Thomas K. Arnold is considered one of the leading home entertainment journalists in the country. He is publisher and editorial director of Home Media Magazine, the home entertainment industry’s weekly trade publication. He also is home entertainment editor for The Hollywood Reporter and frequently writes about home entertainment and theatrical for USA Today. He has talked about home entertainment issues on CNN’s “Showbiz Tonight,” “Entertainment Tonight,” Starz, The Hollywood Reporter and the G4 network’s “Attack of the Show,” where he has been a frequent guest. Arnold also is the executive producer of The Home Entertainment Summit, a key annual gathering of studio executives and other industry leaders, and has given speeches and presentations at a variety of other events, including Home Media Expo and the Entertainment Supply Chain Academy.
There’s only one thing that surprised me about Redbox pulling the plug on its streaming video joint venture with Verizon Communications, Redbox Instant by Verizon: Why did it take so long?
Back when I attended the big press conference at the Consumer Electronics Show in Las Vegas in January 2012, announcing the JV (it didn’t actually launch until March 2013), I had trouble understanding the business model.
Generally, if you take aim at a competitor — in this case, Netflix — you build a better mousetrap, as they say. Apple entered the cell phone market with the iPhone; Sony jumped into the video game business with the PlayStation.
But from the very start, Redbox Instant appeared to be a poorly conceived venture that consistently failed to take advantage of Netflix’s chief weakness: a limited selection of content, particularly on the movie side, which despite its grand success remains a depository for studio castoffs.
Of course, if Netflix couldn’t strike a deal with Hollywood for better product, what would make anyone think Redbox could do it? But even if the two services had similar (weak) content offerings, why has Netflix exploded while Redbox, well, appears to have imploded?
One factor was that Netflix already had an established base of customers accustomed to the subscription model, through its hugely successful disc-by-mail rental service. All Netflix had to do was migrate those customers over to streaming by making the viewing experience even easier and simpler, which it was able to do by eliminating the hassle of having to send back a disc.
The other advantage Netflix had was in brand awareness. When Netflix launched its streaming service, it was already known for sending movies and other content directly to consumer homes, albeit in physical form. Redbox, on the other hand, was known for its vending machines, a model in which consumers had to go somewhere to get their entertainment.
Netflix also marketed the hell out of its streaming service, to the point where Netflix became as iconic a name in home entertainment as Blockbuster had once been. Redbox hooked up with a cell phone company known for smartphones and data plans, not movies.
Redbox’s unique selling proposition was this: Subscribers didn’t just get unlimited streaming of movies and TV shows, they also got four DVD rentals a month from Redbox’s network of kiosks.
Big whoop. If you’re trying to sell someone a new car, you don’t throw in free horse-and-buggy rides.
In the official notice on its website announcing the demise of Redbox Instant by Verizon, the company said, “The service is shutting down because it was not as successful as we hoped it would be.”
That, my friends, is an understatement — and, in retrospect, Redbox has only itself to blame.
How do we stop the steady slide?
When I heard that U2’s new album was being given away free to every iTunes account, I thought to myself how far the music industry has sunk – to the point where albums, once the cash cow of the business, are essentially worthless.
It was actually a slow and steady process, and one in which music industry leaders have only themselves to blame.
Back in the glory days of vinyl LPs, eight-tracks and cassettes, kids like me had a great sampling mechanism for new music. It was called the single, and it cost 89 cents at the Wherehouse. We’d buy singles of songs we liked on the radio; if the flip side was good, as well, we’d spring $3.66 for the album down at Tower.
The model changed with the introduction of the CD in 1982. Record industry moguls, smelling money, jacked up the price of the CD single to $3.99; when consumers, outraged at the steep price hike, stopped buying them, they killed off the single completely and focused on raising album CD prices to make up the difference. That’s when consumers revolted and, with the birth of the Internet, took to swapping music files online through Napster and other sharing sites.
The record industry took a hard line against this practice, suing their customers and raising the price of CDs even more, to over $20. Ultimately, their plan backfired; consumers kept finding new ways to share music for free and the music industry’s profits plummeted until finally they caved and began selling music downloads themselves, at a fraction of the price they had been getting for physical discs.
The leaders of our industry watched and learned. When the movie industry launched a new format, the DVD, the price of movies went down, not up, and consumers responded by buying boatloads of movies and building massive home libraries.
And yet our industry’s fatal flaw was believing that the DVD gravy train would last forever and migrate over to the next advance in physical media, the Blu-ray Disc. They overlooked the fact that quality, as the music experience had shown, wasn’t nearly as important as they had thought. Music downloads don’t sound nearly as good as CDs, but to the average consumer that doesn’t matter: They gladly give up quality in return for cheaper product and ease of access.
And that’s our next big stumbling block: How do studios maintain the profit margin when consumers are perfectly OK with spending less than $10 a month to stream movies over Netflix, even if the quality isn’t as good as disc and the selection is limited to catalog product?
Keeping new releases out of the subscription streaming cycle has worked so far, but there are only so many hours in the day, and the novelty of Netflix has yet to wear off. This has led to a precipitous decline in disc sales, with consumers no longer hell bent on immediately rushing out and buying the latest hot new movie release when there’s plenty of stuff they still haven’t seen on Netflix.
The sale of movie downloads — EST, Digital HD, whatever you want to call it — is supposed to save our business, but despite early windows the practice still hasn’t caught on as studio heads had hoped. It’s still a fringe business, and there are those who believe it will never really flourish until the price comes way down, to $5 or less, a move that would destroy margins and put a serious dent in Hollywood’s revenue stream.
That’s why the studios continue to support the disc business, while looking everywhere they can to cut costs.
Will we eventually suffer the same fate as the music business, where content is essentially being given away? I hope not, but the truth is, we’re almost there. To counter this, studios need to find some way to transform the subscription business into a transactional business, although there are those who say it’s already too late.
If it is true that every challenge presents an opportunity, I hope we find it. I’ll be thinking of possible solutions, as well — perhaps while listening to my free U2 album on my iPhone.
I’ll call them the disc defenders.
Lately, I’ve been running into people who are talking up the benefits of physical media — Blu-ray Disc as well as DVD — to anyone who will listen, often citing their own disappointing experiences with digital delivery.
And the more I listen, the easier it is to categorize these disc defenders into groups — groups that appear solidly committed to discs for some very valid and logical reasons.
The first group is made up of diehard Blu-ray Disc fans. They never cut back on buying discs, and they’re the ones most likely to ultimately replace the bulk of their DVD libraries with high-definition discs, even if half those old DVDs are still shrink-wrapped. They are driven chiefly by the quality of the picture and sound and more than likely have invested big bucks in elaborate home theater systems that really show off what high-definition discs are capable of. Despite advances in digital technology, they say, the fact remains that for the optimum high-definition viewing experience nothing can match Blu-ray Disc.
The second group is the gift-buying market. They love to give — and receive, for that matter — movies as gifts, which they later trade among family and friends. They’re the ones at Best Buy or Walmart or Target on Black Friday with a shopping cart full of discs; they use the cheap ones as stocking stuffers and the heavily discounted movie collections, new releases or TV series as gifts. Giving someone a digital download, often through an email notification, simply isn’t the same as giving someone a neatly gift-wrapped box with a movie or two inside, they say.
The third group is the collector. Yes, even though everything’s now on the Web or in the cloud, these people still like to collect physical things. They have their photos printed out and put into albums; they still have a rack of CDs in the family room, by the stereo; some of the rooms in their houses, by God, even have bookshelves filled with books with actual paper pages. And while I can’t swear to it, I’ve heard some members of this group also collect Franklin Mint plates.
The fourth group is the shell-shocked downloaders who due to a hard drive failure have lost their entire music or movie collection, generally back in the days before everything could be backed up into the cloud. They’ve never gotten over their loss, and they’re not about to be burned again.
The fifth and last group is what I’ll call the disenfranchised Netflixer. Like so many of us, they jumped at joining Netflix for subscription streaming. But after a while, the novelty wore off. Maybe it was the lack of current product — you can only watch so many ‘B’ movies from 2005 or long-canceled TV series. Maybe it was the incessant buffering problems. But whatever the case, the honeymoon’s over and the old Blu-ray player’s being fired up, once again.
The disc is dead. Long live the disc!
Best Buy’s amazing slide to a 45% drop in income in the second quarter of this year, and ominous warnings of further drops to come in quarters three and four, can’t be attributed solely to the lack of new smartphones and the continued migration of shoppers online.
The electronics chain’s makeover, putting discs, CDs and other software in a corner in the back and reserving its prime floor space for tablets and smartphones, has destroyed its character and made it a lot less fun to shop there. You’d think management would have learned a lesson from Radio Shack, whose death march began when it brought in the iPhone. Sales initially surged, but margins plummeted — and before long everyone was carrying the iPhone and Radio Shack had painted itself into a corner.
Best Buy not only followed the same strategy, but also mangled a great idea last fall through its “showrooming” counterattack. Stung by consumers checking out products at Best Buy but then buying online, the company commissioned a series of 11 ads under the "Your Ultimate Holiday Showroom" theme, touting its low-price guarantee and the ability to order online and pick up in store.
The trouble was, the campaign focused more on outdoing Amazon than it did on highlighting the benefits of shopping in-store at Best Buy — although, in retrospect, maybe that’s because those benefits simply aren’t all that pronounced.
It all goes back to how fun it used to be to shop at Best Buy, before the chain transformed itself into a physical portal for tablets and smartphones. And there’s the essence of what Best Buy needs to do if it is to survive, much less thrive, in this increasingly challenging environment.
The stores need to become destinations again. I agree with Jehan Hamedi, global market development manager at Crimson Hexagon, a social-media analytics company that analyzed Twitter and Facebook dialog on Best Buy’s ad campaign. He told Ad Age Best Buy should make the stores more of a "playground" destination with fun in-store events, group discounts and refer-a-friend programs. "There's such a huge opportunity for them to link their product showroom appeal with a social experience," he told Ad Age. “We found that the largest, the prime [consumer] expectations, had nothing to do with what I might expect, like touching or sampling the product. It's more about social gratification — having fun. You go with your friends and they are your pre-purchasing sounding boards. It's a destination.”
My last visit to Best Buy was not a fun experience. The local store is situated in a large strip mall, right next to Walmart. I got there at a quarter to 10 on Sunday, wanting to pick up some discs as a gift for a birthday party my youngest son was going to, but Best Buy didn’t open until 10 and even though there were more than a dozen people outside waiting to get in those doors didn’t open until exactly 10, on the minute. I went to Walmart instead, and that was a lost sale Best Buy could have had if there was some flexibility and awareness of the store’s retail surroundings.
After my purchase at Walmart, I went to Best Buy to check into getting a protective screen around my middle son’s new school-issued iPad. It took me 10 minutes to find an available clerk, and I found the screen protector before he did. It was also I who suggested the Geek Squad put it on, not him.
As I was walking out, I saw a refrigerator I had purchased on sale on the Fourth of July holiday for $1,799 was back up to $3,265 — “10% off the regular price, just in time for Labor Day.” I understand price fluctuations, but come on! It’s episodes such as this that build consumer distrust — and at this point that’s the last thing Best Buy needs.
The pricing dispute between Amazon and Walt Disney Studios is merely the latest skirmish in a 35-year battle between studios, who own the content, and retailers, who distribute it.
It also serves as an indictment of Amazon’s business tactics and, as the Washington Post observes, “power over the retail and media economy.”
Simply put, Amazon is putting pressure on Disney — as it did earlier with Warner Bros. — to get a better deal on Blu-ray Discs and DVDs. In a story Home Media Magazine broke, the giant online retailer is blocking preorders of several Disney titles such as Captain America: The Winter Soldier and Maleficent as a negotiating tactic for better pricing.
Amazon certainly has a big muscle to flex: Preorders typically account for up to 30% of “first day” sales, and Amazon is the biggest pre-seller in the business.
Amazon also happens to be one of the biggest retailers of filmed content, period, and also is poised to be a leader in digital distribution.
But as a matter of principle, what Amazon is doing, quite frankly, stinks. It also exposes one of the online retailer’s weaknesses and rare disadvantages to traditional brick-and-mortar retailers such as Walmart, Costco, Target and Best Buy.
To move huge quantities of discs, Amazon has to sell new releases at the same price as Walmart and the other physical retailers. But Walmart and crew can afford to lowball the price, even selling below their own costs, because they use discs as loss-leaders to drive traffic into their stores.
Amazon hasn’t yet figured out how to get those impulse sales in the digital world — but they have to be competitive, so now they are using their clout to beat up the studios in an attempt to get better margins.
My take, to Amazon: Stop being a bully and, instead, focus all of that misspent energy on figuring out how to snag impulse buyers online. Amazon’s efforts in that regard have been half-hearted and only moderately successful — otherwise, there’d be no squawking over price.
If Amazon could come up with a way to really captivate consumers and, say, through each Blu-ray Disc or DVD purchase, get them to buy a ton of other things, they'd rule the world.
But they’d have to match the disc sales price of Walmart and other brick-and-mortar retailers on their own, without any studio subsidy, even if it meant taking a loss — which, in reality, would be an investment. And Amazon just doesn’t want to do that.
It’s much easier, I suppose, to block studio product and try to get the studios to blink first.
Remember that old line about how the more things change, the more they stay the same? From the very beginning of the home entertainment industry, the studios — who control the content, which of course is the single most important factor in the whole equation — have consistently done battle with various enemies, real or perceived.
In the early days of the business, they tried to crack down on the proliferating video retailers who were renting their videocassettes and pocketing the money. They ultimately lost in court and wound up toying with all sorts of strategies to share in the revenue.
When DVD came around and consumer habits shifted from renting to buying movies and other content, the studios found a new nemesis: deep discounting mass merchants who, in Hollywood’s view, devalued the product. Once again, the studios came up with various strategies to preserve their margins. On the catalog end, they worked with key retailers to agree on tiered pricing, so that the “race to the bottom” wasn’t a straight, head-first plunge. On the new release front, they began issuing two different versions of new releases, a bare-bones DVD the mass merchants could sell for peanuts and a more expensive version, packed with extras, that could fetch a significantly higher price.
A decade later, when the sellthrough business began to level off, studios went after Netflix and Redbox, which through their subscription and kiosk rental models, the studios felt, were cannibalizing sales. A bitter fight ensued, with studios refusing to sell Netflix and Redbox their product. The rental services figured out all sorts of work-arounds, including sending teams into Walmart to buy huge quantities of new releases. Several studios went to court, but ultimately, in 2010, everything was settled at the negotiating table, with three studios now holding back new releases from Netflix and Redbox for 28 days and, in return, extending the rental services better pricing.
Moving into the digital realm, the studios are now pushing Digital HD, or “electronic sellthrough,” which essentially consists of selling downloads to consumers. But despite early release windows the business remains on a slow roll, with consumers by far preferring to stream movies — the electronic equivalent of video rental.
This, in turn, now promises to evolve into the next big battle: transaction versus subscription. If you thought the studios hated video rental, that’s nothing compared to how they feel about subscription, which not only takes them out of the revenue loop but puts all content on a level playing field. So far the studios have been able to keep hot new releases from being included, but there’s already so much other stuff available for around 10 bucks a month that new-release sales are bound to suffer.
How do the studios keep the transactional part of the business alive? That’s a very, very good question — and one that ultimately will be decided not by Hollywood, but by the consumer.
The impact of Netflix on how we watch movies and other filmed content is astounding. There are those who say the company’s subscription streaming service is decimating the disc sales business, while others scoff at this intimation and insist the real victim is broadcast TV.
Those who hold the latter point of view note that Netflix viewing options, at least at this point, are limited to old movies and recent duds, and that as long as the window between Netflix and Blu-ray Disc/DVD is maintained, we have nothing to worry about.
Oh, sure, there’s a definite impact from all the eyeballs watching White Chicks or “Supernatural” on Netflix instead of hot new releases on Blu-ray Disc or DVD, but the debate centers on whether those eyeballs belong to people who would, indeed, be buying new discs if Netflix wasn’t available, or if their owners are sluggish couch potatoes who’d otherwise be watching broadcast or cable television.
But there’s no question that the Netflix juggernaut keeps rolling and amassing power — with the ultimate goal, of course, of offering first-run movies and TV shows at the same exact moment they come out on disc — a move that will, of course, kill the disc business and probably a lot of other businesses alongside it, including pay-TV.
Never going to happen, you say? If the money’s right, of course it will — and if there’s one thing I’ve learned in more than 25 years of covering the home entertainment business, it’s to never, ever, say never.
As Home Media reported July 17, Netflix and The Walt Disney Co. have cut a deal in which Netflix gets exclusive pay-TV access to first-run movies in Canada beginning in 2015. A similar deal is in place here in the United States, although it’s not scheduled to start until 2016.
Netflix in Canada also gets first-run pay-TV films from Paramount, DreamWorks Animation and 20th Century Fox.
If things continue to be heading in this direction, pay-TV will crumble and fall to Netflix’s domination — and after that, there’s really only one more market left to conquer, the disc business.
Studios won’t give it up without a fight — but the more powerful Netflix becomes and the more the disc business falters, the harder it’s going to be to resist a reasonable offer. And if Netflix can somehow figure out how to make the numbers work, offering unlimited access to new-release movies and original TV shows for $9 a month, what began as a disc-by-mail rental service challenging Blockbuster and traditional rental will truly become the pre-breakup AT&T of home entertainment.
For several years now, in the political realm, we’ve been hearing that to really measure the state of the economy we need to focus not on Wall Street but on Main Street.
The same can be said in our industry: We need to focus less on Hollywood, California, and more on Hollywood, Florida.
Our industry has been too quick to give up on formats and technologies simply because they are no longer cool or hip — and in the process we’ve left a lot of people out there in a proverbial lurch, wondering why they can’t get their favorite movie on the format they like and are familiar with.
We’ve also been so dazzled by technology that we forget the formula for success in any field that French philosopher of education Jacques Barzun happened to apply to a book on the craft of writing: Simple and direct.
When DVD came around, it took a while for the format to take hold, but after Walmart jumped aboard about two years after launch the studios couldn’t get rid of VHS fast enough. Studio executives all had DVD players and so did their neighbors, so why bother even making those clunky videocassettes anymore?
What they failed to realize was that those clunky videocassettes were not only immensely popular in America’s heartland, but they also were keeping video rental stores alive — rental stores that indirectly helped feed the DVD juggernaut by easing people into the new format. Ma and Pa Kettle in Jasper, Ala., could keep renting movies they liked, and gradually warm up to DVD — and the concept of out-of-the-gate ownership — at their own pace. It’s human nature to be more open to something new if we can approach it on our own terms, instead of having it forced on us.
Sure, ultimately DVD became the biggest success story the consumer electronics industry has ever seen, but I can’t help but wonder how much money was left behind by the premature death of VHS. I believe the two formats could have co-existed peacefully for a lot longer than they did, and the industry as a whole would have seen a much slower decline in rental spending — and a much less dramatic death march by independent retailers.
When Blu-ray Disc launched, our industry once again was lulled by looking inside, at our own close circle, instead of at the mainstream consumer. We replaced our movie libraries, so we assumed everyone else would, too — failing to realize that at the time Blu-ray launched much of America was still in the process of building up their DVD libraries. A new format, mired in a brutal format war, no less, must have confused the hell out of the average American who doesn’t live and breathe entertainment.
We further complicated matters by touting different “versions” of Blu-ray, as well as high-tech features such as BD-Live — this at a time when not a single studio president I talked to even owned a connected Blu-ray player.
All the while, we should have focused on one thing: a vast improvement in the viewing experience, with a true high-def picture and the best-ever sound.
Simple and direct. That’s what resonates across America.
Twenty-five years ago, I was preparing for my very first home video convention, taking place in Las Vegas under the direction of the Video Software Dealers Association.
At the time, I was freelancing for a thick monthly trade magazine called Video Store Magazine, and I remember the editor, Frank Moldstad, giving me the rundown on the various publicists for the studios I would likely be dealing with. There was Steve Feldstein over at Disney, a big man with an even bigger personality who one fellow reporter confided to me was “the smartest guy in this whole business.” There was Maria LaMagra at MCA Universal, a gregarious charmer who ran her department like Margaret Thatcher ran England. There was Nina Stern at Paramount, the most human publicist in Hollywood.
And then there was Fritz Friedman at RCA/Columbia, who Moldstad told me “is in a class by himself,” as all the other reporters nodded in agreement.
I soon learned for myself what they meant. Fritz had along ago broken out of the bounds of standard studio publicity and had emerged as a true public relations strategist. Like the finest craftsmen, he saw publicity as both a science and an art, grounded in developing close relationships with the press built around mutual respect. If Fritz wanted a story, you ran with that story — not because he begged and pleaded, but because it made sense. Fritz never gave reporters a hard sell because he didn’t have to.
Fritz was also a pioneer in bringing event marketing to home entertainment; one of my first-ever Hollywood parties, in fact, was a bash he threw on the studio lot for Boyz n the Hood. He worked the room like a politician, and drummed up so much publicity for a home video release that event marketing soon became a mainstay on the home entertainment circuit, particularly after the transition from VHS to DVD lifted the business into Hollywood’s single-biggest revenue source. He was the first publicist to bring a major star (Jimmy Stewart) to the VSDA convention; in 1996, when the convention came to L.A., he threw the biggest party in town, an elegant bash for 7,000 people on the studio lot featuring entertainment by Riverdance. More than a decade later, he orchestrated Spider-Man ringing the closing bell at the New York Stock Exchange — not once, but twice.
You hear stories about people who are consumed by their jobs; in Fritz’s case, it’s more like the job was consumed by him. He liked what he did, and he was damn good at it — which is why as word broke that after 34 years of running publicity at what is now Sony Pictures Home Entertainment (and, in recent years, the studio’s acquisition program), Fritz had decided to retire, I didn’t feel bad for him one little bit because I knew that if he was leaving, he was leaving because he wanted to, because he felt it was time.
He’s certainly got enough to keep two or three Fritzes quite busy. He’s an adjunct faculty member at the prestigious Annenberg School of Communications and Journalism. He’s been appointed to the Cal Humanities Board by Gov. Jerry Brown, an agency that since its founding in 1975 has awarded nearly $22 million in grants to organizations and projects within the Golden State, including dozens of Sundance, Emmy, and Academy Award-winning and nominated documentary films.
And he’s involved in all sorts of activities in the Filipino community. He lobbied Congress to give benefits to Filipino veterans of World War II (with Lou Diamond Phillips). He served as Chair and President Emeritus of the Filipino-American Library in Los Angeles. And he co-founded the Coalition of Asian Pacifics in Entertainment (CAPE), which with more than 3,000 members is the largest entertainment networking platform for Asian-Americans.
It’s a tough business. That’s what I’m hearing all around from studio executives and retailers as the home entertainment business adjusts to life as a middle ager (which the U.S. Census says starts at 35).
“This job is no fun anymore,” one high-ranking studio executive recently told me. “Every week, it’s all about cutting — taking out costs to save the bottom line.”
Traditionally, when businesses find themselves in a mid-life crisis, they focus on reinventing themselves and hopefully reinvigorating their revenue streams. The defense industry is a perfect case in point: whenever there’s another cycle of downsizing, defense contractors figure out some other business to get into. In 2012, a company called RTI Internationals, which had built its business largely on selling titanium to the U.S. defense industry, bought a medical-device business focused on spinal implants and other products for the nation's growing number of senior citizens.
Our business is a little different: We’re not suffering a cyclical downturn, but, rather, a transformation from one method of distribution (physical) to the next (digital). Americans haven’t slashed their home entertainment budgets; they’re just spending it in different ways, such as Netflix subscriptions.
We also have a clear eye toward the future: If digital distribution is the new way consumers will get movies and other content into their homes and onto their personal devices, then we need to transition the most profitable aspect of our current business — the consumer purchase model — into the digital realm, which studios are doing through Digital HD and, to spur sales, early release windows.
The problem is that the transition isn’t happening smoothly. It’s a bumpy road, with the biggest obstacle being subscription streaming services and video-on-demand.
And while we all still hope that one day these obstacles will be overcome, it’s managing the interim that’s proving to be problematic. With declining revenue from discs, it’s hard to maintain staff and marketing dollars that may well be needed in the fight to get consumers to buy downloads.
Compounding the problem is that the proverbial light at the end of the tunnel isn’t as bright as many of us had hoped. Sales of downloads may never approach the peak of Blu-ray Disc, much less DVD, simply because the joys of ownership have traditionally been centered on a material object you can look at and hold and file away and show off to your friends.
I most certainly want to own The Wizard of Oz, for example — but if there was no such thing as disc, I’m not sure I would fork over $10 or $20 for a download that lives on my hard drive — or a “license” to access the film in the cloud.
Ah, the joys of middle age.