When Comcast's (NASDAQ:CMCSA) NBCUniversal announced in April that its majority-owned Fandango service would be acquiring a similar platform called Vudu from Walmart (NYSE:WMT), I categorized it as a last chance for transactional video to prove itself. The transactional video-on-demand (or TVOD) market's growth has been lethargic at best, but Comcast, NBC, and Universal are television and movie powerhouses, respectively. If it can be done well, they can do it.
The jury is still out on the true potential of TVOD, but the business model just bought itself some time. With millions of people trapped at home thanks to the coronavirus contagion last quarter, transactional video did surprisingly well.
It didn't do as well as subscription streaming, mind you. That race is still being led by the likes of Netflix (NASDAQ:NFLX), and by a country mile. But, there's a glimmer of hope. The quarter currently underway will serve as the proverbial litmus test for the idea. COVID-19 still has millions of people stuck at home, and in the meantime, a handful of major movie titles have been released in a direct-to-consumer format. More are on the way. Chief among those titles is Universal's controversial Trolls 2, which Universal's chief touted as evidence the film industry doesn't necessarily need movie theaters anymore.
In other words, these unusual circumstances could finally gel TVOD's place -- and growth -- within the streaming arena.
Necessity is the mother of invention
The Digital Entertainment Group crunched the numbers. During the first quarter of 2020, it calculated that digital rentals of individual films and television shows in the United States grew 19.5% to almost $674 million. Digital sales of videos -- where consumers retain perpetual rights to access a video online -- grew 12.6% to more than $749 million. The growth pace accelerates TVOD's otherwise lackluster progress, but for perspective, streaming subscription revenue in the U.S. swelled 24.2% year over year to reach more than $4.5 billion. That's the workhorse of the industry.
Still, think about the timing of the COVID-19 pandemic. It made U.S. landfall in late February, sending an unready film industry scrambling. AMC Theatres (NYSE:AMC) closed all of its doors in mid-March, as did Cinemark Holdings (NYSE:CNK) and Cineworld Group's (OTC:CNNW.F) Regal Cinemas. Those closures effectively wrecked the planned debut dates for all of this spring's films, and Hollywood had no plan B in place.
Comcast's movie arm Universal came up with one pretty quickly, though. Trolls 2 World Tour was offered as a streaming video beginning on April 10, with two days' worth of access sold at a theater-like price of $19.99. The decision effectively bypassed a long-standing norm that gave theaters 90 days' worth of exclusivity. The studio released The Hunt directly to consumers after just a few days in U.S. theaters as well, rather than waiting the usual 90 days before competing over the same title. Universal's Invisible Man and Emma flicks were also only in theaters for a short while before they were closed due to COVID-19, prompting the company to quickly plan their streaming releases, too.
It was Trolls 2 World Tour that ended up being the centerpiece of a war of words between Universal and movie theaters, though. That war was ultimately incited by Universal CEO Jeff Shell's comment to The Wall Street Journal: "The results for Trolls World Tour have exceeded our expectations and demonstrated the viability of PVOD [premium video on demand]."
There's no specific dollar figure yet for Trolls 2 World Tour's total digital box office take. But, multiple sources indicated its digital debut in April racked up nearly $100 million in sales in a matter of days, breaking records in the process. That figure's certainly been bolstered in the meantime.
That figure probably won't be counted in Digital Entertainment Group's second-quarter numbers, for the record, as they exclude premium video-on-demand (PVOD) sales. Trolls 2, The Hunt, and all the other aforementioned movies all technically qualify as PVOD rather than TVOD content, which is usually films that have been fully cycled through theaters and then on to DVDs and/or licensed to subscription streaming services like Netflix. TVOD is still a barometer of interest in PVOD -- they're both transactional -- and there's never been a PVOD market this well-funded in terms of quality and quantity of movies.
A likely turning point
This brings us back to Vudu and Fandango, the latter of which is 70% owned by Comcast's NBCUniversal. The other 30% is owned by AT&T (NYSE:T), which also happens to own a little television and movie studio called Warner Media. Neither company had taken the idea of selling its new films directly to consumers before, because they didn't have to. The theater business may be dying, but it's hardly dead yet.
In some regards though, the coronavirus-related shutdowns have proven the potential of skipping theaters altogether and taking films directly to consumers. It works. Again, Q1's digital rentals and purchases were up 19.5% and 12.6%, respectively, and that was without the record-breaking contribution from Trolls 2 World Tour. Now with a more organized response from studios catering to the COVID-19-minded needs of more informed consumers, transactional video-on-demand has a fighting chance to prove the model is worthy of investment.
Improving this chance is a slate of new direct-to-consumer films from other studios. Aside from Universal's Trolls 2 and The Hunt, Walt Disney (NYSE:DIS) has opted to skip the theatrical release of Artemis Fowl and take it directly to Disney+ in June. AT&T's Warner Media division also took its animated Scoob straight to consumers rather than first routing it through theaters.
And it's worth noting that Scoob, Trolls 2, The Invisible Man, and The Hunt are or will be viewable through Vudu as well as Fandango.
In this light, NBCUniversal's interest in steering Fandango to acquire Vudu makes quite a bit of sense (as does the timing). Fandango and Vudu are the only two major, dedicated transactional video platforms in an entertainment market that's suddenly become very TVOD-friendly. How interested those consumers will remain in transactional video is yet to be seen. But, given the first quarter's growth in digital rentals and purchases without any major movies boosting that progress, Digital Entertainment Group's second-quarter TVOD tallies will speak volumes about how seriously studios should take the idea from here.
Investors would be wise to keep their finger on the pulse of this shift, if only because nobody saw it coming just a few months ago.