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 encouraging news for home entertainment in the mid-year numbers report issued July 31 by DEG: The Digital Entertainment Group, but I fear that once again people are going to overlook it and misinterpret the report in a negative way.
The big news, to me, is that in the second quarter of this year consumers spent more money on digital delivery options than on physical media.
I know, I know — the bulk of that increase went to Netflix and subscription streaming, at the expense of Blu-ray Disc and DVD.
But that’s really not the way I see it — I believe this little statistic indicates not only that consumers are comfortable getting their movies and TV shows over the Internet, but it also suggests that electronic sellthrough (or Digital HD — call it what you will) has a real chance of taking off.
You see, the more people tune in to Netflix, the sooner they’ll catch on that there’s a lot of good new stuff they simply can’t access. I am operating under the assumption, of course, that the average American’s viewing diet consists of movies, and not just the TV series Netflix excels at. And if you’re a movie fan, Netflix simply doesn’t cut it. I can tell you from personal experience that in every home there will come a point when people grow tired of the studio castoffs, direct-to-video bombs and 9-year-old theatricals that make up the bulk of Netflix’s movie programming and clamor for something new, something fresh, something hot.
My 17-year-old, Conner, after consuming dozens of DTV horror sequels and Lifetime movies with Dear Old Dad, reached that point a couple of weeks ago. He wanted to see Guardians of the Galaxy — and because he’s been programmed to watch electronically he didn’t bother to visit our disc room, home to more than 2,000 Blu-ray Disc and DVD movies and TV shows I can’t possibly live without. No, he switched over to Amazon Prime and bought the film (on the family credit card, of course) for $19.99.
I hear lots of talk on the studio side about how to make digital movie purchases more attractive. Early windowing — issuing a film on EST two or three weeks before any other platform, including disc — is certainly a good incentive. So is pushing down the price and adding the extras we’ve grown accustomed to through discs.
But the real key to EST’s success, I believe, is patience — Netflix has done a great job indoctrinating people to watch movies and TV shows OTT, and it’s only a matter of time before the novelty wears off and people want to watch something new and exciting again. And, just like Conner, they’re finding out it’s quite easy to do — as long as you’re willing to pay for it.
And my hunch is, they are.
If we’ve learned anything over the last half-century, it is that consumers love choice.
They also tend to choose things that are cheap and easy.
When I was growing up, it was on the tail end of the three-network universe. Our entertainment-viewing schedules revolved around their broadcast schedules, and if we didn’t like it about the only alternative was watching old “Flash Gordon” serials on one of the handful of non-network stations our rabbit-ear antennas would allow us to watch.
We jumped at the chance for more control over what we watched, more choices — which gave birth to first cable and then, in the late 1970s, home video.
Home video, at the start, was cheap, and relatively easy. You could rent a movie for a couple of bucks a night, but you had to go to a video store — and then bring it back the next day, lest you incur ruinous “late fees.” And if you happened to have the collector gene, you had to wait six months, maybe more, for the movie to be available for sale to consumers. Oh, sure, you could buy new movies for about $65 to $100, but that didn’t pass the “cheap” test — so very few people did.
Since then, every innovation that has caught on with consumers has expanded their menu of choices — and it’s been either cheap, or easy, or both. With DVD, you no longer had to rewind, and you could buy movies for less than $20 right when they were released, with no six-month wait. With Netflix, you got your movie in the mail — no return trip necessary and, hence, no grim specter of late fees hanging over your head. And let’s not forget about Redbox, which let you check out a movie as you’re leaving the grocery store — and bring it back when you run out of milk or toilet paper.
With advances in technology, we saw things get even easier, and cheaper. Netflix ushered in the era of OTT, where for less than $10 a month you can watch a good-sized haul of old movies, newer ‘B’ movies, or TV shows. If you want to watch newer, first-run movies, you can buy them over the Internet, as digital downloads, or pick up a Blu-ray Disc at the local Walmart.
We have never had so many choices, and our choices have never been cheaper — or easier.
That’s why it irks me to no end when I hear people say things like “discs are dying” or “Netflix is taking over the world,” or other misguided pronouncements like that.
It’s all home entertainment, and each sector of the business — physical discs, streaming, electronic sellthrough (or Digital HD) — plays a crucial role in the palette of choices this industry has given consumers.
Consumers get to decide which format, which delivery method, works best for them. And invariably, it will be a mixture — we’ll watch Joyride 3 on Netflix one night, and then buy a disc or download of American Sniper the next. We might spend two weeks binge-viewing “Breaking Bad” and then take a break and watch nothing but first-run movies for the next eight or nine nights.
So let’s stop talking about dying formats and competition and cannibalization, and realize that to the consumer it is, quite simply, all about choice.
Netflix appears to have an insatiable appetite for original content.
Speaking earlier this month at the MoffettNathanson Media & Communications Summit in New York, Netflix chief content officer Ted Sarandos attributed much of Netflix’s 20% year-over-year subscriber engagement hike to the success of original shows such as “House of Cards” and “Orange Is the New Black.”
The percentage of its total acquisition budget that Netflix spends on original programming keeps shooting upward; on an earnings call last month, chief financial officer David Wells said “it’s drifting up to 30% [and] could drift up to 40% … we are building out our … original content investment and that is cash intensive.” Accordingly, in his quarterly letter to shareholders last January, Netflix CEO Reed Hastings promised 320 hours of original programming this year, three times as much as in 2014.
Original content is not just the growth engine for Netflix here in the United States, but also abroad, where Netflix is aggressively expanding its reach. Sarandos noted that “House of Cards,” according to one report, is the most popular U.S. TV show in China.
And Netflix is more than happy to pay whatever it takes for exclusive rights — which is why some of the same studios that for years have griped about Netflix cannibalizing their sellthrough business are now creating original programming for the No. 1 streaming service.
Content, it appears, truly is king.
The more dependent Netflix gets on original content, the more it seeks global exclusivity of that content. Netflix no longer seeks blanket license agreements with studios for bulk programming. It picks and chooses specific programming.
To get control of that programming, Netflix is now dealing directly with creators and producers of TV shows and independent movies. When it licenses a show or movie, the rights are exclusive. That’s because binge-viewing, commercial-free, and on-demand access are key drivers of Netflix’s brand proposition.
“We’re either interested in the global rights or we’re not interested at all,” Sarandos said.
Netflix recently secured rights to African warlord drama “Beasts of No Nation,” starring Idris Elba. The streaming kingpin beat out independent distributors (such as Fox Searchlight) within the major studios — a win Sarandos attributed more to dealing directly with producers and granting immediate access than money.
It also secured exclusive rights to Fox TV’s “Gotham” and A&E Networks’ “The Returned” by dealing directly with the shows' producers, Warner Bros. Television (“Gotham”) and A&E Studios, respectively.
“For a dollar spent [on original programming] and an hour viewed, you get more hours of viewing per dollars spent on originals versus the licensed content,” Sarandos said.
At the same time, Netflix is still interested in bidding on sitcoms with major stars, such as “The Big Bang Theory,” “Mike and Molly,” and “2 Broke Girls,” provided the market for the shows isn’t overheated, according to Sarandos.
“We’re not seeking a lot of [random viewing],” he said.
But for the most part, original programming is the way to go for Netflix — regardless of what it costs, where it comes from, and who they have to beat out at the negotiating table.
Ever since home entertainment, buoyed by DVD sales, overtook theatrical as Hollywood’s primary revenue stream in 2001, it has been a frequent target for those in the media who take great delight in hammering success. When the growth in disc sales began to slow during the high-definition disc transition and format war, countless reports surfaced that the sky was falling on the home entertainment business — a wrongful cry that grew louder when consumer spending on disc sales actually did begin to top off and then decline, even though those dollars were merely redirected toward on-demand streaming and Digital HD.
The business is evolving, toward a digital distribution model, but if you look at the numbers you’ll find the total amount of money consumers are spending on bringing movies and TV shows into their homes and mobile devices has remained remarkably solid, despite competition from all corners of the Web, from Facebook to YouTube.
Indeed, the media’s cries that home entertainment’s days are numbered have become so frequent, and yet so hollow, that it is a wonder that anyone still takes them seriously.
Perhaps cognizant of this, some in the media have drafted a new game plan: If we can’t argue, with a straight face, that home entertainment spending is falling precipitously, then we can pick apart the business and brazenly declare the numbers are cooked.
It is this travesty that online gossip site Deadline has perpetrated with its assault yesterday on the latest quarterly home entertainment numbers report from DEG: The Digital Entertainment Group, which has first-quarter home entertainment spending nudging up a quarter of a percent, when all aspects of the business are factored in. The numbers show a continued slide away from traditional packaged-media sales and rentals into their digital equivalents, Digital HD sales and on-demand streaming.
Deadline quotes analyst Michael Nathanson, of MoffettNathanson Research, who according to the gossip sheet is “at the forefront of analysts who believe” — get this — that spending on “streaming services led by Netflix” should not be included in the home entertainment tally. He feels Netflix falls into the same category as “cable TV or premium channels HBO, Showtime and Starz,” according to Deadline, and thus should not be counted. “What’s more,” Deadline quotes the analyst as saying, the subscription streaming services "are mostly comprised of TV products, while the majority of DVD or VOD transactions are related to film.”
How’s that? Netflix, which began life as a DVD-by-mail rental service and then transitioned into streaming as the next chapter in the rental business, isn’t part of home entertainment? This reminds me of those occasional stories that popped up in the early days of DVD, when the business was booming, that implied home entertainment was dying because videocassette rentals were falling.
And as for the assertion that subscription streaming shouldn’t count because much of their fare consists of TV shows, that’s equally ridiculous. It’s the “on demand” element that sets home entertainment apart, and watching “Breaking Bad” on Netflix is no different from renting or buying the series on disc. Let’s not forget that in the early 2000s, the compact size and greater capacity of DVD led to a burgeoning TV-on-DVD market that at its peak topped $4 billion in annual sales.
As for the original content that inspires comparing SVOD services to TV networks, they are, if anything, more akin to the long-form equivalent of direct-to-video fare than they are the traditional television model, and thus still within the realm of what would be considered "home entertainment."
No, Deadline and Michael Nathanson, you are sadly mistaken. The home entertainment business is evolving, this is true — but you can’t just arbitrarily cut out a traditional segment of the business, rental, because it’s being consummated in electronic fashion rather than physical form.
You might not want to hear it, but home entertainment is alive and thriving — and those of us who have been around for 20 or more years are elated that at a time when more and more eyeballs are watching farting cat videos on YouTube or “liking” some status update on Facebook, filmed content is still being consumed, on demand, as heavily as it ever was.
If you feel like tearing apart some product or business, go after something that genuinely deserves it — like Smart Cars or newspapers.
Home entertainment is doing just fine.
Going it alone in the home entertainment business has never been a good idea. Back in the early days of home video, VHS triumphed over the far-better Betamax primarily because JVC, which designed VHS technology, was willing to license it to other manufacturers. Sony refused to share; only in the late 1980s did the company finally agree to license Betamax to other manufacturers, but by then it was too late: VHS had an overwhelming market share.
The home video market grew and prospered regardless of this disharmonious start, but I fear that’s something of an exception. The home video market gave consumers unprecedented control over their viewing choices, something they had never had before, and it grew rapidly largely because the proposition was so enticing and there was no real competition. Pay-per-view was still in its infancy, and the on-demand factor that really propelled home video’s fortunes was still a pipe dream.
Today’s home entertainment landscape is much more fragmented than it ever was. Consumers have all sorts of options for viewing movies, TV shows, and other programs on demand — when they want to watch it, where they want to watch it, how they want to watch it. And the proliferation of screens — remember, for years, the home TV was the only conduit to watch something, regardless of whether it was delivered on a cassette (and then disc), cable, satellite, or broadcast — has only intensified the competition even more.
The only constant, really, is this: The content owners, chiefly the studios, would much prefer consumers buy a copy of the movie or TV show rather than stream it (or, back in the day, rent it). It’s a clean, finite transaction — and a lot more profitable.
The studios have done a great job, driving ownership, through a series of innovations that focused on the two key factors driving consumer demand in this business: easy and cheap. First came DVD, priced low out of the gate to encourage sales and, with random access, so much easier to watch than a videocassette (no need to rewind). Then came Blu-ray Disc, a qualitative improvement, followed by Digital HD.
Getting people accustomed to buying movies electronically rather than in physical form was made all the more challenging by the emergence of low-cost streaming services like Netflix and Amazon Prime. And yet it can be argued that the ease of streaming has opened up consumer eyes to the wonderful world of digital distribution — and through incentives like early windowing and saving hot new releases for purchase it’s only a matter of time before the studios establish a viable sellthrough business.
UltraViolet only makes the value proposition all the more enticing. The concept of a digital “locker” where your purchased content lives on forever, and may be accessed at any time, on any device, is a sweet proposition. It eases the transition from disc to download, and at the same time acts as a safety net. Even if you lose or break the disc, or your hard drive crashes and takes down your movie library with it, the content you bought is yours forever.
If there’s one fly in the proverbial ointment, it is this: While all the major studios and many independents are part of the UltraViolet consortium, Walt Disney Studios is conspicuously absent, insisting on going it alone with Disney Movies Anywhere, a proprietary alternative to UltraViolet.
That needs to change. Now, more than ever before, is the time to be a team player — to stand united as the industry transitions from packaged media into the digital space, with a viable purchase proposition to counter the proliferation of streaming options.
Disney Movies Anywhere is certainly a great technology, but it’s only one studio. UltraViolet could be the home entertainment industry’s Balm of Gilead, but it needs universal support.
Why not figure out a way to merge the systems?
Have we forgotten that old statement, united we stand?
A byproduct of the growing popularity of OTT is that consumers are judging their wireless carriers not by how cheap the service is, but by how smooth the streaming experience is.
I found that little pearl of information in a recent Ciena-sponsored study conducted by ACG Research, which predicts average bandwidth consumption per mobile user is expected to go up 52% over the next three years.
That sharp uptick in consumption is being fueled both by increasing smartphone penetration, which ACG believes will rise from 55% by 67% by 2018, as well as the growing trend among consumers to watch filmed content over their phones. ACG believes OTT use on smartphones will account for 59% of the predicted bandwidth consumption increase.
At first I questioned the validity of the study, picturing my almost nightly routine these past two months of watching a “Game of Thrones” episode, on Blu-ray, in my family room, on my trusty Panasonic plasma.
But then I caught myself watching a YouTube video during a particularly long red light, and even a half hour episode of a silly old 1960s sitcom while waiting at the doctor’s office for my annual physical.
And I figured if a home theater purist like me would stoop to watching stuff on a tiny smartphone screen simply because it is so cheap and so easy, then this truly must be the wave of the future. Just like home video flourished in the first place because we didn’t want to be tied down by the networks telling us what we can watch, and at what time, OTT and smartphones, together, have unleashed us from every conceivable restraint. And as more, and better, programming becomes available with the proliferation of OTT, so will our freedom increase.
The challenge for carriers, of course, will be to increase bandwidth accordingly. According to the ACG study, supporting backhaul capacity requirements will exceed 1 Gbps by 2018, “and this will be further intensified by the latest wireless standards such as LTE-Advanced and the introduction of more small cells, which are expected to deliver faster wireless services with broader coverage to users. Service providers need to take steps to deploy a mobile backhaul solution that supports 10 Gbps to meet this projected bandwidth and ensure quality of experience.”
As ACG research analyst Michael Kennedy noted in the Ciena press release, “Now more than ever, the quality of experience for the latest OTT applications is paramount and a key driver of customer loyalty. In three short years, these networks must offer broader coverage and handle more people using more applications on more devices at the same time. As a result, the backhaul infrastructure must transform to enable a more dynamic experience."
It’s interesting to note that Netflix is now spending more money on content than HBO, BBC and Discovery. The subscription streaming behemoth, which began life as a DVD-by-mail rental service, spent more than $2 billion on content in 2014, about 20% of which went to original programming such as its hit series “House of Cards” and “Orange Is the New Black.”
That’s a huge expense for a company that charges its customers less than $10 a month for unlimited access to all this content, but with international expansion high on its agenda Netflix seems bent on making a splash in whichever new markets it enters, at the same time casting a wary eye over its shoulders at U.S. consumers and hoping and praying they don’t come down with “Netflix fatigue,” particularly now that Amazon Prime is nipping at its heels.
This huge spend has shaken up Hollywood to the point where studios and independent content producers are seeing Netflix as a lucrative new revenue source that at least for now far eclipses what they can make from this content from traditional channels, be they foreign TV rights or good old DVD and Blu-ray Disc.
Is it sustainable? That’s a good question. Nothing, in business, ever really lasts forever, but then lengths of successful runs vary wildly. MySpace was huge, but was rather swiftly banished to the social media graveyard by Facebook, which has remained on top largely because of its popularity not so much with fickle teens as with older demographics, particularly moms, with an ingrained sense of brand loyalty. The Apple iPhone and iPad remain the Cadillacs of mobility, status symbols both because of their sleek look and incredible craftsmanship.
Netflix has an amazing amount of product, but the lack of first-run movies and spotty record regarding TV shows — you can watch “Breaking Bad” but not “Game of Thrones” — is a definite weakness; hence, the drive toward original content.
But if there’s a word of caution I could throw out here, it’s that if you’re No. 1, everyone and his brother are going to want to unseat you. Amazon Prime is just one of a growing legion of competitors, big and small, broad and niche, hungry for a bite of the Netflix-dominated OTT pie. And while Netflix is smart to look overseas to further expand its reach — in January the company, currently in 50 countries, said it wants to be in 200 by the end of 2016 — the growth potential is not unlimited.
For Netflix, to paraphrase Charles Dickens, these truly are the best of times, and the worst of times. About all Netflix can do is continue to pay big bucks to feed the beast —realizing the beast is growing hungrier all the time and hoping it won’t one day turn on its master.
The Federal Communications Commission’s landmark ruling to declare Internet providers public utilities has met with a mixed response from those in the entertainment business.
The overriding sentiment appears to applaud the concept, but wonder — and maybe even worry — about the execution.
The concept is clear and, in my book, appropriate: Anything relied on as heavily by the public as electricity, or the Internet, needs to be protected in some fashion. And though as a small-government advocate it pains me to say this, the only viable method we have of protecting the public is through the regulatory arm of government.
California’s brief attempt to de-regulate utilities in the early 2000s was a disaster: energy bills tripled, and $10 billion left California in one month alone, bound for the corporate treasuries of unregulated power generators.
That’s because the private sector is not out to ensure what’s best for the public. The private sector answers to its shareholders, and its overarching goal is to maximize profits, not do what’s best for the public.
In the case of most businesses, that’s fine. Let the free market reign. But the big Internet Service Providers (ISPs) are different: They provide a delivery line, not a product or service, and keeping those lines open is critical for the public good. Unfortunately, we’ve seen them act the way any smart, for-profit business would act: in their own best interests. Verizon, AT&T and Comcast want the freedom to charge what they wish. They claim that they can’t afford all the investments they’ve been making and that companies like Netflix and YouTube are making gobs of money off their pipes and need to ante up more money to compensate the ISPs for all the extra bandwidth they are consuming.
The problem here is that the extra costs get passed down to consumers.
Under net neutrality — which the FCC finally accomplished through its finding that ISPs, like the big power companies, are public utilities and thus have to answer to a higher authority (the public) rather than their shareholders — all websites are equal. The commission has effectively eliminated the ability of ISPs to charge interconnect fees to ensure faster streaming speeds. This is as it should be, if you consider any attempt to restrict the public’s access to information — which is what higher costs invariably do — a breach of our constitutional rights.
The downside of government control, of course, is the prospect of over-regulation and, with it, a bigger bureaucracy — and more fees and more taxes to pay for it.
Netflix CFO David Wells really said it best when he intimated that in a perfect world, ISPs and companies like Netflix would be able to work things out on their own and reach some sort of compromise. “We were hoping there might be a non-regulated solution to it,” Wells said at the recent Morgan Stanley Technology, Media & Telecom confab in San Francisco.
But since that hasn’t happened — and clearly wasn’t going to happen — the FCC made the right call.
Honoring Louis Greth and Chris Nagelson of Walmart as this year’s Home Media Visionaries was pretty much a given, based on the big retail chain’s continued innovation in the field of electronic distribution and its simultaneous refusal to give up on the physical disc.
For more on these two fine gents, please read my column in the special section on Walmart.
But looking back through the years at our other honorees, I can’t help but notice that the one trait they all possess in common is an unbridled enthusiasm for the business and an unshaking belief that no matter how uncertain things might appear at the present, there’s always another day when things will become clearer and the business will return to growth mode.
Warren Lieberfarb’s selection as our very first Home Media Visionary in 2002 came as DVD celebrated its fifth birthday and sales were still growing by double digits every year. Few could remember DVD’s half-hearted launch and near death at the hands of Divx. Lieberfarb could have given up at any point in the early stages of DVD’s launch, when some studios simply refused to come aboard. Indeed, to many of us, the obstacles the fledgling format faced seemed insurmountable. But Lieberfarb never forgot that before DVD the rental business was slowly dying, and that DVD was not just a much better product but also the catalyst for a complete change in consumer habits, from going out to rent a movie for the night to buying one to keep or give away as a gift. So Lieberfarb persevered — and DVD became the biggest consumer electronics success story in history.
Our 2006 Visionary, Amy Jo Smith of DEG: The Digital Entertainment Group, is another industry veteran who refuses to give up — or bow down. Her claim to fame is rallying the troops and getting everyone talking again about next steps. Through conferences, workshops, white papers and webinars, Smith has become the glue that holds all of us together — and, it might be said, keeps things from falling apart when the outlook is not good. She’s not afraid to embrace and even encourage change. She and her team are always looking ahead, and in the process getting everyone excited about the business and its future prospects.
Louis Greth and Chris Nagelson are on the same track. Equal parts cheerleaders and visionaries, they know home entertainment will always play a key role in consumers’ lives, regardless of how it’s delivered. And like Lieberfarb and Smith, their overarching goal, quite simply, is to keep the customer satisfied.
Talk about the end of an era. I woke up this morning with a press release in my inbox telling me Rentrak has sold its Pay-Per-Transaction business to Vobile, a “worldwide leader in video and audio content protection, measurement and monetization services,” for $7 million.
Remember PPT, folks? That was the founding premise behind Rentrak back in the mid-1980s when a video retailer named Ron Berger founded the outfit, now a major media measurement and research company.
At the time, Berger ran a video chain called National Video, a major player facing stiff competition from Blockbuster and its policy of stocking up big on the hits. Berger devised Rentrak as a way for smaller retailers to even the score: they could lease titles rather than buy them outright and thus go a lot deeper on the major new releases than they otherwise could afford to.
Rentrak’s formula later was the model for studio “copy-depth” programs, which allowed retailers to buy more copies of hot new titles on the cheap in return for sharing a percentage of their rental revenues with the studios.
Revenue-sharing, as it’s now known, remained the studios’ preferred way of dealing with rental retailers through the DVD era right up to the rise of Redbox and Netflix.
Rentrak, meanwhile, used the profits from PPT to build its movie and TV measurement businesses, which have ensured the firm’s viability.
Using profits from the old to build the new is a smart business strategy, and one that’s kept industry – all industry – alive over the years. When IBM was faced with an onslaught of PC clones, the company’s fortunes suffered – remember that $8 billion loss in 1993? – until the firm wisely shifted course and began focusing on IT services and enterprise server solutions. Western Union survived email and texting by shifting from telegrams to money transfer services.
Here in Hollywood, we have a slightly different cycle. The core product – movies and TV shows – has long been the same. But the funding mechanism continues to change. First, it was theaters; then, syndication and TV rights. Home video became a potent funding force only after sellthrough triumphed over rental. And now the very same streaming services that threaten the viability of packaged media sellthrough are becoming a key movie and TV show funding source, thanks to the huge bucks Netflix and Amazon are willing to pay for original content as they aggressively expand beyond the United States.
Ah, the cycle of business. As one writer, for the How Stuff Works website, recently wrote, “A successful company is like a great white shark. In its prime, it chews up the competition, but if it dares to sit still for too long, it dies.”
Rentrak is a great example of this. As for the studios, it’s still too early to tell.