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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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7 Jan, 2003

Shadowing the Underground DVD Economy

This holiday season taught me a few things about the shadow DVD economy, not the least of which is how much DVD traffic can't be quantified.

Online rental, with Netflix in the lead and a half-dozen other sites following the model, flies pretty much under the radar. We know how many subscribers Netflix has, but not how much they are renting. Since the online rentailers don't report their rental data to anyone outside, we can't tell how much business traditional rentailers are losing to that model, as opposed to sellthrough.

As far as I know, nobody is yet attempting to measure sales of used DVDs (those consumers buy and then sell or trade off to a merchant, as distinguished from “previously viewed” rental copies). That's a brisk business, especially online. In fact, just yesterday a site called skinnyguy.com announced its new barter program, in which the customer sells his or her discs online and uses the credit to buy discs from the site. The site sends the customer the order with instructions on how to use the same box and prepaid shipping label to send back the discs he or she is selling. Wherehouse has operated similarly on its site for some time. I'm sure these merchants know just how much business they are doing this way, but they aren't telling.

Another segment nobody can plumb is what Blockbuster CEO John Antioco calls the video “sharing” economy. Because DVD emerged on sellthrough pricing, consumers started owning it a lot sooner in its technology life cycle than VHS. The next natural step is for neighbors to borrow DVDs along with that cup of sugar or tray of ice they borrow over the fence. Mine do. One copy, several users.

Which, incidentally, leads to another unquantifiable aspect of the industry: Hollywood moguls spent an inordinate amount of time on Capitol Hill last year complaining about how online movie piracy is decimating the industry's profits, citing declining sales. But in an industry that relies, as the cable and broadcast folks put it, on eyeballs, nobody in Hollywood can tell how many people didn't buy or rent a title because they watched their neighbor's copy, as opposed to who didn't buy or rent it because they watched a pirated copy online. Why spend two hours (at best) downloading (plus $3.99 if you want to do it legally) what I can borrow from next door and be watching in five minutes?

Now here comes the next wave in the share economy, one I suspect never took hold on any serious level with VHS: A friend I spoke with after Christmas talked about how nice her family's celebration was. They had a nice dinner and exchanged gifts and then, to round out the evening, everyone labeled the discs they were tired of with Post-Its and they sat around trading. Everyone got “new” movies and extras without shelling out another cent. My brothers used to do the same thing with baseball cards.

I believe DVD has made the pie bigger, as most new entertainment technologies do. But it has also splintered the portions, scattering them to places nobody measures. This means many of the traditional measures no longer apply because they overlook sharing, trade in used copies, online rentals and other subscription rental models that make statistics like turns per copy more or less irrelevant.

And who really knows what else we aren't counting?


6 Jan, 2003

The Battle of the 800-Pound Gorillas

Buena Vista is suing Blockbuster over abuse of its revenue-sharing deals with the No. 1 U.S. rentailer. Who would've thunk it?

Not so long ago it seemed as if Blockbuster and the studios were comrades in arms with direct deals that sent many an independent rentailer out of business. Blockbuster gained market share and the studios seemed all too happy to assist in that endeavor.

Now, it appears the studios aren't so delighted with this 800-pound gorilla they've created. Even before the Buena Vista lawsuit, studio execs noted in public and in private that Blockbuster had too much power, that the chain called too many shots. Using sellthrough pricing on DVD as the club, the studios have tried to beat down the monster they helped create with competition from the mass merchants, most notably Wal-Mart, and the strategy seems to be having an effect. Blockbuster's stock has taken a hit on the realization that video sales are cannibalizing rental. Such influential publications as Forbes and Business Week are wondering if Blockbuster has the right stuff to take on the sellthrough goliaths, if Big Blue can compete on Wal-Mart's sellthrough turf as rentals flatten and fall.

The next financial report from Blockbuster will tell us whether the rental dip is an anomaly or a sea change in Big Blue's business, but one thing seems certain – the studio–Blockbuster relationship is on rocky ground. The studios have found a new retail star in Wal-Mart. But like your typical Hollywood marriage, this union seems shaky, The studios don't like any retailer calling the shots. They still yearn for the days when they controlled distribution of their content. Manipulating the retail customer is the next best thing.

How will they contain this new goliath? Video-on-demand and a rental window come to mind. In any case, it promises to be a wild ride in the years to come.


5 Jan, 2003

Recordable DVD's Breakout Year

This is CES week in Las Vegas, and DVD will, once again, be in the spotlight. This time, however, it will be recordable DVD machines breaking some new price ground and not DVD players. It's pretty much accepted that there isn't much room left for price cutting on entry-level players, at least.

Analysts expect some of the first sub $400 recordable DVD players to make their appearance at CES, which may presage the beginning of the major consumer push for recordable machines that could see, even, some sub $300 machines by Christmas 2003. Of course, as we saw with the DVD player, the real mass-market adoption begins when you start to see sub $200 machines and that's not a likely scenario until the fall of 2004, industry watchers say.

“We expect 2003 to become the breakout year for recordable DVD, with demand fueled especially by consumers who want to back up their videotaped memories on the more durable DVD discs,” Robert Greenberg, VP of brand marketing at Panasonic told Video Store Magazine in an article running in this week's issue.

I suspect that there will, indeed, be a whole generation of baby boomer parents for whom the idea of taking that unsightly pile of taped home videos and cramming them all onto thin little discs will be well worth the money. And, they'll tell themselves, they have a ton of kids videos on VHS (the ones their children couldn't live without), some of which they can also find a way to copy over to DVDs, thus adding to the justification of being an early adopter to the recordable DVD player.

Just what the impact the recordable DVD player will have on home video when it begins to make a mass market push in 2004 is anyone's guess. But one might assume that the recent surge in TV fare on DVD may hit something of a bump in the road once (and if) the mass market of recordable DVD owners start recording their favorite shows. And those studios with classic kids fare that saw huge VHS sellthrough might be well advised to issue their DVD versions sooner than later in the recordable DVD player's evolution. Though I'm not suggesting a connection here, it's a good bet (and good timing on Disney's part) that with the theatrical appearance of The Lion King on IMAX early this year we'll see its DVD special edition version coming later in the fall, following last year's Beauty and the Beast rollout model.

Though standards issues remain on the recordable front, it's time is fast approaching and 2003 will, indeed, be the year recordable DVD breaks barriers on a variety of fronts and sets itself up for a major year in 2004.


3 Jan, 2003

The Unbearable Lightness of Warren

I think we're all still reeling a bit over Warren Lieberfarb's abrupt dismissal from his longtime post as president of Warner Home Video. I know I am. Of all the executives in home video, he always seemed to be Warren the Invincible, Warren the Indispensable, Warren the Untouchable. In his long tenure at the helm, he certainly angered many people. He could be gruff, he could be obstinate, he could be condescending. It was his way or the highway and, were it not for the fact that Warren was almost always right, he likely would have been shown the door a long time ago.

But that's just it — Warren was right, about so many things, in so many ways, on so many occasions. And because of his inherent rightness, Warren's peccadilloes would be overlooked, as they were for so long. He ruled Warner with the might of a Middle East dictator. He had a lot of clout, and he made sure everyone knew it. I still remember when the forces behind Divx, the failed pay-per-play DVD variant, confronted the Japanese consumer electronics companies about their initial failure to support their technology. Their hesitation, they stated, owed to a dire warning from “the most powerful man in Hollywood” that the studios would never back Divx. And who, pray tell, was this “most powerful man in Hollywood?” “Warren Lieberfarb,” came the response. When asked who had branded him so, the response was the same: “Warren Lieberfarb.”

This story is bound to elicit a chuckle from those who know him. It's so Warren. We're talking about a man who, when he went to Las Vegas for the annual Video Software Dealers Association convention, would not only stay at the ritziest hotel in town (the Bellagio), but also bring his own limousine — and driver — from Los Angeles because he didn't care for the Vegas cars and drivers.

Now the unthinkable, the inconceivable, has happened. Warren has been toppled, apparently done in by the Hollywood politics he so detested — and so frequently railed against. I have no doubt that Warner Home Video will continue to perform ably and adeptly under Lieberfarb's second-in-command, Jim Cardwell, heir apparent to the top spot.

But the home entertainment industry has suffered a tremendous loss, because Lieberfarb is one of the few true visionaries our industry has known. In a world of packaged-goods salesmen and marketers, he was a leader, a dynamo, a seer. He was a master strategist, but he was a lot more than that — a whole lot more. I would go so far as to say that it was Lieberfarb's zeal and perseverance in pushing DVD that singledhandedly saved home video from certain death, because if all we had in this high-tech digital era was the blasted videocassette, we'd be in deep doo-doo. Video retailers would be hawking stereos or hardware; studio salesmen would be selling refrigerators or cars, and our marketing gurus would be concocting grand plans to build awareness for Chia Pets or Nestle's Quik.

As for me, I'd be writing about pay-per-view, because if it wasn't for DVD, that's what home entertainment would be.

I know this sounds like a eulogy, and Lieberfarb is certainly not dead. But our industry has just as certainly suffered a little death. The father of DVD has been deposed; the captain of our industry is gone. I can only pray that Warren will either surface somewhere else in a position where he may continue to guide us, or that some other leader with similar qualities and vision will arise to take his place.

I hold out little hope for the latter, so Warren, if you're reading this -- please come back!
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How do you think the recent top home video management changes at several major studios will affect the business?Talk About it Here!


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.