0. UK Digital Discussion
July, 2011

1. Executive Summary – Industry Trends
As consumer behavior shifts and digital consumption increases, the windowing concept remains
Existing windowed distribution models are expected to remain in place, as titles are monetized most strongly initially in sale and rental, and thereafter sold in exclusive packages that support channel or online distributor brands for subscription and ad-supported models
However, new windows and business models are being added
For Hollywood studios, each existing consumer business model is expected to have an analogous digital component (eg – ad-supported, subscription and transactions, both rental and sale)
New windows for VOD, and potentially EST, are being introduced to driver higher value
The margins for these new models vary widely
In this landscape, studios seek to emphasize and drive adoption of higher margin digital models
Privileged and Confidential For Discussion Purposes

2. Executive Summary – Digital Marketplace and a Way Forward
The UK market, similar to the US, is in the early stages of developing a vibrant, legal digital marketplace
Globally, digital transactional revenues already represent in excess of 25% of the home entertainment business contribution, and this number is expected to increase rapidly
The UK marketplace today physically is characterized by a higher than normal mix of sales to rental for films, and the early indicators online generally support digital ownership as a viable product
Challenges in driving the sale of digital product today are four-fold
Encouraging consumers to own content, rather than rent or steal
Improving the digital product proposition
Driving the speed of adoption and movement of product online while managing incumbent businesses
Addressing bandwidth and infrastructure issues
Ensuring a viable marketplace for digital downloads will require
Making the product digitally available at the right price, both SD and HD
Ensuring that incumbent players do not inhibit the development of the digital marketplace
Managing piracy appropriately
Supporting infrastructure development
Privileged and Confidential For Discussion Purposes

3. Privileged and Confidential For Discussion Purposes
Agenda
Background – Industry Trends
Consumer views on digital
Current status and challenges to digital adoption
Driving further adoption
Privileged and Confidential For Discussion Purposes

4. 4/20/2017
Traditional windows
From CY1998 to CY2005, the industry’s window structure was generally stable, generating strong profits for studios during the growth period of the DVD market
0 Days
+60 Days
+90 Days
+120 Days
+180 Days
+1 year
Theatrical
Hotel &
Airline
DVD Sell-Through & Rental
PPV /
VOD
Pay TV
Pay TV
Broadcast 4

5. Introduction of subscription/kiosk rental and EST
4/20/2017
Introduction of subscription/kiosk rental and EST
Since 2005, subscription (Netflix) and kiosk (Redbox) rentals have come to market; combined with the economic downturn, these have eroded home video profits
Electronic sell-through (EST) offers attractive margins; however, its growth has been slow relative to Netflix and Redbox
0 Days
+60 Days
+90 Days
+120 Days
+180 Days
+1 year
Theatrical
Hotel &
Airline
DVD Sell-through and Brick & Mortar Rental
EST (Non-HBO Studios)
EST (HBO Studios)
EST (HBO Studios)
PPV /
VOD
Pay TV
Broadcast
Subscription Rental
Kiosk Rental 5

6. Changes to traditional windows
4/20/2017
Changes to traditional windows
Day-and-Date PPV/VOD: Titles released on VOD day-and-date with DVD street date
Subscription/Kiosk Rental: Potential to delay films to 28 days after DVD street date
Premium Home Theater: High priced, HD PPV/VOD product offered before DVD street date and traditional VOD
0 Days
+60 Days
+90 Days
+120 Days
+180 Days
+1 year
Theatrical
Hotel &
Airline
DVD Sell-through and Brick & Mortar Rental
EST (Non-HBO Studios)
EST (HBO Studios)
EST (HBO Studios)
PPV /
VOD
Pay TV
Broadcast
Day & Date
+45Days
Subscription Rental
Potential
Delay
Home
Theater
Kiosk Rental 6

7. Home Entertainment Market Impact of Business Model Mix
New models have widely varying margins; success requires emphasizing and driving adoption of the “right” offerings
$ Contribution to Studios per Transaction by Business Model (Industry Average)
Digital
Digital
Rental
Sell-Through
(1)
Source: Screen Digest, FutureSource, Morgan Stanley
Notes: SPHE margins generally in-line with industry averages with exception of Redbox where SPHE margin is ~$1.10 vs. industry kiosk average of $0.95
(1) Brick and mortar (B&M) margin represents a weighted average of traditional DVD and Blu-ray rental margins. Weighting based on number of total domestic 2009 rental units consumed by format (i.e., 95% traditional DVD, 5% Blu-ray) per Morgan Stanley 7 7 7 7

8. 10 Year Ultimate Gross Contribution by Window for FY10 Slate
10 Year Gross Contribution1, by Window
FY10 Theatrical Releases
$1.3 B (39%)
$0.01 B (0%)
$0.9 B (26%)
$1.2 B (35%)
= $3.4 B
Can this be made generic to industry?
And what’s the tag line? Digital is still small?
% of Gross Contribution
6 weeks
2 wks
2 wks
6 wks
16 weeks
Theatrical + 32 weeks thru Yr 10
Exhibition
In Home Transactions2
Multiple Business Models
Notes: 1. Before marketing, amortization, and overhead
2. Except for Netflix (subscription model)
3. 71% of physical contribution occurs in the In-Home Transactional window
PRIVILEGED AND CONFIDENTIAL

9. Marketplace today: Consumer prices, Mix of transactions. US vs UK
Wave 3,
How many times did you watch…?
SPHE 2005 A&U, SPHE 2011 A&U
Note: Data based on New Release buying occasion in the last 6 months. 9

10. Privileged and Confidential For Discussion Purposes
Agenda
Background – Industry Trends
Consumer views on digital
Current status and challenges to digital adoption
Driving further adoption
Privileged and Confidential For Discussion Purposes

11. Summary of Consumer Behavior
Do we need a lead-in or wrap-up on this section that explains the main points and tees –up both the challenges and solutions we’re about to outline?
Is it meant to say:
Ownership still viable for multiple views
Online demand is growing
But increasing online demand requires:
Increased connectivity
Increased storage
A better understanding of the cloud
Wave 3,
How many times did you watch…?
SPHE 2005 A&U, SPHE 2011 A&U
Note: Data based on New Release buying occasion in the last 6 months. 11

12. Watched Movie Bought – Yes/No
Inherent viewing behaviors with purchased physical discs continue to support ownership of content as a means to enabling multiple title views
Watched Movie Bought – Yes/No
2005 A&U
2011 A&U
Avg. # of times Watched
Wave 3,
3.7
3.0
2005 A&U
2011 A&U
How many times did you watch…?
SPHE 2005 A&U, SPHE 2011 A&U
Note: Data based on New Release buying occasion in the last 6 months. 12

13. Average hours of Movies watched Share of Movies Watched
Hours watching movies is up in Online’s share nearly triples YoY.
Average hours of Movies watched
12.0
16.1
Share of Movies Watched
Subscription Streaming: (10%)
Free Online (not including subscription svcs): (9%)
EST/Digital Rental Online: (5%)
Base: Total HE respondents (2010 = 1976; 2011 = 2073)
W4. On average, how many hours per week do you spend watching movies at home in each of the following ways?

14. Consumer acceptance of digital content continues to increase
Consumer acceptance of digital content continues to increase. Nearly one in three believe downloading movies will be easier, flexible and convenient within the next year.
Technology and Home Entertainment Attitudes
% ‘Definitely Would Agree’ 6,7 Rating on 7-point scale
2009
2010
2011
Future Scenarios
% Scenario will happen to me
Base: Total HE Respondents = 1998; 2010 = 1976; = 2073;
A1. Now we have some questions about your general technology and home entertainment attitudes and behaviors. PA7. Listed below are some possible future scenarios in home entertainment. Please indicate when, if ever, each scenario might happen for you.

15. Motivators to purchase movies digitally
Improving value, connectivity and storage are top motivators to drive digital sales.
Motivators to purchase movies digitally
Top Mentions
Base: DV7 – Have not streamed/downloaded movie or TV show in past 6 months = 705; EST9 - Purchased movie digitally in past 6 months = 269.
DV7. On another subject, earlier you said that you have not downloaded or streamed a movie/TV show in the past 6 months. Which, if any, of the following would encourage you purchase movies digitally?; EST9.  Earlier you said that you purchased (INSERT MOVIE AMOUNT FROM DV1_1) movies digitally in the past 6 months.  Which, if any, of the following would encourage you to purchase more movies digitally?

16. Consumers Under 35 are Most Interested in Moving Content to ‘The Cloud’ – Movies and TV Shows Among Top Items
Content interested in storing in Cloud among General Population….
Personal photos
50%
Personal
49%
Full length movies
TV shows
47%
Documents for work/school
45%
Business/school
39%
Video games
38%
Home security settings/controls
33%
Source: GfK Custom Research North America: March 2011
Q.5 How interested would you be in storing each of the following types of content online and then accessing it through some type of Cloud-Based service? Base: 1,000

17. Only 9% of Consumers Completely Understand ‘The Cloud’17
Source: GfK Custom Research North America: March 2011
Q.3 Before today, were you aware of the Cloud?
Q.4 How well do you feel you understand the idea of the Cloud?
Base (1,000)

18. Privileged and Confidential For Discussion Purposes
Agenda
Background – Industry Trends
Consumer views on digital
Current status and challenges to digital adoption
Driving further adoption
Privileged and Confidential For Discussion Purposes

19. UK mix slide own vs rent, maybe relative to other countries
Wave 3,
How many times did you watch…?
SPHE 2005 A&U, SPHE 2011 A&U
Note: Data based on New Release buying occasion in the last 6 months. 19

20. Challenges in driving the sale of digital product today are four-fold
Encouraging consumers to own content, when the online sale offer exists immediately adjacent to lower priced rental offers, and with subscription and ad-supported catalog content a click away. Illegal alternatives to new release and catalog product continue to evolve
Improving the digital product proposition, especially for ownership, and ensuring that consumers understand the potential benefits of remote storage and access relative to the existing DVD/Bluray product
Driving the speed of adoption and movement of product online, as traditional distributors (eg – retailers, pay tv networks) fight to defend their existing businesses. Sample pay tv contractual holdbacks include.
No VOD during pay tv window
Cap on EST transactions allowed during pay tv window
Floor for prices for EST during and ahead of pay tv window
Addressing bandwidth and infrastructure issues
Tiered pricing and usage caps
Investment necessary to support online video
Privileged and Confidential For Discussion Purposes

21. Retail and pirate offers
Apple page – sale next to rental
Pirate page – showing lots of new releases
Privileged and Confidential For Discussion Purposes

22. First legal US in-home availability
Is there a simpler way to illustrate piracy?

23. Incumbent page – Transitioning to digital is challenging…
Retailer pressures on online sales
PayTV channel pressures
Privileged and Confidential For Discussion Purposes

24. Privileged and Confidential For Discussion Purposes
Infrastructure page
Limitations today
Connected TVs
Bandwidth
Consumer pressures from tiering and caps on usage
etc
Privileged and Confidential For Discussion Purposes

25. Privileged and Confidential For Discussion Purposes
Agenda
Background – Industry Trends
Consumer views on digital
Current status and challenges to digital adoption
Driving further adoption
Privileged and Confidential For Discussion Purposes

26. Ensuring a viable marketplace for digital downloads will require
Making the product digitally available at the right price, for rental and sale.
HD product availability is especially critical
Day/date
Catalog product
Improving the digital ownership proposition, leveraging technologies such as cloud storage
Ultraviolet points
Ensuring that incumbent players do not overly inhibit the development of the digital marketplace
Managing piracy appropriately
Supporting infrastructure investments and development
Privileged and Confidential For Discussion Purposes

27. Consumers would buy more digital movies if they were about 20% cheaper
Consumers would buy more digital movies if they were about 20% cheaper. HD helps to enhance the value for NR and Catalog.
Digital Movie Pricing
New Release
Standard Definition
High
Definition
Catalog
Standard Definition
High
Definition
Base: EST10/EST11 – Purchased Digital Movie in Past 6 Months = 269.
EST10. How much do you usually pay for each of the following types of digital movie purchases?
EST11. What price would be attractive enough for you to buy significantly more of the following types of digital movies?

28. In SPE’s own testing in the US, the ownership performance for titles with a wholesale discount in the first 2 weeks grew 50% compared to full-price titles
November 2010 – February 2011 Full Price Titles
Box Office Factor of Day-and-Date SPHE Titles (Nov 2010 – June 2011) in first 2 weeks from street date
+99%
Full Price Titles (4) Nov-Feb 2011
Can we make this more generic?
Discounted Titles (8) March-June 2011
March 2011 – June 2011 Discounted Titles
Box Office Factor
+50%
Note: Box Office Factor (BOF) defined as unit sales divided by box office multiplied by 100,000
Source: Sony Pictures Home Entertainment 28

29. Privileged and Confidential For Discussion Purposes
UV slide
Ultraviolet benefits and consumer info
Privileged and Confidential For Discussion Purposes

30. Privileged and Confidential For Discussion Purposes
Conclusion
The market is in a challenging point of its evolution
Consumers still coming up to speed on possibilities online
Actions by incumbents impacting strength of online alternatives
Infrastructure still developing
Piracy
Opportunities exist to drive online transactions
Right pricing vs rental, and other alternatives (including piracy)
HD product offers
Day/date availabilty
Robust amount of catalog product
Ultraviolet and other cloud storage services
Appropriate policies with respect to piracy and illegal alternatives
Studios, service providers and the government will need to work together to make a valuable digital marketplace a reality
Privileged and Confidential For Discussion Purposes

31. Privileged and Confidential For Discussion Purposes
BACK-UP / ALTERNATIVE SLIDES BEYOND THIS PAGE
Privileged and Confidential For Discussion Purposes

32. Maybe economics slide – bars. Value by product timing
Maybe economics slide – bars. Value by product timing. Value digital vs physical? See next few, ideas…
Wave 3,
How many times did you watch…?
SPHE 2005 A&U, SPHE 2011 A&U
Note: Data based on New Release buying occasion in the last 6 months. 32

33. Studio marketing drives title contribution
Typical Title: % Gross Contribution by Week
Years 1-3 Post Theatrical Release
Studio Marketing
% Gross Contribution
Weeks
0-6:
Exhibition
Weeks
6-16:
Piracy
Weeks 16-32:
In Home Transactions
Week 32-Year 3*:
Multiple Models
*Note: Only weeks 1-75 are shown; assumes weekly contributions remain constant from week 75+
PRIVILEGED AND CONFIDENTIAL
page 33

34. Consumer paid transactional window value is supported by high contribution per view
SPE Gross Profit per Customer Transaction
Title is the star, consumers are selecting individual titles, not aggregated service brands
60-100% of consumer spend to studio, vs % for branded services
Behaviors are both impulse and marketing driven
Convert rental to sell thru
SPE Gross Profit Home Entertainment Equivalent View
Convert physical rental to VOD
Customer View: Does not reflect aggregate value of wholesale deals
Source: SPHE Internal Estimates
PRIVILEGED AND CONFIDENTIAL