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Guba Nation

1 Sep, 2006 By: Erik Gruenwedel

Guba CEO Tom McInerney

Eight-year-old Guba.com in June emerged from the throes of file-sharing anonymity when Warner Bros. Entertainment Group agreed to sell 200 movies as digital downloads on the San Francisco-based site, which has just 25 employees. In July, Sony Pictures Home Entertainment followed with 100 titles.

So, why did two major Hollywood studios team up with a file-sharing service that, like others, allows users to watch, stream or download videos to a PC, iPod, PSP or other portable device?

Home Media Retailing asked Tom McInerney, CEO of Guba, to shed some insight on the rapidly evolving digital landscape.

HMR: Will the evolution of digital distribution rejigger packaged media's rank in home entertainment?
McInerney: I think so, eventually. In the future when the economics are there, it could very well [alter the pecking order]. Digital distribution already is attached to home video. We get content day-and-date with the release on DVD. But I suspect if the revenue generated from online sales — especially if it is plugged into your television — becomes significant, there may be pressure to release content simultaneously with theatrical.

HMR: Do you see a day when a movie's simultaneous release on DVD and digital could make more money than a traditional theatrical blockbuster?
McInerney: Oh yeah, absolutely. It is not a matter of if, but when. We certainly have the early adopter crowd now. In digital, you don't need the blockbuster business model. The economics become quite attractive on more of the independent content, which is why we are interested in content discovery and allowing consumers to find movies they otherwise might not have heard of.

HMR: The Internet allows you to turn a small independent film into a blockbuster?
McInerney: That's right. The reason the theatrical blockbuster business model has evolved is because of the cost of distribution. Distribution in theaters means a studio is able to ship a bunch of film reels to thousands of theaters that have opportune viewing times and locations. The print and advertising (P&A) campaigns are often half the budget of a theatrical release. Then they flip a switch, and people go and see it. They build up a demand.
With the Internet, it is completely different. The cost is just about zero. I think it costs us about five cents to deliver a movie over the Internet in terms of bandwidth.

HMR: Is sellthrough still the most lucrative to the studios, and will it always supercede rental, VOD, pay-per-view, etc.?
McInerney: Yes. Sellthrough does very well. People like to collect movies. There have been arguments that people don't collect movies like music. We find with our user base, there's a healthy demand to download-to-own.

HMR: How real is the PSP/iPod video market considering the screen size, capacity and battery life?
McInerney: I think it is a very nascent market. What was exciting about the Apple video iPod was its potential and how it stimulated thought about this technology. In terms of a viable market for movies, it is still quite small.

HMR: How do you see the competitive landscape of the video download space?
McInerney: There are a number of players in the market, but we were the first non-studio-owned service to deliver studio content in the United States. I'm happy with our lead, but we're not resting. YouTube has staked out user-generated content quite effectively. But they have a bit of a copyright problem. There is a ton of copyrighted content on their site. Apple is probably going to move into the space.

HMR: How do you circumvent any possible copyright infringement problems?
McInerney: We scrub very aggressively copyrighted content out. We have special technology [a proprietary, MPAA-approved filtering technology named “Johnny”] that can identify copyrighted videos.

HMR: Was that a principle concern among the studios prior to their participation with Guba?
McInerney: That was a major point to them. The last thing they wanted was their content sitting alongside free versions of their stuff. We had to make sure that we were completely copyright compliant. This technology has taken us a number of years to build.

HMR: Why have the studios warmed up to the download-to-own business model?
McInerney: I think they realized that this is the future. If they don't offer a viable alternative, people will just get more comfortable pirating movies, which is exactly what they don't want. And if you look where young people are spending their time, it is increasingly online. These guys are savvy enough to get that, and you see the recent acquisitions of MySpace [by NewsCorp.] and Grouper [by Sony Corp.].

HMR: What did you think of Sony's recent acquisition of Grouper.com?
McInerney: I thought it was interesting, and it is definitely good for us. Grouper fetched a good price. It validates the space. It shows that the studios want to have distribution online and the importance of the sector.

HMR: Will Guba be acquired anytime soon?
McInerney: Who knows? We are really focused on creating value for the customer. The rest will take of itself.

HMR: What is in the near future for Guba?
McInerney: We are excited about offering free content that is ad-supported. I'll be curious to see how [MySpace] monetizes user-generated content because that is quite challenging. These brands are quite careful about what they advertise against, and I think it might be tricky to user-generated content despite it getting quite a bit of attention. Our focus is more on the premium side.

HMR: Is the ad-supported content coming from the studios?
McInerney: We can't say, but we are definitely engaged [in discussions] with all of the studios.

HMR: How would you monetize user-generated content?
McInerney: We have a referral program where we pay 25 cents for every user referred to the site. If you refer 1,000 people, it is $250. A lot of college students surf these sites anyway, so they might as well make some money at it. You are going to start to see users who are active contributors to these properties making a little money at it.

HMR: How is a referral qualified as a legitimate referral?
McInerney: We use cookies to track them. Let's say you take a video from Guba and embed it in your blog as a text link or flash player. People click on the video, click through to Guba and sign up [which is free], and they get a quarter. We cut checks every two weeks. You can also tell your friends through e-mails, we just keep track of it.

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