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Insights from home entertainment industry experts. Home Media blogs give you the inside scoop on entertainment news, DVD and Blu-ray Disc releases, and the happenings at key studios and entertainment retailers. “TK's Take” analyzes and comments on home entertainment news and trends, “Agent DVD Insider” talks fanboy entertainment, “IndieFile” delivers independent film news, “Steph Sums It Up” offers pithy opinions on the state of the industry, and “Mike’s Picks” offers bite-sized recommendations of the latest DVD and Blu-ray releases.


Opinion
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1 Jan, 2003

The Perils of Box-Jumping in Hollywood

The industry has been abuzz for the last week or two about a couple of unexpected developments: Blockbuster's admission that sellthrough is cannibalizing rental; and the terse surprise announcement that Warren Lieberfarb would be departing his post as president of Warner Home Video.

The Warner announcement was only more shocking on the heels of Blockbuster's stock tailspin, which seemed to prove Lieberfarb right: make sellthrough DVD cheap enough and it will grow into a big, fat can of Rental-B-Gone.
Lieberfarb acknowledged to The Wall Street Journal that his unceremonious departure from Warner was the result of “policy differences on organization and structure,” but nobody was confirming or denying rumors that he was making a play for control of the entire movie marketing process from theatrical to broadcast.

The sad thing is that most industry observers who would talk off the record believe Warner will probably execute Lieberfarb's end-to-end strategy without him, a backhanded compliment if ever there was one. Anyone who doubts the soundness of the approach need look no further than Warner-distributed New Line's Lord of the Rings trilogy. It seems only logical the division that generates most of the profits for movies should be setting their course.

The lesson in this, it seems, is something I've written about before: that release windows are not merely a profit structure, but the foundation of the entire Hollywood economy and power structure.

The reason Hollywood moguls are mad at the movie masking services for editing out potentially offensive content, I think, is less that they are changing a filmmaker's vision and more that they are shifting eyeballs back several months from the broadcast-sanitized TV version to home video rental. Studio broadcast executives must be quaking in their boots knowing that, played out to its ultimate conclusion, that means today's VP of Broadcast Placement is tomorrow's VP of Bupkis – even if the industry wins on digital broadcast flags.

Lieberfarb's fate is yet another example of how Hollywood institutions hold back potentially profitable technology. It's obvious that DVD and Lieberfarb's strategy for it have begun shifting profits from rental back to studios.

The fact that he's typing “Godfather of DVD” onto a resume this week is a glaring illustration that a few fat cats guarding personal profits, not movie or even studio profits, are in the driver's seat.


30 Dec, 2002

Report From Enron Country

Over the holidays I visited family and friends in Houston, otherwise notoriously known as Enron country.

On the front page of the Houston Chronicle Dec. 29 was a story outlining a fraud investigation of Enron's broadband business. A grand jury is investigating whether Enron executives' broadband cheerleading, including their claims about the company's deal with Blockbuster, constituted fraud.

Some of the evidence outlined in the case is eye-opening. According to the Chronicle story, the deal with Blockbuster was inked before it was determined whether delivery of movies on demand under the plan was technologically feasable. Tests took place after the deal and included such mishaps as set-top boxes that occasionally caught fire! The cost of the service was also a problem as the company had trouble getting the price of the boxes under $1,000 apiece -- and that was on top of a $150-per-month charge for the service!

Another hangup, according to the article, was Blockbuster didn't have digital rights to films, and, unbeknownst to Enron, was a pariah among the studios.

"Blockbuster was widely hated by the studios, so they weren't the best partners," according to a Chronicle quote from a former Enron Broadband Services finance employee.

As was many a strategic move during the late technology craze, much of the Enron-Blockbuster deal was smoke (sometimes fire!) and mirrors designed to boost stock and impress analysts.

Following the fad of the moment, Blockbuster struck what proved to be a silly deal. I only hope the chain isn't taking a short-term, fad-of-the-moment view about the DVD business, putting too many eggs in the sellthrough basket. Blockbuster abandoning the rental business would be like -- well, it would be like a water company buying a studio.


27 Dec, 2002

New Year's to Test Retail Cannibalization of Rental

So will Vin Diesel fans rush out to buy XXX Dec. 31 and watch it on New Year's Eve? That, of course, is a scenario Columbia TriStar Home Entertainment would dearly love to see. And that would serve to epitomize the trend that has manifested itself during this holiday season of sellthrough DVD, where retail seems to have cannibalized rental, though to what true extent we do not yet know. Certainly Blockbuster has paid a price for what it expects will be a holiday downturn in its rental revenues.

This week, historically one of the busiest for rentailers, will be something of a barometer as to just how much the urge to buy has overtaken the rental mentality of the home video consumer, at least during this annual heightened period of consumerism. Certainly there will be many more owners of new DVD players this week than there were last week and they'll be looking to play as many DVDs on those machines as they can squeeze in between parades, football games and family gatherings. The idea of taking home and actually keeping recently released blockbuster movies to play on their new machines will be tantalizing. Of course, they could do that with VHS if the title was priced for sellthrough, which is something of a recent phenomenon for some new releases outside of the family genre. They won't be able to do that with XXX, since its VHS version is rental priced.

No doubt that New Year's Eve and New Year's Day are popular times for movie watching. A recent Blockbuster Video poll of customers around the world indicates families are most likely to spend a portion of New Year's Eve watching a movie and celebrating at home. Only those partiers in the United Kingdom and Australia tend to see a majority of their households celebrate the New Year's away from home. In such different locales as Hong Kong and Denmark, New Year's Eve day is the busiest day of the year for Blockbuster stores. The marriage of home video and New Year celebrations seems to be a worldwide phenomenon.

We have only just posted our online poll asking how rentailers are faring this holiday so I can't yet comment on what this informal survey may show. I will be curious to see how it progresses as we move through this week. But I cannot help but think that a majority of the nearly 40 percent of U.S. households with at least one DVD player (probably more than 11 million new owners than last year at this time) will be watching at least one movie they own on New Year's Eve. That will certainly have an impact on rentals, in my opinion.

Buzz Back and tell me how you're doing this season.


25 Dec, 2002

'Tis the Season...

Well, Merry Christmas!

To be honest, I hope nobody reads this column today. I hope you are all either home carving some delectable treat with your families or doing so much business that you don't have time to poke around your favorite Web sites looking for my blather.

It's a weird season. Stores I expected to be slow were busy and places I thought would be busy were deserted. Except for people following advertised bargain prices, I still can't figure it out – I was just glad I did my shopping early and only had to wander stores last week as an observer, not a participant. Best Buy looked a bit like a hockey game last week, with elbows flying and customers jockeying for line position.

One thing no retailer or observer could escape was consumers squeezing every dollar until Washington screamed. Amazon.com told Business 2.0 the season's hottest item was DVD players under $70. Shoppers at Best Buy leveled pallets of the $55 Mintek players but left $89 progressive scan models stacked to the ceiling. Even $69 players were moving much more slowly, which tells me $10 or $15 was a dealbreaking difference to consumers this year. I even met a guy at Wherehouse who said he had a $10,000 home theater system built around a DVD player and large screen TV, but was holding out on buying a combination DVD/VHS player because he couldn't find one under $250. Go figure.

Last week we also saw Blockbuster take a pounding in the stock market after reporting that sellthrough releases had cannibalized post-Thanksgiving rentals, a trend the chain's executives hopes will abate after today. Personally, I predict there will be a surge of rentals in January and February as new DVD player owners play with their toys. We're into the middle adopter part of the technology curve now and, unlike the early adopters, these are not the people who have to own every new thing – just the new thing to play it on.

So here's hoping this holiday brings your customers gifts that keep on giving and with it, a new wave of business for you.


23 Dec, 2002

Customer Service Can Be as Important as Price

Shopping Wal-Mart during the holidays is an adventure. The hunt for the elusive DVD section amid the tires, cosmetics, clothes and car batteries can take some time. While many may be willing to embark on that safari to save a few bucks, time-strapped parents like me often find a little customer service worth the extra cost.

Recently, I had a discussion with some salespeople in the hypercompetitive telecommunications business. That business has hit such hard times that prices are about as low as they can go. But one salesman mentioned he had made a deal with a customer recently, stealing him away from the competition not with a lower price, but with the promise of better customer service. During the sales call, the customer dialed up the customer service line and got a live body on the phone. That call sealed the deal.

As prices head for the floor in all business, including the sellthrough video business, this anecdote offers some solace to those competing with the big chains. Most retailers are competing on price. Blockbuster is promising to match any competitors' advertised price, and Wal-Mart is selling DVDs for under $10. Customer service often goes by the wayside in the race to the lowest price. Kmart is a perfect example. That chain chose to compete with Wal-Mart on value and let its customer service suffer. The result: stores in disarray, uninformed clerks and a generally unpleasant shopping experience that sent the chain into bankruptcy. Last week, the chain's rock bottom stock was delisted from the exchange.

Service has a value as well, especially when customers' time is at a premium. Retailers who recognize this will likely be rewarded because not everyone wants to hunt for DVD bargains in the forest of items sold at mass merchants.


22 Dec, 2002

Stock Market Hit a Short Term Reaction to Long Term Trend?

Have we reached that moment of paradigm shift (a much abused term of the ‘90s) in the home video business from a rental model to a retail/sellthrough one?

You might think so when Blockbuster takes a 30 percent whack on its valuation in one day after reporting that its fourth quarter numbers won't be what it had hoped they would. This based largely on the fact that higher-margin rental revenues have taken a major hit due to the avalanche of top theatrical hits on DVD priced to own – due, that is, to the retail business that Blockbuster is fast trying to become a major player in, but too late for this season at least.

The market reaction extended to Hollywood and Movie Gallery, both of which lost 14 and 17 percent, respectively, in their stock value in one day, despite no change in their forecasts.

An overreaction on the part of Wall Street? Gee, we haven't seen that before, have we? There is so much tension in the market right now that any tilt in a company's forecasts can mean disaster. Blockbuster chief John Antioco said he believes this is a seasonal anomaly and that Big Blue's rental business will be back on track after the holidays…this even before two historically very busy rental weeks of the year over Christmas and New Year.

An unsteady economy and rumors of war shook retail confidence in consumer activity and in response, many retail sectors made early and fantastic price reductions at the outset of the holiday season, very notably in DVD software and hardware, that fueled a low-margin selloff attempt that hasn't matched expectations, but meanwhile took a bite out of rental as well.

Video Store Magazine market research has been tracking a downturn in rentals for 10 months now. The size of the discrepancy between last year's rental volume and this year's has been gaining steam on a monthly basis. November saw a dramatic 20 percent drop in rental dollars compared to November of 2001, again possibly an indication of the impact of the holiday sellthrough barrage. Overall rental spending year-to-date is down 11.6 percent, according to Video Store Magazine market research.

Blockbuster had largely been able to resist that trend, posting rental revenue gains of two and three percent throughout the year's quarterly reports. But at least for this holiday season, so far, the trend has caught up with the nation's biggest rentailer. Blockbuster's move to devote significant space to sellthrough will have to prove itself in the coming year.

My two cents is that as the holiday sellthrough phenomenon fades rentals will regain their footing. To what extent, however, remains to be seen.


20 Dec, 2002

Don't Price Yourself Out of Your Market

There's a new reality in the home video business. It is this: retailers who don't drastically discount prices on new releases, at least for the first week or 10 days, might as well shut their doors and hang a “Gone Fishin’ sign on the front door.

Several studio executives with whom I've spoken in the last few weeks have marveled at the pervasive deep discounting of new video releases by such retailers as Wal-Mart, Target Stores and Best Buy. It's a practice in which they've engaged for some time, but never have prices been this low on so many titles. It's gotten so that virtually any new DVD release can be purchased for less than $15 — a most attractive price point for impulse buyers as well as multiple purchasers.

And therein lies the rub. The mass merchants have a history of lowballing prices on everything that's new, then they make up for whatever money they might have lost by selling additional units of older items that typically sell at or just below list price. In the short term, it might cost them some dough — in May, Wal-Mart was selling copies of Harry Potter and the Sorcerer's Stone for more than $2 less than what reliable sources say the chain paid for them — but in the long term, it helps perpetuate the perception that they've got the best prices in town, period, even if they don't.

Thus you find things like Wal-Mart's shelf price for the Monsters, Inc. DVD shot up from $14.77 to $18.77 overnight. Or copies of Shrek selling for $22.98, the equivalent of list — and a full six bucks less than the first-week price in November 2001. The mass merchants are serious about being a category leader in DVD and they're doing exactly what it takes. And I'd bet all three of my sons that at the end of the day, Wal-Mart comes out ahead of the game, with customers lured by cheapo prices on new releases walking out with a handful of other DVDs with decent margins. They don't call ‘em “loss leaders” for nothing, you know.

Best Buy has adopted this strategy as well, and just look at how robust their software sales are. The only thing dragging the company down is its Sam Goody mall music stores, which have traditionally charged higher prices on both CDs and video software than the big-box discounters.

This business has become increasingly price-sensitive. Retailers who are trying to carve a serious stake in sellthrough but aren't willing to compete on pricing are out of luck. This applies not just to video, but also to music. Tower Records and Video, for years one of the strongest audio-video combo chains in the country, is in serious financial trouble. I look at their ads and I instantly diagnose the problem: They're advertising the latest Britney Spears album for five bucks more than Wal-Mart or Target.

Consumers are bombarded with fliers, circulars, mailers and newspaper inserts, all of them hawking the same “flavor of the week” hit products. The prices on those hit products are the barometer by which consumers measure the entire operation. It does Tower no good to have twice the selection of CDs and DVDs as Wal-Mart, or better prices on catalog titles than Target.

You need to get the customer into the door, and the only way you're going to do that, in today's media-saturated environment, is by beating, or at least matching, the competition on price.

That's how you get them into your store — and once you've done that, you've won.


17 Dec, 2002

Viewers are Taken with original cable programming

Since I started writing about the home video industry, I've become accustomed to a sort of fortressing mentality among video rentailers, especially indies, that seems to regard every potential competing technology – pay-per-view, video-on-demand, cable and satellite – as poaching on its prerecorded territory.

But after a trip to Broadband Plus a couple of weeks ago, it's becoming more and more clear to me that is a fallacy.

It may have been true at one time, but the cablers especially have realized that original programming is their ticket into homes. Far from wanting to squash packaged media, the cablers are counting on packaged media to offset the production costs of their original series and movies.

HBO has been leader of the pack. It's not only the popularity of The Sopranos that led HBO to put the show (and many of its other original programs) on cassette and DVD. The average cost of original programming for cablers is $1.2 million per program, according to Matt Blank. That cost is way lower than most broadcast networks spend on shows and not even close to the cost of a studio blockbuster theatrical hit.But what happens when your cable show becomes the water cooler show of the season? Four things, at least: it increases demand for the show, increases demand for the network, creates a market for a less transient form of the show and, in all likelihood, ratchets up the stars' salary demands.

That means the programs hit a sort of equilibrium, in which just about the time a show is hot enough to trigger big salary disputes, it's also hot enough for previous seasons to sell on tapes and discs to make up the difference.

The cable networks are starting to bank on that. A great example is “Steven Speilberg Presents Taken, a ballyhooed miniseries that catapulted Sci-Fi Channel's ratings beyond its wildest expectations. As the network avers, the show gobbled up its bandwidth for two straight weeks, pushing many other shows off the schedule as the channel re-aired the entire series several times in different time blocks. It also made Sci-Fi the leading basic cable network in prime time for the first time – for two weeks in a row. And as I watched some of the catch-up marathon last Saturday, I saw the crawler line across the bottom of the screen: “Coming to DVD in 2003.”

I'm interested to know who rents boxed sets and how such rentals are structured. Or is the boxed set just a sellthrough and gift phenomenon? If you've tried renting boxed sets to your customers, Buzz me back.


16 Dec, 2002

Rapunzel, Rapunzel…where are your toys?

If you're shopping for gifts for little girls this holiday season, you'll notice one of the hottest selling toy franchises this year is the Barbie as Rapunzel series. I know I've been to numerous Web sites where the toys are no longer in stock (my daughter has requested many of the items in the series). In fact, respondents picked Mattel's Barbie as Rapunzel doll as the top toy for the season in marketing firm Playdate's survey of toy industry retailers.

What's striking about this is that the toy series is based on a direct-to-video title. That DTV production, distributed for Mattel by Artisan Home Entertainment's Family Home Entertainment label, is the second such program for the video marriage and it's shaping up to be a great franchise for both.

These sort of synergies don't always work. Many a store found itself with too many Star Wars toys to unload after overestimating their appeal during the release of Episode I. Even when these partnerships do work, it's usually a television series or feature film driving the toy franchise -- such as the Harry Potter phenomenon – not a direct-to-video series. So the success of the Barbie franchise is a great testament to the marketing acumen of the Mattel/Artisan marriage, as well as the quality of the product.

I wonder, however, if all video retailers have capitalized on this tie-in by offering the dolls and various accessories. I know it's hard for rentailers to compete with mass merchants in the licensing arena, but getting in on the hottest toy of the season should add excitement, if negligible profit, to a rental store. I know I'd buy the stuff wherever I could find it this holiday season. I'd be interested to hear from rentailers who've made a successful go of it selling licensed items.


15 Dec, 2002

Ratcheting Up the DVD Buy

It's a mixed up, crazy dual format world in the home video business going into 2003 and it will remain a struggle for both studios and retailers to juggle their DVD and VHS businesses even as they participate in the creation of the DVD era.

Figure that of the 96 million U.S. homes with VHS players, say 38 million also have a DVD player going into 2003 (I am averaging a couple of estimates here from several sources). Also figure that, according to at least one estimate from Warner Home Video, 10 million households have two DVD players. Now think of the rental or retail combinations any one buyer can represent when they walk into a store. I won't even try to factor into the mix DVD-enabled video game consoles.

Despite the stupendous and exciting growth in DVD, consumers are still very much fractured in their use of home video platforms, even as they continue to embrace the concept of collectibility of movies (predominantly on DVD) while still visiting the rental counter (where VHS still has the edge.)

It's clear from the current poll on this Buzz page that retailers are committing themselves to building DVD in rental (and, of course previously viewed sellthrough), since more than 56 percent of the poll respondents say they intend to expand their DVD inventory by more than 21 percent going forward. But they are also fully aware that VHS still drives the majority of rental transactions (56 percent for the month of November, according to Video Store Magazine market research). The VHS rental business continues to decline, however, and as one studio head told me last week, retailers know they won't go wrong heavying up on their DVD buys.

On the retail/sellthrough side, a number studio execs express surprise and confidence that there is still a very strong VHS market, even as they continue to see 65 percent DVD sales on most major new releases, on average. The fact is they have to do a lot of title-by-title consumer surveys polling intent to buy by platform to try and get a handle on how to plan for DVD/VHS splits on new releases. The multiplatform household of today means any number of combinations is possible for any one title in terms of positioning the DVD and VHS product, especially VHS pricing and marketing. And that's going to continue for the next 12 months or more.

Despite the legitimate hype over DVD, this will still be a dual-personality business in 2003.