YouTube film service unlikely to be as profitable as iTunes

"The content companies have all their content on iTunes and have shown complete support for the site despite their worries about Apple dominating the market. The studios aren't making the same content available for ad-supported services."

It's just not worth it for the studios to throw their support behind ad-supported sites, according to Tom Adams, one of Hollywood's most-respected researchers and the owner of Adams Media Research, an entertainment industry research and consulting firm.

Last week, in reporting a story as I reported a story about YouTube's plans to build a feature-film service, I asked an executive at a large media company why his company wasn't being more aggressive in posting long-form content to the Web. He told me to talk to Adams and that his company thought his research on the subject was correct. On Monday, Adams told me the paid model is a clear winner over ad-supported.

"The issue comes down to ad-supported versus the paid model," Adams said. "For ad supported, the question is how many ads can you run and how much money can you generate per viewing? That has to be compared with the money made from rental or movie purchases. The content companies have all their content on iTunes and have shown complete support for the site despite their worries about Apple dominating the market. The studios aren't making the same content available for ad-supported services."

YouTube disagrees that ad-supported film sites are at a disadvantage and so does a one high-ranking studio executive, who told me last week that he was convinced long-form video has a place on the Web and was looking forward to having the studio's content in front of YouTube's 80 million monthly visitors.

"We think that content creators will continue to benefit from engaging with the YouTube community, the largest audience for video in the world," said Aaron Zamost, a YouTube spokesman. Representatives from Hulu could not be reached for comment.

Nonetheless, it's easy to spot the differences in the way the studios treat iTunes compared with Hulu or YouTube. For example, Lionsgate has been selling full-length features off iTunes since February 2007. Last summer, the Canadian studio agreed to give YouTube users access to only snippets from its films.

Disney has yet to post films to YouTube or Hulu and Paramount has no films on YouTube and just six on Hulu. Compare that to iTunes, which has inked distribution deals with all the major studios.

Adams tempers his gloomy outlook for ad-supported Web movie services by acknowledging that this is just the beginning of their development. He argues, however, that the services will always be less important to the studios than DVDs or paid services because the public has for the most part rejected films that are interrupted by commercials. His firm expects revenue from Internet film rentals and paid downloads to double this year.

"We have a 30-year history where all of the growth in movie revenues has come from commercial-free options," Adams said. "First came pay TV in the 1970s with HBO, then VHS and then DVD. Consumers have made it clear they will gladly pay up for commercial-free movies. Of course, they consume a ton of movies now on TV, at places like Turner Broadcasting. Our last study we found 15 or 20 cable networks that dedicate a lot of their programming hours to movies and make money. But they generate very little money per viewing (for the studios) as opposed to the $4 rental or $20 DVD sale. That's where you're talking real money per transaction.

"(Ad-supported movies) are a nice revenue stream but it's shrinking," Adams continued. "The networks have gotten rid of movies for the most part. The fact is, consumers love commercial-free films and can get them that way in lots of different forms."

To illustrate the difficulties in advertising to Web users, Adams focused on Hulu.

Hulu, the year-old Web portal formed by NBC Universal and News Corp., has won accolades for offering full-length TV shows and films in high-quality video. In addition to Universal and Fox, the site offers feature films from Sony and Warner Bros and offers hundreds of catalog titles. The site generated splashy headlines this year by announcing that it had sold out of ad inventory. Adams said Hulu likely sold out because it doesn't have that much to offer.

Hulu runs four 30-second commercials every half hour, Adams said. This is about four minutes of ads for every hour. That is four times less than the 16 minutes of commercials typically found on broadcast or cable TV, Adams said

"Maybe the Internet guys can cram some more in there eventually," he said. "But they have a pretty instant feedback loop with their viewers. This is as much as they can push it at this point it looks like. You can tell they are pushing it as far as they can because the CPMs (cost per thousand impressions) for the site are pretty high. This indicates that there is limited inventory...clearly they are finding that adding more ads causes people to click away."

Hulu has disclosed little about ad inventory, user habits or revenue figures other than to say it gets a higher CPM rate than traditional TV broadcasters. But if Hulu is limited in the number of ads it can sell, the site may not be making much money, Adams said.

Even after coming down hard on ad-supported services, Adams says the studios are wise to offer some film content online. He thinks it helps combat piracy by offering films to the niche market who prefer watching films online and this generates incremental revenue he called "found money." So does he think there's a future for Internet movies?

"The key to Web movies is TV connectivity," Adams said. "The Netflix Player (a set-top box from Roku that connects to the Web and streams movies from Netflix) is a value-added proposition. It's kind of the best of the paid model and the ad-supported model. You have to pay for your Netflix subscription but you don't have to inject a lot of ads into the films.

"We think Netflix is on to something."