It may not be ready to run just yet, but it looks like digital content distribution is starting to take baby steps towards viability. Don’t get us wrong: Linear broadcast is still the biggest opportunity going, and content owners aren’t getting rich selling digital multi-platform rights. But unlike two years ago when KidScreen first examined the non-linear distribution scene, sustainable business models are emerging for some platforms, broadcasters and program buyers are recognizing distinct rights in some cases, and actual cash has started changing hands.

Kids content owners are also learning when to hold onto certain rights and let go of others in the ongoing struggle to serve two masters, broadcasters and their own bottom lines. And while it’s true that scores of start-ups entering the market and broadcaster experimentation with new media over the past two years has helped get the industry to this point, the space is far from settled. More than a whiff of the unruly Wild West hangs in the digital atmosphere, as players try to stake their claim on every platform being used by the ever-changing target audience. So how are things shaking out across the variants of VOD, mobile, digital downloads and streaming video? Read on for a full report.

Cash money?

Make no mistake, traditional media – your old-school broadcast, film and publishing – still generates the lion’s share of revenue. A recent report from IBM entitled Navigating the Media Divide pegged the category’s value at roughly US$455 billion. However, the same study revealed that the far more dynamic new media channel (including online advertising, mobile content and web gaming) is bringing in US$55 billion and growing at a healthy rate of 23% a year.

In and of itself, this figure is encouraging, but perhaps more meaningful for content owners are the stats being bandied about by Nickelodeon owner Viacom and the House of Mouse. In its most recent quarterly earnings report, Viacom declared it was on target to exceed US$500 in revenue derived from digital sources this fiscal year. Meanwhile, with more than 21 million iTunes downloads and the launch of an ad-supported HD streaming video service under its belt, Disney is projecting it will generate US$1.5 billion from the sector by year’s end.

Strides made by these two behemoths might seem to have few implications for smaller producers at first blush, but the idea that they have started to realize digital revenue may be helping to set standards and put a value on what used to be fairly ephemeral rights. For example, Turner Broadcasting Systems director of digital media for EMEA, Ian McClelland, says digital rights are now firmly on the negotiation agenda. Like most broadcasters, Turner’s Cartoon Network typically bids to secure as many of these rights as possible, but McClelland’s team is now willing to assign a value to them, which might not have been the case two years ago. ‘It was difficult to say what these rights were worth before,’ he says. ‘But now we know what online and interactive games are generating.’ Usually McClelland hammers out terms on a case-by-case basis, but says the deals can encompass any combination of a complete carriage deal, granting a separate license fee for the right, or instituting a revenue-sharing scheme with a minimum guarantee to back it up.

Everyone wants their VOD

Speaking of minimum guarantees (a concept that didn’t figure into digital rights negotiation in 2005), content owners are finding that purveyors of cable VOD are now starting to pay cash up front for content. And looking at the North American market, it’s no wonder. The US appetite for VOD has become voracious. According to VP of content acquisition, Diana Kerekes, Comcast’s more than 14 million digital cable subscribers (up from 9.1 million in ’05) are ordering roughly 250 million VOD views per month (more than doubling ’05 figures). And the service is on track to surpass three billion views this year.

Comcast now manages somewhere between 7,000 and 9,300 VOD assets per month, and Kerekes says kids programming ranks consistently in the top four genres. (PBS Kids Sprout alone generated 15.8 million VOD views in July.) She adds that Comcast’s free VOD library is helping to retain paying digital cable subscribers, so she’s continually on the lookout for content to keep them happy.

Just about every major kids content provider, including Disney, Nick, Cartoon Network, Discovery Kids and 4Kids, has a spot on Comcast VOD, and many are ad-supported. Bill Schultz, CEO of Taffy Entertainment, which launched its own VOD/broadband channel Kabillion earlier this year, says advertising on the platform has almost reached a tipping point as media buyers have been increasingly cottoning on to the benefits of advertising in a clean, uncluttered VOD environment.

The viewer experience is also fully measurable, which should help sell advertisers on the platform’s merits. For example, Taffy has learned that Kabillion’s VOD viewers fast-forward through content less than once per session on average. Similarly, PBS Kids Sprout president and GM Sandy Wax says she doesn’t see a lot of fast-forwarding on the VOD channel, and adds that a recent study conducted by the net found that 68% of parents were watching with their kids.

What it all adds up to is an opportunity to monetize digital content. Not surprisingly, cable TV providers, broadcasters and home video companies are clamoring for VOD rights in the US. Again, no one’s getting rich off of them – per-ep VOD fees ring in at about 25% of a typical broadcast license fee – but Nelvana Enterprises president Doug Murphy says he’s treating VOD pretty much as a core income stream, right alongside broadcast. ‘We don’t do VOD deals unless there’s cash up front now,’ he says. ‘We know what they’re worth.’ And when it comes to dealing with broadcasters, Nelvana gives them two minutes worth of content for web and on-air promotions and holds back the other rights. In a make-or-break situation where Nelvana does hand over VOD rights, Murphy says there must be a value ascribed to them in the license fee.

On the other side of the pond, the VOD market is starting to heat up across Europe, and particularly in the UK. A different market in terms of technology (VOD is often carried through IPTV or digital terrestrial box in Europe, as opposed to traditonal cable) and penetration, VOD is not developing at the same break-neck speed there. However, it is spawning some aggressive players. In the UK, yearling operator BT Vision had established more than 20,000 digital box customers as of May, in a potential universe of 10 million Freeview households.

For BT head of television Kate Dean, acquiring more kids content is a priority. She’s upped her requirements from 400 hours of programming to 600 since the service bowed in December ’06. And besides scouting at Cartoon Forum in Girona for the first time this year, Dean is also getting ready to seek out and pay for exclusive content up front as soon as the service meets its subscription goals. ‘Exclusivity is not really an option for us at the moment,’ Dean says. ‘But we will be looking to do things really quickly.’

But where there’s heat, there’s often fire. And in Europe, Decode Entertainment’s VP of distribution, Dominique Bazay, is finding that broadcasters with non-linear outlets, especially those offering catch-up viewing on their websites, won’t let go of VOD rights now. So she’s made the distinction in her contracts between SVOD (streaming VOD) and regular VOD. Bazay will usually agree to kick in SVOD rights (if the broadcaster has a branded streaming video service), while holding back regular VOD rights for up front payment, like Nelvana.

DIC Entertainment SVP and MD of EMEA Leslie Nelson says, ‘There is a huge demand for VOD rights in EMEA right now, and you have to be prepared to negotiate for them.’ In super-saturated kids territories like France, she’s been approached by commercial broadcasters willing to pay guarantees on the front end to secure exclusives, but admits if top dollar is offered on the regular broadcast license, contention for VOD rights wouldn’t be a deal-breaker.

Mobile makeover

In the case of mobile rights, the geographic ratio is reversed. Europe and Asia were the first regions to host wide-reaching wireless carriers and adopt high-tech 3G phones capable of playing and/or streaming video content, so it’s only natural that mobile rights be in hotter demand overseas than in North America. As with VOD in North America, European mobile carriers and aggregators are doling out advances and guarantees. Barcelona, Spain-based BRB Internacional has had some success in designing short-form content for portable media. ‘We’re not funding 100% of our production budget with mobile deals,’ says head of co-productions and new technologies Carlos Biern. ‘But something like [CGI comedy] The Imp could make more sales on cell phones than on DVD in Europe.’

At Bristol, England-based Aardman Animations, head of sales Alix Wiseman says the mobile market has been particularly open to the toon studio’s funny short-format fare, adding that the platform is now second only to broadcast licenses when it comes to generating revenue. The branded ‘Aardman on the Go’ channel has been picked up by wireless carriers in 40-odd countries, while its older-skewing made-for-mobile series Angry Kid has generated 28 million downloads since its 2000 debut. The key to working in the space, as with many other digital platforms, notes Wiseman, is to keep contract terms as open and non-exclusive as possible.

And while getting a 360-degree content proposition off the ground remains a tough slog (See ‘Multi-platform aspirations meet cold, hard reality’ on page 94), at least one producer has managed to get mobile shorts based on an existing series financed with up front cash from broadcast partners willing to pay for digital extras. Toronto, Canada’s Breakthrough Entertainment is in production on a 44 x one-minute mobile/web series derived from 2-D animated show Captain Flamingo, which currently airs on Jetix Europe and YTV in Canada. The mobisodes present a ‘behind-the-scenes’ perspective on the linear show and should be delivered by early 2008.

At this stage, of course, successes like Breakthrough’s are the exception rather than the rule. And content owners with similar aspirations in North America will likely have to wait to realize them. According to IBM’s recent report The End of Advertising as We Know It, only 7% of 2,400 households surveyed have mobile video content subscriptions. And as for kids, it’s been well-documented that payment mechanisms for such services are problematic. DIC, for one, got in the game early and launched a mobile channel on a US subscription-driven service called SmartPhone. Recalls Nelson, ‘After all the time and work we put into setting it up, we saw the revenues and realized we needed to step back and wait for the market to mature a bit.’ So it’s no wonder content owners aren’t putting up too big a fight for mobile rights in North America. Nelvana’s Murphy even goes as far as saying that wireless is ‘the least interesting right’ in the kids space right now.

Electronic sell-through finished?

For all the fanfare that followed the advent of download-to-own video, the electronic sell-through space is still in its infancy. Services that started up two years ago have begun to fall by the wayside, the most notable being the closure of Google’s Video Store in late August. And even iTunes itself has its share of difficulties when it comes to video downloads, despite controlling roughly 90% of the market. Between January and June 2007, video traffic on the Apple-run site fell by 50%. And according to Dallas, Texas-based digital media research firm Parks Associates, only 20% of video downloaders currently feel compelled to indulge in direct-to-PC grabs.

The reason for this consumer reluctance, some industry pundits have suggested, stems from the fact that users, and families especially, aren’t inclined to sit around a computer monitor and watch a show. And when it comes to kids, they’re so busy watching full streaming episodes on channel sites like TurboNick, which chalked up 106 million streams this past May alone, that paying for programming elsewhere seems redundant.

But all is not lost. Nelvana’s Murphy, who confesses that electronic sell-through has yet ‘to move the needle’ on the revenue front, remains bullish on its future and its ability to support the longtail theory of content ownership. He points to computer giant Hewlett-Packard’s entry into the market with its Video Merchant Services setup as proof that the medium has potential. HP has partnered with Wal-Mart to beta-test the VMS system through which consumers can go to the retailer’s website, choose a video and download it to a portable player using their PC, all the while waiting for the delivery of a DVD (featuring the same content) that was manufactured on-demand. Theoretically, the retailer would then be able to stock countless titles because they’d take up no real physical space in the warehouse, and there’d be no risk that the content provider or publisher would be stuck with massive product returns on titles that didn’t sell. Then again, if it catches on, this may just be another right that sends home entertainment companies, content owners and broadcasters back to square one in negotiations.

Ad-supported streaming video

As previously mentioned, the major kidnets are already active in the ad-supported streaming video space, thanks to their robust and ever-evolving websites that draw kids like flies to honey. However, upstarts including Joost, Veoh and Babelgum are proliferating at a heady pace. In the case of Joost, kid content owners like Aardman and Hasbro have offered up their library fare to create branded channels on the video streaming service. And most offer a revenue-sharing model as compensation to content partners. The problem, notes Andre Burgess, MD of London, England-based consulting firm Crucible Media, is that there just aren’t sufficient metrics to measure consumer usage and help determine the ad rates that will drive revenue for these burgeoning services and make a revenue-share proposition meaningful for content owners.

In fact, activity in this space highlights an overarching problem with digital distribution right now. The proliferation of digital media companies means content owners really need to do their homework and be vigilant in making sure these new entrants can deliver on their promises. Fernando Szew, president and CEO of MarVista Entertainment, says he doesn’t do a deal unless the company in question can provide a credible business plan and demonstrate sales growth. BRB’s Biern, meanwhile, has a host of questions for digital rights cold-callers. ‘I always ask what business they have done lately, what their download numbers are like, where they have marketed the service, and how much they have invested and where,’ he says, adding that if the numbers warrant it, he asks to be paid up front. ‘If they say no, I know the figures are wrong, or they’re just trying to get ahold of whatever library titles they can.’

Due diligence can save time and money. Josette Bonte, VP of digital media at Cookie Jar Entertainment, says she could’ve made 25 new digital deals in her first five months at the company, but wasn’t confident that the potential revenue would defray the cost of preparing the assets and her staff’s time. ‘We’re just not prepared to make deals where we lose money,’ she says. ‘We don’t have to license our content to all the new platforms that are emerging just because they’re there.’