are not necessarily indicating definitive intent to see the movie but rather a desire to gather more information. Studios need to be present with compelling trailers and other desired information at the moment moviegoers indicate purchase intent the moment they search. Industry: Media & Entertainment Subsector: Movies Key Metrics: Query Volume YoY: QTD 2010 Movies 31% 26% Broadcast and Cable 27% 25% Gaming 26% 16% Cable & Satellite 35% 17% Publishing 40% 30% Ad Stats: Movies QTD Avg. CPC (cost per click) $0.35 Avg. CTR (clickthrough rate) 5.3% Top Sector Queries (week of 3/20) Netflix Imdb Charlie Sheen Movies Fandango Natalie Portman Indexed Query Volume: Movies /1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 Analyst Team Debra Schwartz Analyst, Media & Entertainment debraschwartz@google.com 1

2 The changes in movie consumption over the past few years have led to an evolution in the way film producers create and distribute content. The shift was driven largely by the transition from physical to digital in home entertainment. It began four years ago with increased availability of digital content and has been propelled since by the proliferation of Internet-enabled devices. As a result, we re now seeing an exciting level of experimentation on the part of the studios to streamline theatrical film slates and alter traditional release windows. The latest buzz is around the creation of a new premium VOD window that would make film content available for rent days after its theatrical release. This builds on the notion of compressing the theatrical to DVD window and releasing VOD titles day and date with DVD that was highly publicized last year. The theory behind these initiatives, as we understand it, is to develop an incremental revenue stream that would build on the marketing investment and buzz developed in the theatrical window without cannibalizing box office receipts. Inherent in this debate are many variables including appropriate pricing of a new premium product, the likelihood to cannibalize the theatrical window, and piracy considerations, among others. We won t attempt to address the economics behind many of these questions, but rather offer perspective into this debate by offering insights we glean from search activity throughout the lifecycle of a film. We analyze search behavior as it is a strong barometer of awareness and intent and oftentimes represents a point of decision. In this report we: 1) Analyze the evolution of home entertainment consumption, and assess new initiatives including premium DVD windows through the lens of search. 2) Illustrate the impact of studios streamlining theatrical film slates and investing in franchises on search, and highlight recent changes in moviegoer search behavior. 3) Identify opportunities and propose solutions for studios to further engage their audience. Search Interest in Home Entertainment The film industry is at an inflection point driven largely by changes in consumption patterns (physical to digital) in home entertainment. Given the strong profitability of the home entertainment window, disruption at this phase reverberates through the lifecycle of a film. Search patterns in home entertainment confirm the widely recognized shift toward digital movie consumption. A more interesting insight we garner from this search data is that consumers continue to have a strong desire to consume film content in the home post its theatrical run. While the physical DVD sell-through market began its decline in 2007, search activity for DVD terms increased significantly through The shift in online behavior driven by the increased ability to buy and research DVDs via the Internet compensated for the decreased desire to own physical DVDs. The result was strong growth in search activity for terms including DVDs, new movies on DVD, new DVD releases, among related other generic DVD terms. Query volume for this bucket of terms peaked in the 2008 holiday season. Similarly, piracy became evident in search behavior beginning in 2008; terms including free movies, movie torrent, and free movies online grew significantly. In 2010, search activity for DVD terms remained high, but was off 45% from its peak while searches for pirated content terms have fallen to low levels. The strongest home entertainment query growth is currently in more navigational terms like Netflix and to a lesser degree, Redbox. Query volume for Netflix hit a new peak in February 2011 after 90%+ growth in both 2009 and 2010, as illustrated in Figure 1 below. Even though Netflix receives home video content with a delayed window from a film s DVD release, search activity suggests that consumers interested in knowing what s available in home video are shifting from searching for terms like new releases to the brand term Netflix. Has Netflix become synonymous with home video the way Band-Aid has for bandages? Figure 1: Query Trends: Generic DVD Terms vs. Netflix vs. Redbox Present DVD Terms: DVDs Movies on DVD New DVD Releases Top DVD Rentals /1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 Netflix Redbox DVD Terms Free Movie Terms Free Movie Terms: Free Movies Movie Torrent Free Online Movies 2

3 We can t answer that with any level of certainty but we can uncover search trends that indicate increased levels of Netflix usage. Subscriber growth at Netflix has been well publicized 2010 marked a year of continued acceleration in net subscriber additions reaching over 20 million subs at year end. Combining search activity on Netflix with subscriber trends illustrates that Netflix growth is not only a function of adding new subscribers, but existing customers accessing the service more. Queries on Google per each Netflix subscriber grew a strong 40% in Can Premium VOD Mitigate the Netflix Effect? A View Through Search The recent surge in Netflix success is largely driven by its rollout of online streaming. With the robust growth of online video viewing, a viable business model, premium VOD, has emerged for the studios to offset the loss of physical DVD sales to players like Netflix. The potential introduction of premium VOD would require careful consideration along many factors pricing, windowing, and cannibalization / implications to distribution partners would be among the most important. Search activity can shed light into the time period appropriate for the premium VOD window to begin. The alternatives being considered include a 30-day and 60-day window. Our analysis which uses queries as a proxy for interest suggests the 60-day window would be optimal. Figure 2 below illustrates the percentage of box office earned after each week of release as compared to the percentage of searches made on movie title terms. Note: Since movie titles oftentimes generate search volume unrelated to a movie s release (i.e., Alice in Wonderland that has evergreen search interest), we show incremental queries to best isolate the search activity related to the movie. Search activity persists much longer than box office revenue is generated. In the first 30 days of release, 85% of box office has been earned, whereas search activity has only reached 77%. If a premium VOD product is released at this period, there is a strong level of awareness as 23% of searches are yet to occur, but there is also the likelihood of missing 15% of box office revenue or potentially 25% if people at the 3-week mark decide to wait one more week to view the movie in home. At 60 days, the theatrical potential has largely been captured with 97% of receipts earned while search activity is still active. There are millions of searches (6-12% of total) that persist in the days post theatrical release indicating a high enough level of awareness to introduce the movie on a new format without having to fully invest in a new marketing initiative. Figure 2: Cumulative % of Box Office and Queries Earned After Various Periods % of Box Office % Incremental Queries 1 Week 42% 33% 2 Weeks 62% 55% 3 Weeks 75% 68% 30 Days 85% 77% 45 Days 94% 88% 60 Days 97% 94% 75 Days 98% 97% 90 Days 99% 98% Source: Google internal data, boxofficemojo.com, Piper Jaffray equity research December Or Changes in Windowing? Similarly, studios have been experimenting with compressing the windows from a film s theatrical to home video release. In 2004, studios waited 5 months on average to release a title on DVD which has since been condensed to 130 days (average as of 2009). While studios continue to time the home video release of certain titles to coincide with peak purchasing periods such as the December holidays, several have recently been considering tightening windows to allow for reduced advertising spend and more effective sequential marketing in the home video window. The theory posits that buzz and awareness can be better maintained from theatrical to home video with shorter windows. We analyzed search activity between the theatrical and home video release for all film grossing over $50 million in 2009 and We segmented the films into four buckets based on release window: 1) ~ 3 months, 2) 3-4 months, 3) 4-5 months, and 4) 5+ months. Since search activity is one indicator of awareness, we tested whether there was any meaningful difference between the search curves of releases with short versus long windows. 3

4 Figure 3: Indexed Query Volume for Long Window Releases T-4 T-3 T-2 T-1 Theatrical Release T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16 T+17 T+18 T+19 DVD Release T + 21 Figure 3 above illustrates the average search curve of 2010 films with release windows between 4-5 months. Search volume was indexed to peak query levels (typically the week of theatrical release) and the curve aligns each title to its theatrical release date and its DVD release date. Typically, search activity for a film builds prior to premiere, peaks at premiere, and moderates thereafter until a smaller spike builds concurrent with the home video release. Films with a long release window follow that pattern and illustrate search activity falling to pre-theatrical levels 8-10 weeks following the theatrical release. At the DVD release, queries build to 36% of peak volume on average. Searches are active only in the1-2 weeks prior to the home video release. Figure 4: Indexed Query Volume for Long vs. Short Window Releases T-4 T-3 T-2 T-1 Theatrical Release T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16 T+17 T+18 T+19 DVD Release T + 21 Long Window Short Window Short windowed films, including the much talked about Alice in Wonderland, do not materially differ in search activity as illustrated in Figure 4 above. Search activity for short window releases, similar to long releases, is sustained for 8-10 weeks before declining to pre-release levels. DVD search activity also lifts only as high as 33% of peak volume with activity beginning 1-2 weeks prior to the DVD release. Since search activity trails off at the 10 week mark, a new VOD window at 8 weeks would more effectively capitalize on awareness than windows at 12 weeks. Figure 5 below further illustrates the minimal impact compressed windows have on search activity by comparing query volume and DVD performance of specific films with comparable box office and staggered windowing. We include an analysis of both tentpole and average grossing films. Tentpoles: Both Alice in Wonderland and Iron Man 2 grossed over $300 million in the domestic box office. The DVD for Alice in Wonderland was released with a short window (88 days) while Iron Man 2 had a longer period for release (144 days). In both cases, query volume 10 weeks after the theatrical release declined to pre-theatrical levels, a modest 10% of peak query volume. DVD sales were higher for Iron Man 2, the longer windowed film, in its opening week and in aggregate. Non-Tentpoles: Similar trends exist with more modest releases we compare The Town grossing $92 million in box office to Date Night at $99 million. The Town was released on DVD with a short window and saw query volume decline to 10% of peak volume prior to its $6.1 million opening DVD release. Date Night had a longer release window yet held search interest strong between the theatrical and DVD release. The DVD opened with $10.6 million in sales. Figure 5: Query and Sales Trends for Select Long vs. Short Windowed Titles Tentpole Box Office $90-100mm $ in millions Alice in Wonderland Iron Man 2 The Town Date Night Box Office $334 $312 $92 $99 Theatrical Release 3/5/10 5/7/10 9/19/10 4/9/10 DVD Release 6/1/10 9/28/10 12/17/10 8/10/10 Window (days) DVD Opening Sales $35.4 $61.3 $6.1 $10.6 DVD Opening Units in millions DVD Total Sales $75.3 $118.6 $28.7 $23.9 % of Peak Queries at: Theatrical Release Theatrical + 5 weeks Theatrical + 10 weeks DVD Release Source: imdb.com, thenumbers.com, Google internal data. Theatrical Successes Evident in Search Data The home entertainment section of this paper illustrates how early stage we are in the home video transition. As such, new initiatives haven t yet fully materialized in search activity. In contrast, strategies 4

5 to streamline the theatrical business have been at play longer and have had a much more pronounced impact on search activity and revenue performance. As a result of the challenges in home entertainment, box office has become an increasingly large proportion of consumers movie spend. Box office increased to $10.6 billion in 2010 versus $9.6 billion in 2009 and has generally been on an upward trajectory over the past ten years. One strategy studios have employed to maximize box office potential has been to be more selective in choosing film slates. Reducing clutter and investing more in each release has positively impacted the profit profile of release slates. Box office per film grew at a 15% CAGR over the past two years and 9 films grossed over $200 million in 2010 versus 6 in The success of streamlining films slates has not only translated into higher revenue per film, but also stronger online engagement prior to release. In analyzing search activity on movie title terms for all movies grossing over $50 million, we see that queries per moviegoer increased at a 17% CAGR from 2008 to Digging deeper into search behavior across the varied tiers of films brings to the forefront several noteworthy trends as to how moviegoers search for films and subsequently convert / buy a movie ticket. Figure 6 below illustrates per film performance in sales and searches across two buckets of films box office > $100 million and box office between $ million. Top tier films Search trends for films grossing over $100 million are encouraging. Moviegoers searched 1.75X more per film in 2010 than in While comparable numbers of moviegoers attended each film on average between 2008 and 2010, they have demonstrated significantly higher online engagement prior to purchasing a ticket. Searches per moviegoer have been quite strong, in fact, growth has been increasing at a faster rate (6 percentage point spread) than Google s total search activity. This trend in film search activity indicates that consumers are more deliberate about the movies they consume and increasingly use online channels to gather information to make the purchase decision. We can assert that studios have been successful in making trailers, cast information, and reviews available to engage audiences and encourage repeat searching. It also, however, points to missed opportunities to capture potential moviegoers. According to Compete, consumers search for 2 titles on average when deciding to see a movie. Since moviegoers are searching more, and they are searching for multiple films when they do search, it is likely that a portion of the query growth represents people searching but not converting. Mid tier films Films in the $ million bucket have seen box office per film increase to $78 million in 2010 from $73 million in 08. Search activity per moviegoer, however, has stayed at the same level over the two year period. In addition to the lack of growth, it is also noteworthy that queries per moviegoer are higher for this bucket of films than the tentpoles. Consumers are indicating a high level of interest in these films, but are converting at a lower rate. There is significant opportunity to improve box office for mid tier films by better engaging these searchers. Figure 6: Box Office and Search Performance per Film BOX OFFICE GROSS > $100 mm $50-$100 mm $ in millions # Films Avg box office per film $189 $168 $78 $73 Avg ticket price $7.89 $7.18 $7.89 $7.18 Avg moviegoers per film* Queries per moviegoer * Moviegoers in millions The Value of Franchises as Seen Through Search Along with streamlining film slates, studios have upped the ante on franchise films. Consumer demand for entertainment goods is unpredictable which makes creating hits difficult. To mitigate the volatility of the film business, studios have increasingly been investing in proven concepts or franchises. Figure 7 below shows average query volume for all franchise titles and new movie titles for 2010 and There are several noteworthy trends: 1) Query volume at premiere for franchises is massive franchise titles earned 2.25X the searches of new titles during premiere week. 5

6 2) Pre-premiere query volume for franchise titles was 5.4X new titles in 2010 in the six weeks prior to premiere. 3) Chase period query volume for franchise titles was 1.75X new titles in 2010 in the 4 weeks after premiere. Franchise title query volume in both the awareness and chase periods is significant. To frame the magnitude of query activity for franchise titles, we can highlight that volume for franchise titles in the awareness and chase periods equals the peak (premiere) level of many new titles. Figure 7: Average Query Volume: All Franchise Titles vs. New Titles 2010 vs Figure 8: Iron Man Franchise Query Volume: Iron Man Franchise: Box office opening: 2008: $102 million 2010: $128 million Iron Man 2: 2010 Iron Man: 2008 Avg. New Title Franchise Franchise New Title New Title Strong Search Activity Completes the Recipe for a Successful Franchise There are many elements that make for a successful franchise compelling characters and storyline, among others. When those elements resonate with audiences, franchise potential exists. We can illustrate the makings of a strong franchise through search activity post release. The 2008 release of Iron Man followed a fairly typical search curve prior to release as illustrated by the red curve in Figure 8 below. However, search activity post release was significantly stronger than average films. On average, query volume declines 28% for title terms the week after premiere. Iron Man searches performed significantly better, declining a modest 6% in week 1 and demonstrating a high relative volume of queries through the following 7 weeks. The 2010 sequel release saw 2.5X the search activity in the 5-8 weeks prior to release. Iron Man 2 opened with $128 million and grossed $312 million in total. Engaging Audiences Beyond the Movie Category and Broadening Relationships with Each Title Consumers with a moderate level of awareness of new movie releases oftentimes search for terms like movies, new movie releases, and new trailers, among others. Despite movie attendance declining over the past several years, the bucket of generic movie search terms has grown significantly (22% CAGR) from 2006 to 2009 as shown in Figure 9. Figure 9: Query Volume: Generic Movie Terms Terms: Movie New Movies Movie Showtimes New Trailers That said, growth in generic movie searches has hit a plateau. In 2010, we saw a 3% decline in this query basket. Shift to Trailer Searches CAGR: 22% The increase in searches for trailers helps explain the slowdown in generic movie term searches. In 2010, searches for trailers of specific movies (i.e., Iron Man trailer ) grew 51% as shown weekly in Figure 10 below. Consumers are indicating less interest in learning which new movies are available but rather are seeking out specific trailers that have 6

7 generated buzz. They are gathering more information online prior to purchasing a movie ticket. The increase in search volume on brand trailer terms equates to 2.4x the decrease in volume of generic movie terms. Figure 10: Average Brand Trailer Searches per Film: 2010 vs T-23 T-22 T-21 T-20 T-19 T-18 T-17 T-16 T-15 T-14 T-13 T-12 T-11 T-10 T-9 T-8 T-7 T-6 T-5 T-4 T-3 T-2 T-1 Premiere T+1 T+2 This trend is further highlighted when considering search activity on YouTube, a go-to destination for trailer viewing. While searches for generic movie and trailer terms declined on Google search in 2010, they grew 27% on YouTube. Since YouTube is a platform for video viewing, the intent of these searchers is likely to view trailers and movie clips. The shift of generic searches to YouTube indicates more deliberate intent by moviegoers. YouTube now represents 15% of the search volume for generic movie terms across Google s search properties versus 11% in Note: Brand and title searches on Google continue to see robust growth, the decline we discuss in this analysis was limited to generic movie terms. Figure 11: Search Volume: Generic Movie Terms - YouTube Generic Movie Terms: Movies New Movies Trailers New Movie Trailers In analyzing YouTube search activity, we can demonstrate the increased amount of information moviegoers seek out. Example: Black Swan: The trailer for Black Swan earned 16 million views on YouTube. 40% of the video views were generated through YouTube search while 10% of views were derived from related videos. Specifically, consumers who viewed trailers including The King s Speech and 127 Hours went directly to watch the trailer for Black Swan. Consumers searching for a movie are not necessarily indicating definitive intent to see the movie but rather a desire to gather more information about a specific title and potentially related titles as well. Figure 12: Discovery Sources for YouTube Trailer: Black Swan Source: YouTube Insights. Extending the Movie Decision Making Process Not only are people increasingly viewing trailers to make informed moviegoing decisions, they are also seeking out movie information earlier. Searches for film title terms in the 8 weeks prior to release were up 54%. The growth in weekly search activity is illustrated in Figure 13 below. Figure 13: Pre-premiere Query Volume: 2010 vs Similar to Google, searches on YouTube for specific titles are substantial and continue to grow. In 2010, 21% of movie title searches across Google and YouTube were generated on YouTube. T-8 T-7 T-6 T-5 T-4 T-3 T-2 T

8 Conclusion and Recommendations Changes in media consumption have led to an evolution in the way studios produce and distribute content. The transition in theatrical is well underway as studios have successfully streamlined films slates and focused investment on high quality, proven concepts. As a result, not only has box office performance improved, but also online engagement as measured by searches per moviegoer has grown significantly in That said, there remains significant opportunity to further engage movie audiences online. Since moviegoers are becoming more deliberate about the movies they consume and are increasingly using online channels to gather information, we see significant opportunity to capture additional moviegoers. Consumers searching for a movie are not necessarily indicating definitive intent to see the movie but rather a desire to gather more information. Studios therefore need to be present with compelling trailers and other desired information at the moment moviegoers indicate purchase intent the moment they search. The evolution in home entertainment is much more nascent. Studios are contemplating the creation of a new premium VOD window that would make film content available for rent days after its theatrical release. Our analysis of search activity supports the viability of a new 60-day window. Given the importance of search as a continuously tracked metric representing consumer awareness and intent as well as sea changes in the industry, Google offers a free tool called Insights for Search through which studios can monitor search activity. Go to: Figure 14: Screenshot Insights for Search Insights for Search shows relative query volume over various periods of time for search terms you select. The screenshot in Figure 14 compares search activity for the terms Movies, Harry Potter, and Netflix illustrating relative volume and differences in query patterns. Similarly, the tool provides insights into top related searches and rising searches (searches that are growing the fastest). Moviegoers tell us what they want when they search. Insights for Search is one more way to listen. 8

9 Appendix: Movie Search Trends Query Volume: Entertainment Category: Present Google Query Volume: Generic Movie Terms: Present /1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 Query Volume: Home Entertainment Terms 2007 Present YouTube Query Volume: Generic Movie Terms: Present /1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 Netflix Redbox DVD Terms Query Volume: Free Movie (Piracy) Terms Present Query Volume: Movie Title Terms 2010 vs /1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/