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Six Questions With Kaleidescape CEO Michael Malcolm

30 Dec, 2010 By: Chris Tribbey

Michael Malcolm

A rough economy may seem like a horrible time to be in the high-end movie server business, but Kaleidescape has found a way, lowering its prices, debuting an industry-first Blu-ray Disc server and introducing new features. Company CEO Michael Malcolm spoke with Home Media Magazine about the movie server business, keeping content owners happy with copyright protection measures and what’s next for Kaleidescape in 2011.

HM: It’s been a rough couple of years for the economy — not exactly prime times for consumers to buy movie servers. How has Kaleidescape fared during the past couple of years, and what has Kaleidescape done to keep its business relevant?

Malcolm: A new home build spans months or even years, so many custom installation dealers continued to complete jobs even as the economy floundered. But these jobs came to an end in 2010. Our more resilient dealers adapted their businesses to upgrading existing customers, and evolved their companies to a retrofit business model. We responded, too. We now offer simpler and lower cost controls, such as the Kaleidescape Remote and the Child Remote. In 2009, we introduced the Mini System at an MSRP of $7,995 in the United States, and we recently replaced it with the Cinema One at an even lower price of $4,995. Regardless of the state of the economy, people want to be entertained, and Kaleidescape is the perfect upgrade to any home entertainment system.

HM: An iPhone application, a new interface for kids … Kaleidescape has come out with some interesting advances for movie servers in the past year. Can you run through some of the projects the company has gotten off the ground, and can you pick a favorite?

Malcolm: Our customer base has quickly expanded from cinema buffs to include many families with young children. The child user interface is an innovation designed for this segment. Press any button on the Child Remote, and the screen switches to a simplified user interface that shows only the child’s movies. It’s so simple, even toddlers select and play their own movies.

The iPhone app makes a Kaleidescape system even more useful. Most people with large collections of movies can’t remember every movie they own. The iPhone app helps by connecting a customer to his Kaleidescape system, even when he is shopping in a store. For example, you can scan a Blu-ray Disc barcode, and the iPhone app will display whether you already own the movie, and whether the copy you own is a DVD or Blu-ray Disc.

Our most important introduction this year was the Kaleidescape Blu-ray movie server. The entertainment experience we’ve delivered for years is now available for Blu-ray movies, and customer response is fantastic. We have more demand than we can fulfill.

Of these advances, my personal favorite is the Blu-ray movie server. But watching my daughter’s eyes light up as she explores her own personal collection of movies is very rewarding.

HM: The new Blu-ray movie server was just announced in December. It’s the first of its kind. What’s the market like for a movie server for these high-def movies?

Malcolm: The market for a Blu-ray movie server is large and growing. According to DEG: The Digital Entertainment Group, Blu-ray Disc year-over-year sales in the United States grew 80% in the first three quarters of 2010. By comparison, electronic sellthrough grew 37% in the same period. Spending on Blu-ray Discs is more than double that of movies purchased, delivered and stored electronically, and it’s growing a lot faster.

Blu-ray Discs are quickly replacing DVDs as the preferred method of purchasing movies, concerts and television series. Home theaters have always been popular, but now with Blu-ray, you can enjoy movies at home with exceptional video and audio fidelity. The problem with Blu-ray has been very slow startup times and even more features than DVDs that get in the way of just watching the movie. Kaleidescape solves all of these problems and more to transform your Blu-ray Discs into a fabulous home movie experience.

HM: More movies and television shows are being delivered electronically (e.g., streaming). Will this trend continue? How will movie servers evolve, and what impact will this have on your business?

Malcolm: There is a lot of confusion about electronic delivery of home entertainment. Streaming is a method for delivering movies by which the movie is presented to the viewer as it is being delivered over the Internet. The movie is not stored locally, so the quality is limited to what your Internet connection can deliver in real time, and you must be online to watch the movie. Netflix uses streaming for their electronic rental business.

An Internet download works differently. The movie is copied to local storage from which it is played back later. For example, a movie purchased from the iTunes store can be downloaded to an iPad and viewed offline. Downloads work well for movies you purchase because you can view your collection without relying on a service “somewhere in the cloud.” Both streaming and downloads are growing, but not nearly as fast as Blu-ray Disc purchases.

We believe that people will continue to collect movies for a long time, just as they collect books and art. We buy movies we love. We buy movies our children love. We sometimes buy a movie to ensure that it will be possible to watch it, even outside of an “availability window.” Children watch the same show over and over, which makes buying more economical than renting. Another great reason to purchase is that DVD and Blu-ray offer the best video and audio quality.

In this context, our view on downloads is quite simple: It is just another delivery mechanism for purchasing movies. Today, DVDs and Blu-ray Discs offer the broadest selection and the best fidelity. If you buy movies you must store them, and we believe a movie server is the best place to keep your treasured collection of movies. A natural evolution for the Kaleidescape movie server — one that we have planned from the beginning — will be to support downloads in the future.

The selection of movies available via streaming suffers from the same limitations as other movie rental services: restrictive availability windows and studio licensing deals. In addition, streaming services limit video and audio quality to save bandwidth. Today, streaming is a convenient source of entertainment when immediate availability is more important than quality and choice. Streaming serves important needs, but it does not take the place of a high-quality movie collection. Will the Kaleidescape movie server support streaming in the future? Maybe, but it’s not a high priority for us because streaming is already supported by various devices in the home, and because Kaleidescape is focused on transforming your personal collection into a magical experience.

HM: What did Kaleidescape take away from its litigation with the DVD Copy Control Association Inc., and are there any more legal issues standing in the way of Kaleidescape’s business?

Malcolm: Since the 1800s, every major entertainment technology innovation has resulted in a lawsuit by those who benefit from the status quo. Kaleidescape was sued by Hollywood in 2004 for breach of contract. We prevailed in court, but that decision was overturned on appeal. We are now preparing for re-trial. This lawsuit has not stood in the way of our business. We continued to innovate during the past six years, we became the category leader and we built a very successful business with thousands of loyal customers. We are confident in our ability to continue serving our customers, building an even greater business and creating innovative products, regardless of this or any other lawsuits that may come our way.

HM: What’s next for Kaleidescape in 2011?

Malcolm: With two new product lines solidly in place, our challenges have become those of marketing and sales. The Cinema One is our first movie server designed for retail distribution. We plan to focus on helping our retail dealers be successful. This new challenge together with a rapidly growing demand for our new Blu-ray movie server will require us to substantially grow our marketing and sales organizations. We are confident that a healthy retail market for Cinema One will benefit our existing custom dealers by creating a large number of new Kaleidescape customers who will need a custom dealer to expand their Kaleidescape system, and by creating more brand awareness.

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