Product Features, Physical Distribution Networks, and Effects of Digital Channel Introduction: Evidence from the Korean Movie Market

Abstract

Our research considers how the introduction of a new digital channel impacts physical sales for movies. While many studies in the Information Systems literature have explored the consequences of digital channel introduction, they have typically done so in contexts where channel choice is relatively independent from the consumers’ ultimate consumption experience. However, in several important industries, including motion pictures, health care, and higher education, important distinctions exist that raise unique questions for the choice of whether and when to introduce a digital channel. First, in these industries purchase via physical versus digital channels may have stark implications for the quality of the consumption experience. Second, physical distribution, often depends upon third-party stakeholders (e.g., movie-theater chains, health care networks, or faculty), who may be resistant to a new digital channel. Bearing these distinctions in mind, in this work, we seek to extend the literature on digital channel introduction by considering the following questions: First, to what extent do digital in-home releases during the theatrical window impact box-office revenue? Second, to what extent do any such effects vary with the extent to which a particular movie is crafted with a theatrical experience in mind? Third, to what extent do theater owners seek to shift supply in the physical channel, in response to a digital release?

We address these questions using data from South Korea, where, for a number of years, studios have pursued an early digital release of many movies via an offering known as Super Premium (SP) Video-on-Demand (VOD). SPVOD was introduced in South Korea in 2012 and was adopted by every major movie studio in Korea by the end of 2018. Whereas traditional (non-SP) digital releases typically occur 90 days after the initial theatrical release, SP releases occur as early as four weeks after a theatrical premiere—while the movie is still being shown in theaters.

We employ a difference-in-differences design, contrasting SP versus non-SP Korean movies across the box-office window, before versus after SP release. We find a statistically and economically insignificant decline in average theatrical revenue following SP release. That said, the average effects mask heterogeneity, as we observe significantly differing effects depending on the nature of film production, with significantly small theatrical losses among films that include features that enhance the theatrical experience (i.e., advanced sound technologies). We also provide evidence that, given sufficient lead time, theater owners respond to a looming digital channel introduction by cutting supply in the physical channel in anticipation of lost demand. Finally, we provide evidence that the early digital release leads to a statistically significant rise in the volume of high quality piracy sources, implying a negative externality for movie demand in other geographies. This last aspect highlights another novel consideration of digital channel introduction that arises with information goods. We discuss the implications of our various findings for the literature on digital channels, as well as the literature on digital movie sales.

Keywords: Movies, release windows, piracy, regulation, digital distribution, motion picture industry, natural experiment