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.
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.
The home entertainment business is becoming increasingly polarized in its thought leadership. We have those executives who believe there’s still plenty of life left in physical media, particularly in the country’s less-tech-savvy heartland, and then we have the disc-is-dead folks who believe Netflix and subscription VOD have destroyed sellthrough, paving the way for the disc’s imminent extinction.
The former group seems to be throwing their lot in with the 4K crowd, believing there’s a growing market for even higher-quality viewing experiences than high-definition and that the industry needs to start offering consumers a 4K option with both physical discs and set-top players.
The latter crowd, meanwhile, dismisses quality as a secondary factor — citing the disaster that was DVD-Audio and Super CD — and maintains any investment in building a better disc, so to speak, is futile, since we’re all going to move over to electronic delivery before too long.
This contrast really struck me the other day when I had conversations with the presidents of two major-studio home entertainment divisions in the space of about an hour and a half. One president said he sees Netflix eating into broadcast TV, not disc sales, and maintained the disc market remains much healthier than many might think; the other president said disc sales are plummeting “because everyone’s gone over to Netflix.”
Black and white, folks — when, in truth, as with so many things, the real answer lies in the gray area in between.
Here’s my take: Yes, let’s forge ahead and keep improving the physical disc — all the while promoting it as the premier viewing experience when it comes to quality – but let’s manage our expectations. As we’ve seen with Blu-ray Disc, people are not going to rush out and rebuy their entire movie libraries again — it’s the law of diminishing returns, compounded by growing acceptance of the cloud, which presents us with a unique way of “owning” something without cluttering up the house.
The disc market, then, will be smaller, quite possibly a lot smaller. But it’s not going to disappear, either — simply because there will always be people who want the best possible viewing experience and for the foreseeable future, at least, the disc remains the best way to deliver on that front.
And yet at the same time, electronic delivery will continue to grow — although I’m not convinced EST will ever be as big as many in our industry hope. Even if building a movie library is cheap and easy and you can store it in the cloud instead of the hallway closet, the need to own is tenuous. Part of the success that DVD enjoyed came not from people wanting to own a bunch of movies, but from the collectability it inspired. And now that we’ve been there and done that (sorry for the cliché) it’s time to move on.
The fact is, subscription DVD, a la Netflix, is about as simple, easy and cheap as the average all-American couch potato could hope for. So I’m not surprised in the least by the new PricewaterhouseCoopers study that predicts electronic home video revenue will be the main moneymaker in all of filmed entertainment by 2018, driven by subscription VOD services, which generated $7.34 billion in 2013, but in PcW’s view will more than double to $17 billion by 2018.
That’s where the viewing future of on-demand home entertainment lies — I think we can all agree on that. But it’s not going to be an all-or-nothing proposition, and I have a hunch the physical disc, though down, won’t be out for a very long time.
A new NPD study finds that UltraViolet users are 11 times more likely to have made an electronic sellthrough purchase in the past year, compared to other U.S. consumers, and four times more likely to own a connected Blu-ray Disc player or other streaming media device.
The research group calls Ultraviolet users “early adopters” who like early adopters of other technologies — most notably, DVD and Blu-ray Disc — tend to be voracious consumers of entertainment and much more tech-savvy than mainstream folks.
If the pattern holds true, we have nothing to worry about: The early adopters set the trend and everyone else follows, just like that.
The problem is, Ultraviolet isn’t a new product, it’s more of a concept — and selling people on a concept is significantly more difficult than pitching them something tangible.
And the concept we are selling here is buying movies electronically rather than physically — a much bigger stretch than getting someone to switch from a videocassette to a disc.
Compounding matters is that UltraViolet is really the means to an end. It’s a way of storing purchased content in the cloud and then accessing it anywhere, at any time, on any device. It’s designed to add value to physical discs and transition consumers to the end game, which is buying movies electronically, without any disc at all, with the same promise of ubiquitous access and availability.
In that sense, then, the other means Hollywood has employed to effect this transition — early release windows — is much simpler and easier to understand. You can buy The Amazing Spider-Man 2 on disc right before Christmas, but you can buy the film electronically two or three weeks earlier, for less money — and watch it just as easily on your home theater setup as on your smartphone.
Bingo. That’s the magic formula, and we as an industry need to promote the heck out of it.
As for UltraViolet, it’s a wonderful idea, but the execution has been miserable — we should have had a common, universal website from the get-go, and everyone should have been onboard from the start.
Given the countless obstacles and resistance from some quarters, it’s amazing that UltraViolet has been accepted as widely as it has been. But in the big picture, UltraViolet is small potatoes: The real trick is selling digital downloads, and hyping the hell out of early release is the way to go.
I must confess, for years I have put off getting Netflix, despite my kids’ ardent requests, because I have seen the subscription rental service — particularly its movie-streaming — as an enemy of our industry. I have bought into the notion that Netflix cannibalizes sellthrough, the lifeblood of the home entertainment business, and insisted my kids watch every single DVD and Blu-ray Disc I’ve got socked away all over the house before I feed such a destructive beast that threatens the livelihood of the entire home entertainment universe, including Home Media Magazine.
A few weeks ago, I relented — or, rather, the boys teamed up with Mom and signed us up on her credit card — and I must say, I have completely changed my mind. We’re still watching new movies as they come out on disc, at the rate of two or three a week.
What’s changed is that we are no longer watching any network or even cable TV.
There’s lots of good old movie and TV stuff on Netflix — very similar to what’s on cable — so when the kids are in the mood for some channel surfing, they browse Netflix instead of the cable menu or what they’ve DVR’d. Last weekend Conner and Hunter binged on “Family Guy,” just as they do most Sunday afternoons after particularly heavy sports Saturdays — but instead of watching the animated show on the DVR, they watched it on Netflix.
And while our hunger for new movies go down a little in the coming weeks as we continue to explore the wonderful world of Netflix — last night I even set up my own channel, consisting mostly of cheesy horror movies I never got around to picking up on disc — I’ve already assembled a play pile of The Counselor and several other recent Blu-ray Disc releases, hot new stuff Netflix won’t be getting for a while.
So yes, cannibalization is occurring — but not, necessarily, where one might think. And from my conservations with several high-ranking studio executives who have admitted to me, privately, that they, too, have become Netflix households, it appears we’re all having the same experience.
Here’s to sleeping with the enemy.