Erik Gruenwedel, senior editor Before joining Home Media Magazine in 2003, Gruenwedel was a reporter at Billboard, focusing on the legal issues. During his 15-year print career, Gruenwedel has written for the bicycling, homecare. advertising (Adweek), and spa and poolindustries. He has a degree in journalism from Cal-State Northridge, as well as an MBA from Pepperdine University.
The home entertainment industry appears to be borrowing a page from Netflix’s playbook regarding digital revenue — lauding electronic sellthrough (EST), transactional VOD, and even subscription streaming, as market saviors.
But if you analyze the third-quarter data from DEG: The Digital Entertainment Group, EST and transactional VOD rental collectively (again) lagged packaged media’s $1.45 billion in revenue by a whopping 50%!
Transactional VOD and EST totaled $742 million, with widely heralded digital sellthrough generating a rather modest $274 million in standalone revenue. While EST is up 46% year-over-year and boasts significant margins (compared with disc), does the industry really want to crow about a sector that generated just $29 million more in revenue than the surviving ghosts of Blockbuster did renting discs over the counter? Packaged media sales, which are indeed declining, still generated 80% more in revenue than EST.
To put it another way, $29 million is approximately the amount Netflix CEO Reed Hastings, CCO Ted Sarandos and CFO David Wells collectively earned selling stock options in September. And why? Because SVOD’s $815 million “contribution” to the $1.55 billion in Q3 digital consumer spending is misleading.
SVOD revenue largely went to Netflix, Hulu Plus and Amazon Prime Instant Video — not studios and content holders. Content holders receive license fees from SVOD operators over a multi-year period. In fact, Netflix said a record 5 billion hours of content was streamed by its subscribers during the quarter. That’s a lot of content being consumed for just $7.99 a month. Had those hours been from transactional VOD or EST, the fiscal impact (and relevance) would be exponentially higher.
Indeed, when subtracting SVOD revenue from both the 2012 and 2013 Q3 tallies, this year’s total home entertainment consumer spending actually declined.
Netflix, which continues to turn a cold shoulder and pull back marketing dollars from its high-margin disc rental business, said it does so in order not to confuse an increasingly digital consumer.
Home entertainment would be wise not to emulate; and instead up marketing of packaged media with a few changes.
That’s because transactional VOD, which has been heralded by studios for 10 years as the preferred rental option, grew less than 3% year-over-year, suggesting that the hype surrounding SVOD (and kiosk rental) is undermining the $4.99/$5.99 VOD transaction — and packaged media.
The consumer has been in the throes of an economic recession for more than five years. Low cost (and low margin) entertainment sources such as SVOD and kiosks have gained traction (it’s hard to argue against $7.99 monthly and $1.20 nightly rentals) and improved their content offerings. Home entertainment has become a commodity.
Studios, as a result, do need to heed recent comments from Netflix’s Sarandos criticizing inane release windows that allow theater operators to control distribution of new movies for up to four months after launch. Studios should call theaters’ bluff and release $40 bundled Blu-ray Disc/DVD/digital titles (and $20 DVDs) simultaneously with the theatrical launch. Nearly every home has a DVD or Blu-ray player. Then release to digital channels and kiosks four months later. And let the market decide.
If the theaters refuse to screen movies being released simultaneously at retail (which they will), that’s their right. So is it the right of studios to move their theatrical releases and marketing budgets to home entertainment.
Sarandos says the consumer should have ubiquitous access to content on their terms (without pirating, of course). It’s time studios stop protecting low margin theaters and throw a lifeline to higher margin home entertainment, beginning with packaged media.
Netflix’s indifference towards its pioneering by-mail disc rental business turned another page Oct. 21 when it relegated mention of packaged media to just two sentences (67 words) in the third-quarter investor newsletter.
In the brief paragraph, CEO Reed Hastings and CFO David Wells spent half of it cautioning that the pending first class rate hike by the U.S. Postal Service would add upwards of $4 million in quarterly expenses, beginning in 2014.
Netflix has more than 7 million subscribers who rent discs (and also stream content), contributing an impressive $107 million in operating income on revenue of about $227 million to Netflix’s bottom line. Nonetheless, the segment was eliminated for the first time from the service’s summary fiscal results outlining domestic and international streaming. Disc rental was included in the overall totals with no breakdown of revenue or operating income.
Notably, disc rental's operating margin of more than 47% doubles domestic streaming's 23.7%.
Meanwhile, Netflix’s international segment, which continues to be heralded by management (as well as Hollywood) as the growth opportunity of today and tomorrow, again lost $74 million.
When questioned in the video webcast, Hastings reiterated his typical detached support for by-mail rental, which he said was operating largely as a stand alone business requiring little marketing.
“[The disc rental segment] is doing great work,” Hastings said, adding Netflix was “very excited” about the unit’s breadth of content selection, including availability of Showtime and HBO shows — content, it should be pointed out, is not available anytime soon on streaming.
Then, reality reared its ugly head. In reference to a question about British competitor LoveFilm Instant, the CEO revealed his true POV toward disc. Specifically, Hastings said Netflix clearly had the upper hand on LoveFilm Instant (and Redbox Instant) precisely due to its streaming-centric business model. Public perception of Redbox Instant and LoveFilm Instant, on the other hand, is confusing and bad for business, according to Hastings.
The culprit: discs. He said Netflix purposely does not market its disc rental business so as to minimize confusion among an increasingly streaming-educated consumer.
“The [streaming/disc] brand, fundamentally, is not correct because they can't deliver on that promise, as exciting as it sounds to consumers. So that's a big tension,” Hastings said.
In other words, Netflix’s lucrative disc and hybrid streaming cash cow — which is twice as profitable as domestic streaming — is actually a flaw in the digital world, according to the CEO. That it continues to drive earnings apparently is just an aberration.
CNBC media reporter Julia Boorstin
Netflix named JP Morgan analyst Doug Anmuth to join BTIG Research analyst Richard Greenfield as co-moderators for streaming pioneer’s Oct. 21 third-quarter video fiscal call.
Anmuth replaces CNBC media and entertainment reporter Julia Boorstin, who along with Greenfield, hosted Netflix’s first-ever video call in July.
Netflix spokesperson Joris Evers said the switch was part of the company’s strategy to “keep trying new things.” He didn’t elaborate or indicate why Greenfield is returning and Boorstin isn’t.
From the outset, the streaming video format was typical for a pioneer like Netflix. Analysts and investors submitted questions in advance to Boorstin and Greenfield, who then organized them into theme questions presented to CEO Reed Hastings, CFO David Wells and CCO Ted Sarandos — the latter making his first appearance on a quarterly call.
The format, which represented a break in protocol from the traditional corporate webcast whereby analysts phone in or email questions to the CEO and CFO, generated its share of controversy. Notably, Wedbush Securities analyst Michael Pachter said the moderators would have an unfair advantage controlling the questions that some might consider deferential to Netflix.
Greenfield, in an email prior to the first video call, was adamant he would remain independent prior, during and after the event. And by all accounts he succeeded asking straight forward questions, including the impact “Arrested Development” had on new subscribers, clarification on “basis points,” margins, and related financial queries.
Boorstin, who clearly relished her role and was most at ease in front of the video cam, approached the Q&A as she would an interview with a newsmaker on CNBC — trying to find that one question that would result in a notable sound bite.
Indeed, Boorstin’s began the event questioning Hastings about the alleged controversy surrounding the third-party hosted video format — a query that appeared to irritate the CEO.
“I think we should process that after the interview and let's see if it's productive and useful for investors and see what they think,” Hastings responded.
Then she asked Sarandos how many people watch Netflix originals.
Viewer data, along with price hikes and churn, are subjects Netflix executives like to avoid. Netflix, a while ago stopped reporting churn , opting instead to focus on net adds. Boorstin knew this but asked anyway.
The SVOD service, per policy, also refuses to disclose how many people watch original programming like “House of Cards,” “Arrested Development,” “Hemlock Grove,” and “Orange is the New Black,” among others.
The non-disclosure is a sore spot within the TV industry since broadcast networks live and die by Nielsen ratings. Netflix argues that since it doesn’t have to appease advertising, viewer tallies are immaterial.
Price hikes is another matter. When Netflix in 2011 infamously increased by 60% the price of its popular hybrid streaming/disc rental plan, subscribers jettisoned in droves, the media pounced, and Hastings was left offering confusing explanations that sent the stock into a tailspin and had many questioning his leadership.
Undeterred, Boorstin again asked about a price hike and viewer data. And Hastings and Sarandos again denied the existence of any pending price hike or program ratings.
“We are going to keep on asking for numbers. Some day, Ted, you will give one to me,” she quipped.
Pachter said Boorstin’s departure is a negative.
“I thought that [she] gave an appearance of objectivity, which has been removed now,” he said.
In the end it wasn’t even close. Netflix came to the 65th Annual Primetime Emmy Awards with high expectations following 14 Emmy nominations — the first ever for an Internet-based subscription service.
With majority of those nominations (nine) for political drama reboot “House of Cards,” scuttlebutt suggested Netflix would score big in the high-profile categories, including Outstanding Drama, Lead Actor (Kevin Spacey) and Lead Actress (Robin Wright).
It didn’t. The subscription video-on-demand pioneer, which has marketed itself in part as an agent of change within the traditional TV landscape, took home just one Emmy during the Sept. 22 primetime awards telecast: Oscar-winning helmer David Fincher for Outstanding Directing for a Drama Series.
Clearly, with the monies invested in billboard and related national marketing, in addition to grassroots political-style lawn signs in greater Los Angeles, Netflix had hoped for more than a directorial nod.
And some might say the Emmy directing award should not be confused with similar accolades presented at the Oscars and Golden Globes. Indeed, Fincher only directed two of the 17 “Cards” episodes, including the pilot. “Cards” won two other Emmys for castings and cinematography, which were awarded during the separate Primetime Creative Arts Emmy Awards on Sept. 15.
HBO, which Netflix management has oft mentioned as both erstwhile mentor and foe, again took home the bulk of Emmy hardware, including a combined 27 trophies for “Veep,” “Boardwalk Empire,” ‘The Newsroom” and Liberace biopic Behind the Candelabra.
AMC Networks again scored big for perennial Emmy favorite “Breaking Bad,” which nabbed Outstanding Drama and Outstanding Supporting Actress (Anna Gunn). Notably, series creator Vince Gilligan attributed the show’s longevity in part to Netflix.
"I think Netflix kept us on the air," Gilligan told reporters back stage, alluding to streaming access to past seasons. He should have also mentioned packaged media since season boxed sets of “Bad” consistently rate high at retail. Amazon ranks seasons one through three among its top-selling DVDs.
Regardless, the Emmys once again underscored what cable has brought to TV in terms of quality serialized drama. And while Netflix invented binge viewing and isn’t afraid to spend big on original content, it’s still chasing the cable networks' creatively.
"It just seems like there's a real swing in the cable world," Bobby Cannavale, who edged favorite Aaron Paul (“Breaking Bad”) to win Outstanding Best Supporting Actor Award for HBO's "Boardwalk Empire," told Reuters.
"[Movie] studios don't make dramas, so the best place to do drama is you go to HBO or Showtime, or you go to AMC or FX, and I think that was sort of reflected today."
Outerwall said margins at subsidiary Redbox would fall below expectations in the second half of the year as consumers rent movies for fewer days, among other issues.
By definition, margin is the difference between the cost and the selling price of something. For Redbox, the selling price would be the number of nights it can charge $1.20 for a particular disc at a kiosk. Outerwall’s profit margin in the first half of 2013 shrunk to 6.2% from 8.2% in the same period of 2012. And it’s expected to fall further.
Culprits include Redbox promotions and a shorter rental period per disc, according to CEO Scott Di Valerio. He said the kiosk vendor would report increased revenue in the third quarter, including record rentals in July, but the profitability (margin) of those rentals is lower.
That’s because while more people are renting movies from kiosks, they're returning them the next day, instead of days later. With the margin on a nightly $1.20 rental razor thin, Redbox makes its money through volume (renters) and extended rental nights. Previously, the average kiosk rental generated more than $2 in revenue. When a consumer returns a disc in less than 24 hours, that revenue (and margin) falls.
Pitfalls of Teaser Pricing
Redbox (and streaming services such as Netflix) has shifted the rental paradigm, transforming the $3.99 video store transaction into a low margin commodity. Kiosks and subscription video-on-demand services have reduced the cost of the rental transaction, replacing it with a big-volume business model predicated on the belief that if a movie/TV show rental is priced at next to nothing, people will flock, rentals or subscribers will balloon and profit will follow based on increased volume.
If you’ve ever had someone ask you at McDonald’s, "Would you like a drink with that?," then you get the idea. Redbox is silently asking customers, "Would you like to keep that another night? It’s only $1.20 more." And Netflix every month is cajoling, “It’s only $8 a month. Isn’t the entertainment we provide each month worth that?”
This mindset has been a boon to the consumer, but it’s a delicate balancing act for Redbox and the home entertainment industry. Studios and media companies loudly herald the incremental revenue SVOD is generating via multimillion dollar license deals. Redbox, too, is paying select studios hundreds of millions to secure street date releases.
Yet, this business model is dependent upon SVOD and Redbox continually growing their subscriber bases and/or maximizing the time a disc is gone from the kiosk and in the home. Any deviation from these prerequisites, and the bubble bursts.
“Unfortunately, this demonstrates the leverage in the Redbox model, but on the negative side,” said B. Riley & Co. analyst Eric Wold. “The more you can push customers to multiple nights, larger baskets, etc., the more you leverage that cost.”
Analysts say Redbox needs to adjust its promotional strategies going forward to offset the single night shift and negative margin hit. Consensus suggests Redbox is not operating on the margin fringe as much as it is operating a business model that requires a certain level of risk predicting disc demand ahead of time, which doesn’t always pan out correctly.
“They make outsized profits when revenue is higher than budgeted and lower profit when revenue falls short. It’s a tough model to predict, but I think they need to manage a bit more conservatively,” said Wedbush Securities’ Michael Pachter.
As for Netflix, as long as they can grow their subscriber base and leverage their ballooning stock price, the party will continue. However, someday the music may stop,
The day (Sept. 10) Netflix shares set an all-time valuation record (above $311) based on news Virgin Media would enable its subscribers to separately access the streaming pioneer, a pair of Wall Street analysts declared death on Redbox’s disc rental business model.
Both extremes underscore the effects of Wall Street’s war on packaged media, including movie sellthrough and rental, and its desire to declare digital distribution winner — however prematurely.
Virgin Media said it would rollout Netflix to its 1.7 million multichannel video distribution subscribers in the United Kingdom — access they have to pay for separately. While it was noteworthy that for the first tme a MVPD agreed to expose its subscribers to Netflix (over-the-top streaming services are seen as direct competition), the reality is that most of those subs can already access Netflix.
It would appear that Virgin Media knows that, and is more interested in being an ISP — selling subs the broadband connectivity required to stream TV shows and catalog (not new release) movies. But that didn’t stop investors from driving Netflix’s stock further into the stratosphere — ignoring billions due in content license agreements and profit at break even.
Then Pacific Crest Securities analysts Andy Hargreaves and Corey Barrett issued a note saying Redbox’s parent, Outerwall (formerly Coinstar), faced a looming financial squeeze due to its kiosk movie rental subsidiary.
Specifically, Hargreaves and Barrett contend fewer people are renting DVD and Blu-ray Disc movies, which they say will drop Redbox revenue up to 30% annually over the next few years. They buttress their POV with data from The NPD Group that showed disc rental revenue fell 37% over a five-year period through 2012.
The analysts say Redbox rental volume would need to increase about 5% annually to support Outerwall’s current stock price — a premise the Pacific Crest duo deem unlikely.
What Hargreaves and Barrett ignore is the fact the NPD data referred to total disc rentals, which also included by-mail and video stores. It’s no secret what Netflix thinks about its by-mail disc rental business — despite the fact the segment generated nearly 50% of the service’s operating profit in the most recent fiscal period.
Meanwhile, Redbox revenue increased 4.5% to $479 million in its most recent fiscal quarter. Its share of the disc-rental market passed 50% for the first time.
B. Riley & Co. analyst Eric Wold, who is bullish on Redbox, said the Pacific Crest note makes the false assumption that declining disc rentals are primarily due to consumer migration to digital channels such as transactional VOD and streaming.
“While I agree that overall revenue generated by the DVD/Blu-ray market will decline in the coming years, that is not due to a technology switch from discs, but rather a switch from older rental channels [Blockbuster, video stores, etc.] to the comparatively smaller Redbox channel,” Wold said.
Indeed, Wall Street scuttlebutt that transactional VOD will supplant disc rentals is nonsensical. If the $3.99 to $4.99 nightly rental fee for a new release movie at Blockbuster or video store is considered a premium, why would someone pay just as much (or more) to access a movie at home through their cable channel when it can be rented at Redbox for $1.20 ($1.50 for Blu-ray)?
As disc rental revenue declines due to shrinking physical access (beyond kiosks), the number of rental transactions should remain unchanged. That’s because Redbox doesn’t care what people used to pay for disc rentals, it only cares that people rent a movie from a kiosk.
“For the population base that could not afford renting discs for $5, offering VOD for $5 and also requiring broadband access (vs. a $20 DVD player) doesn’t make their lives any better,” Wold said.
I am a cord cutter. I’ve been one since the summer of 2011 when economic reality transformed me from homeowner to renter.
Having already shunned the car in favor of the bicycle as a primary means of commuting, going down the fiscal downsize “to do” list it wasn’t hard to miss that $140 DirecTV bill.
I canceled the satellite-TV service, opting to pay the $20 monthly termination fee through the remainder of my contract — ignoring DirecTV’s myriad incentives to retain me.
From here on out, I would just pay for broadband access, watch a movie from my disc collection, rent from Blockbuster (LOL), stream on Netflix — or in desperation, read a book.
Fast-forward to the present, and I haven’t missed the bundled pay-TV experience. While I experienced initial ESPN withdrawal, avoiding the network’s East Coast bias is probably a good thing. And in February I streamed Super Bowl XLVII on CBS.com via HDMI cable.
But that streaming access is getting expensive.
When Comcast, Time Warner Cable and Cablevision collectively reported video subscribers losses of more than 1 million during their most recent fiscal periods, the multichannel video program distributors were able to offset the losses and actually improve ARPU (average revenue per subscriber unit) by gains in the number of new subscribers of high-speed Internet and telecommunications.
Time Warner Cable now generates 42% of its revenue from non-video sources. Its growth in residential broadband Internet access driven by thousands new subscribers seeking ultra-fast 30 megabits per second (Mbps) data flow speed. TWC also increased equipment rental fees, including upping cable modem charges more than 50%.
In 2012, I paid less than $1 a day for broadband access from Cox Communications, which is based in Atlanta and ranked third fastest in Netflix’s ISP speed index for July.
But getting Cox here in Buford, Ga., which is less than 40 miles from Atlanta, is not an option. My choices are limited to AT&T U-verse (11th on the Netflix index) and Clearwire (dead last).
And AT&T is charging me up to 75% more per day (introductory offer).
Cord cutting seems to be tying me to lower quality and growing bills.
The phrase, “If you build it, he will come,” may have worked resurrecting the ghosts of baseball past in the 1989 movie Field of Dreams, but for streaming media devices, consumer adoption remains more of a fancy.
While industry leader Roku says it has sold more than 5 million devices linking the living room TV to the Internet, the number of households actually using the devices remains small.
That might help explain why BSkyB, the United Kingdom’s largest pay-TV operator, is offering subscribers a Roku-manufactured (patterned on the LT) streaming device for $15 — less than half the cost of Google’s new (and equally inexpensive) Chromecast.
Google’s plug-in is designed to simplify consumers’ ability to stream videos from its YouTube subsidiary and Google Play content platform via their smartphone, tablet and laptop to the TV in the living room.
Sky’s “Now TV Box” makes accessing the satellite TV operator’s proprietary subscription video-on-demand service as easy as pushing the “Now” button on the remote. Of course, access to Netflix and LoveFilm Instant are not options for obvious reasons.
The box does offer access to news, the BBC iPlayer, new-release movies and assorted one-day passes to Sky’s premium channels, including live sports, without the prerequisite bundled subscription.
With loss-leader pricing and HD (720p) playback, it would seem to make “Now TV” a no-brainer — at least Sky CEO Jeremy Darroch said as much during the company’s July 26 fiscal call.
“We’ve seen an explosion in on-demand and mobile viewing as more people connect … to broadband and watch TV on laptops and mobile devices,” Darroch said.
Maybe, but across the pond in the U.S., consumer adoption of streaming devices remains sluggish. The NPD Group found that just 6% of respondents in a recent survey said they use them. The majority connect to the Internet through a video game console or Blu-ray Disc player to watch a movie or TV show from the Internet.
“It just seems to be some consumer indifference to hooking up one of these things to the TV,” said NPD’s Russ Crupnick. “Maybe it’s because the folks who want to use services connected to their TV have an Xbox or Blu-ray player already. Or those who don’t use them don’t understand what the devices do.”
Indeed, confusion about streaming players and their role in an evolving CE market inundated with content apps appears to be muddying the waters.
NPD’s Stephen Baker said both CE and media companies are wrestling with how to best deliver content from the little screen to the big screen.
“There is still a bit of gold-rush mentality about how to make that happen,” Baker said. “Frankly, I don’t know if there are a lot of business models out there that fully embrace how to make money beyond just selling the connecting device. There’s so much opportunity around being able to disrupt the consumer’s relationship with the content. But there’s not one hardware answer to an access problem.”
"House of Cards"
The Wizard of Oz had a good thing going until Toto got in the way.
Netflix and its original programming could be be operating in the same vacuum of wishful reality.
With 14 combined Emmy nominations led by “House of Cards,” “Arrested Development,” and “Hemlock Grove,” Netflix’s original series would appear to be the subscription video-on-demand pioneer’s emerging Ace card as it attempts to transform the TV landscape and grow subscribers.
Except that after door-to-door campaigns in West Los Angeles (to help secure nominations), online, billboard, taxi ads, and free publicity at the White House Correspondents' Dinner, among other chatter, no one really knows just how many people have actually watched the shows — a reality that began with Nordic black comedy “Lilyhammer last year.
That’s because Netflix won’t release the numbers — no matter how many times moderators Rich Greenfield from BTIG Research and CNBC’s Julia Boorstin asked, cajoled and pleaded with CEO Reed Hastings and chief content officer Ted Sarandos to do so during Netflix’s July 22 investor interview webcast.
The official line is that since Netflix doesn’t have advertisers, it doesn’t feel compelled to divulge ratings the way ad-supported network TV programs do. It’s a clever excuse and tactical strategy right out of the playbook of fictional House minority whip Francis Underwood (played by Kevin Spacey) in “Cards.”
“From this moment on you are a rock. You absorb nothing, you say nothing, and nothing breaks you,” Underwood tells his bodyguard.
Indeed, if scuttlebutt and conjecture equaled Nielsen households, Netflix certainly has a few winners on its hands. But hype isn’t hard data, and so the question festered.
Sarandos said all of Netflix originals are drawing “TV size audiences,” adding that those obsessed with data should look to Netflix’s renewal of a second season as a “very positive sign” regarding viewership.
“If we are renewing programs people aren’t watching, then we are creating a huge opportunity cost in our content spend,” which he said would result in Netflix not having the money to spend on content subscribers do want to watch.
Then the CCO threw a curve ball.
Sarandos said that each original series had outperformed the previous original during its initial seven-day streaming period. That meant that largely panned gothic horror series, “Hemlock Grove,” drew larger audiences than “Cards,” and just-released women’s prison dramedy, “Orange is the New Black,” outdid them all, including the reboot of Fox dark comedy, “Arrested Development.”
The seven-day window is significant since Netflix makes all episodes of its originals available on street date.
Indeed, Hastings admitted “Development” resulted in a small bump of new subscribers, which analysts speculate meant about 100,000 new subs. A modest tally considering the show’s ardent fan base and pre-launch word-of-mouth.
Perhaps “Cards,” which appears a lock for an Emmy, was nothing more than a polished serial hyped by many and observed by few.
A common theme throughout the recent studio fiscal calls was the emergence of electronic sellthrough (EST) as an undercurrent to a stabilized home entertainment market.
But a question arises as to how significant digital sellthrough really is. Is EST the catalyst to a renaissance in owning movies? Or is it a big fish in a small and largely insignificant pond?
To be sure, EST generated $231 million in revenue in the first quarter, which was up more than 50% year-over-year. Studios such as Sony Pictures Home Entertainment and 20th Century Fox Home Entertainment, among others, jumpstarted laggard digital sales in the fourth quarter by releasing select titles for $14.99 up to four weeks ahead of street date.
When combined with UltraViolet functionality, EST consumers now have cloud-based access to movies on connected devices — a utility heretofore limited to packaged media. Early access spearheaded a 400% uptick in Q1 digital movie sales at some studios.
“We definitely see an appetite for ownership and incremental lift in our overall title revenue from releasing titles early ahead of physical and VOD,” said an executive who wished to remain off the record.
Yet, while the industry extols digital sales, its contribution to overall home entertainment revenue in Q1 was less than 5%. In fact, sales of Blu-ray Disc and DVD titles — which topped $2 billion — was up more than 2% from last year, according to DEG. EST generated 90% less in revenue than packaged media — the format some observers consider just a few steps behind rental icon Blockbuster in relevance.
In an age of Netflix and subscription video-on-demand, the ability to meld sellthrough with streaming represents a consumer flashpoint to the studios that cannot be understated.
“There’s a subset of consumers that want to own a title as soon as it’s out. And early EST allows them to do that,” the executive reiterated.
Indeed, total digital revenue increased 26% in Q1 to more than $1.5 billion. After sellthrough, principle drivers included SVOD (up 29%) and transactional VOD (up nearly 16%).
But Wedbush Securities’ Michael Pachter questions the true impact of EST. He agrees early access and lower prices afforded digital are appealing to a small percentage of consumers. But lifeline to home entertainment? That’s another issue.
“They are putting too much stock in that data point,” Pachter said. “I don’t think most consumers will embrace movie ownership in the cloud. But I could be wrong.”