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.
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.
Sometimes I just don’t understand retailers. Disc sales may have dropped significantly since the 2005 peak — slipping from an estimated $16 billion in sales revenue in 2007 to $7.8 billion in 2013 — but that number doesn’t factor in the rampant discounting we saw happening during that same period, which means actual unit sales aren’t nearly off by that much.
And $7.8 billion is still a very healthy number, particularly on the studio end, where you have to factor in that a growing percentage of every dollar that’s lost from the sale of physical discs is made up for on the digital end.
Sure, from a retailer end, a drop of more than 50% is a scary concept. But instead of looking at the glass as being half full, many retailers are reacting as though not only is the glass half empty, but it’s also draining, fast.
Visit any of the big chain stores and you’ll see that DVD and its successor, Blu-ray Disc, aren’t getting anywhere near the respect they once did.
Best Buy stores are a prime example. Movies used to be front and center, commanding huge, neatly organized aisles. Now, the DVD and Blu-ray Disc sections are tucked away in a corner in the back of the store, maybe one-third the size they once were. At the Best Buy in Oceanside that’s one of my regular stops, the disc section is almost always in a state of disarray, with half-empty shelves and tattered merchandisers standing around like bored people in an elevator.
At the nearby Walmart, it was 2 p.m. on a Tuesday and a pallet of unopened disc boxes was still sitting around at the front of the electronics department, almost completely blocking access to the meager new-release endcap at the front of one of just two rows the store now uses for its DVDs and Blu-ray Disc.
It appears that retailers are fast giving up on packaged media, and if they keep treating DVDs and Blu-ray Discs as the proverbial red-headed stepchildren (no offense, Chris Tribbey — this is an old Southern expression!) then their fears that discs will soon become obsolete will become a self-fulfilling prophecy.
I understand retailers have to go with what’s hot; everything else is an afterthought. That’s why so many big retail chains where the disc was king are now focusing on tablets and smartphones, as well as accessories. Follow the money, as the saying goes — and that’s precisely what they’re doing.
And yet if you look back, DVD achieved its phenomenal success in the first place because these same retailers took a gamble and put the disc front and center — long before there was any money to follow — and largely through their efforts at wooing consumers with their bright, catchy displays and prominent positioning, the format took off in a far more successful fashion than anyone had expected.
In hard numbers, the golden goose may have lost some of its luster, but it’s still golden. Retailers should rethink their strategies and breathe a little life back into their disc sections. They just might be pleasantly surprised at the results.
It was encouraging, for those of us who still love physical media, to hear that the disc will be with us for quite some time.
During a presentation at the Ultra HD Physical and Digital Media Conference at NAB in Las Vegas, Michael Arrington, senior analyst with research firm IHS, predicted that consumers will still be shelling out a respectable $10 billion or so on Blu-ray Discs and DVDs in 2015 — half what it was a decade ago, but hardly an amount to be dismissed.
“People … like to have [content] in their hands,” he said, while home hardware storage and bandwidth aren’t quite yet where they they need to be for everyone to go full-blown digital.
I’m certainly one of those who likes to have content in his hands. One of the great joys in life is walking into the closet where I keep all my discs, neatly filed, alphabetically, Blu-ray Disc on one side, DVD and TV on the other, and picking out something to watch that night.
Of course, I keep getting told it’s a generational thing. I still like to read an actual newspaper in the morning, and I have eschewed e-readers for paperbacks — new and used, which I devour during my daily spinning sessions at the gym.
But I wonder — will physical ever go completely away? Despite the ease of downloading and storing music electronically, CDs are still around. So are books and magazines. Is this merely pandering to a generation — my generation — that will one day die out, or is there in an inherent need in human nature to at least on occasion reach out and touch something real?
My boys are 18, 16 and almost 12, and while they’re knee-deep into YouTube and Hulu and streaming, they, too, are frequent visitors to the media closet, especially when they have friends over and want to watch a movie on the big TV in the family room. In those cases, quality still matters, and I don’t care what anyone says — you still can’t beat Blu-ray Disc for clarity and sound.
It sort of makes you wonder.
Studio restructurings are painful. Longtime staff members are laid off, often through no fault of their own. It’s not the quality of their work, or their productivity; it’s part of the ongoing drive by corporations everywhere to cut costs and boost efficiencies. I remember when I first joined this magazine a colleague called a studio publicist a few minutes before 9 a.m. “We’re not open yet,” said the publicist, who must have answered the phone by chance. “Call back during business hours.”
These days, I get emails and calls at 6:30 in the morning and 11:30 at night. Most studio publicists are required to carry their smartphones with them at all hours and on weekends, so they can be reached at any time, at any place. 24/7 is a cliché, but it’s really true. Technology, which we all thought would make our work easier, has done exactly that — but our bosses know this too, and they want to get as much out of us as they possibly can.
Studio executives know they can get more out of less, and they seem bound and determined to do exactly that. It’s the same all over corporate America — hence the “jobless recovery” of our economy and the fact that so many smart, talented people are out of work.
And yet the latest wave of restructurings at the major studios are far more complex than mere “people dumps.” Studio structures are changing not so much with the times as in advance of them. It’s now clear that the future lies in digital distribution — and once that realization hit, studios began prepping for the revolution.
Nothing levels the proverbial playing field so much as the Internet — and if the Internet is going to be the primary mechanism through which studios transmit content to consumers, it’s time for a “one world” approach. We can no longer look at home entertainment in “domestic” and “international” segments the way we did, say, in the early days of DVD, when discs were coded for different territories and even countries so there would be no crossover.
These days, it’s all about crossover — the Web knows no boundaries, and it’s high time we began looking at home entertainment from a true global perspective. That’s why Sony Pictures and Universal Studios recently tapped international business leaders, highly attuned to global business issues, to lead their respective home entertainment divisions. Globalization is no longer a catchy buzzword; it’s rapidly becoming the reality, not just in Hollywood but throughout corporate America.
Now, any time you bring two entities together there are bound to be casualties in “human capital.” You see it whenever two companies merge; there are always redundancies.
And yet the wave of restructurings that is now hitting Hollywood — and believe me, we’re just in the early stages — isn’t driven solely by globalization.
It’s also a reflection of the massive transformation in how we do business. We’ve entered a new era — an area of social networking and big data, of business intelligence and search, of mobility and analytics — that compels studios (and other corporations, for that matter) to completely rethink their business models. The CIO not only has a seat at the table, but more and more he’s driving innovation — he’s not reacting to business needs, but helping to shape and determine them.
Call it Hollywood 4.0. It’s a brave new world out there.
It must be gratifying to go out on top. Craig Kornblau’s sudden and unexpected departure from the presidency of Universal Studios Home Entertainment, after 16 years at the helm, was part of a bigger strategic move by the studio in which he was nothing more than collateral damage.
Universal, you see, was the last of the majors with separate domestic and international divisions, and with globalization being the mantra of corporations everywhere his higher-ups were faced with a pickle: They had to meld the two units into one, and yet each was headed by a top-notch executive — smart, savvy and shrewd — the company could ill afford to lose.
And yet one had to go, and one can only surmise that Eddie Cunningham, the international president, stayed on as head of the new worldwide home entertainment division because his learning curve was a lot lower: He had to learn the ropes of just one market, a market that despite its size is really quite simple, and one where Universal, thanks to the team that Kornblau put together over the past 16 years, was cresting on top. In a way, Kornblau was a victim of his own success: The former Universal Studios Home Entertainment was a smooth, well-oiled machine with some of the industry’s most respected executives, a clever marketing team, and an unparalleled supply chain apparatus. It was also coming off one of its best years in history, with the division laying claim to the top-selling DVD/Blu-ray Disc of the year (Despicable Me 2), the No. 1 EST title of all time (also Despicable Me 2), the No. 1 catalog title of the year (the original Despicable Me) and two of the top five rental titles (No. 1, Identity Thief, and No. 5, Ted). Identity Thief was also the No. 1 VOD title of the year.
Kornblau also left on a personal high. Just five months earlier, Kornblau was given expanded duties at Universal, as his division assumed responsibility for all of NBCUniversal’s digital distribution and marketing, including VOD and EST. Kornblau also won industry kudos for working closely with NBCUniversal sister division Comcast Cable to launch a digital storefront to sell digital copies of its movies to 25 million subscribers, and for crafting a fulfillment contract with Paramount Home Media Distribution to capitalize on Universal’s supply-chain strengths.
He also finalized renewal of an agreement with Open Road Films to handle all marketing, sales and distribution services for Blu-ray Disc, DVD, EST and VOD platforms of Open Road Films' theatrical titles through 2017.
Kornblau leaves behind not just an extremely efficient, and successful, domestic home entertainment operation, but also a legacy of leadership and vision. The son of a retailer, Kornblau arrived at Universal Studios 16 years ago to take over the ship from Bruce Pfander, a former 20th Century Fox executive who briefly ran home entertainment after the ouster of longtime head Louis Feola.
He was not yet 40, and an alumnus of the legendary home entertainment empire at Walt Disney assembled by Bill Mechanic — and honed to what many consider perfection by his successor and former lieutenant, Ann Daly, now at DreamWorks. It was an empire built on the concept of selling movies directly to consumers rather than retailers. In an era dominated by the rental cassette, the revolutionary sellthrough model worked at Disney for two reasons: The studio is the only one with a genuine brand that means something to consumers, and its executives were smart enough to figure out a way to exploit it through such strategies as placing hot titles on moratorium after a specific period of time to build consumer excitement — and demand.
Kornblau was a key member of Team Disney, back in those days: As SVP of worldwide operations and logistics, he pioneered Direct Account Management, and served as the chief architect of this system, which set a new standard within the home entertainment industry, particularly after the advent of DVD and the explosive growth of sellthrough.
During his 16 years at Universal Studios, Kornblau quickly established himself as one of the home entertainment sector’s true thought leaders. He saw the threat to sellthrough posed by new rental models pioneered by Netflix and Redbox and led the industry charge in establishing unprecedented, critical windowing agreements to minimalize cannibalization. He clung to HD DVD during the next-generation format wars because he thought it made more sense to retool an existing product rather than introduce something completely new; when it became clear HD DVD was a lost cause he became one of rival Blu-ray Disc’s most enthusiastic supporters, although in hindsight he may have been right. The revolutionary nature of Blu-ray prompted a hiccup on the manufacturing as well as the retail end, and the format never quite rose to the heights of DVD.
More recently, Kornblau has been a key driver in industrywide initiatives to promote consumer and retail adoption of digital content, including the aggressive push to early electronic sellthrough (EST) windows and the standardization of Blu-ray combo packs. He also influenced the development and promotional rollout of the pioneering digital storage offering, UltraViolet.
To say Kornblau had a good run is a vast understatement. To twist an old saying, he may be out, but he’s certainly not down.
The proposed merger between cable giants Comcast and Time Warner Cable — actually an acquisition in which Comcast would buy Time Warner in a deal valued at $45.2 billion — has some interesting ramifications for the home entertainment business.
One of the most significant developments in Hollywood’s push for bigger movie download sales was the decision by Comcast last November to start offering movies for sale through its Xfinity TV store. Subscribers are able to buy select movies several weeks ahead of their release on Blu-ray Disc and DVD, just as they can on iTunes, Amazon.com and Walmart’s Vudu, among other services.
In a recent conference call with analysts, Lionsgate CEO Jon Feltheimer noted that less than three months after Comcast began selling movies, it already controls 15% of the electronic sellthrough/Digital HD market — a testament to Comcast’s aggressiveness and willingness to try new things.
“Comcast’s recent entry into the EST business is already proving to be a catalyst for accelerated [digital] growth,” Feltheimer said. “We expect additional growth as other MSOs follow suit.”
Indeed — grabbing a 15% share of the market after just three months in is a tremendous achievement, particularly if that market is expected to grow significantly in the coming years as consumers become more comfortable with the concept of digital movie ownership.
And while the merger is by no means done — expectations are it could take until the end of this year for the deal to clear all the necessary regulatory and other hurdles — a combined Comcast/Time Warner, with aggressive, innovative Comcast in the driver’s seat, could really ignite the EST/Digital HD business.
Under Apple’s iTunes thumb, EST grew slowly. And as recently as 2011, iTunes still commanded about 65% of the EST business.
But with the entry of Comcast into the market last November, it was, as they say, a whole new ballgame — centered on a box of the kind Apple can only wish it had. As the Motley Fool noted, “Comcast — unlike Time Warner Cable — has invested heavily in its own set-top box technology. Gone are the days of sluggish, buggy cable boxes: the new X1 and X2 platforms offer Comcast subscribers a highly advanced, cloud-based set-top box complete with voice commands and personalized recommendations. … Not only do Comcast's X1 and X2 differentiate it from its satellite-based competition, but they also serve as gateways to Comcast's pay-per-view services.”
Comcast’s new Xfinity TV store competes directly with Apple’s iTunes, and given Comcast’s massive footprint and the nature of competition, it’s almost a foregone conclusion that we’re going to see significant growth in online movies sales — and in Comcast’s market share.
Throw Time Warner into the mix and Comcast’s already formidable clout in the marketplace becomes even stronger — positioning online movie sales for even further growth.
The studios desperately want the ability to sell their movies without the hassles of a physical product. They’ve long had the will, and thanks to Comcast the way is suddenly becoming very clear.
NBC's 'Ironside' remake
Brand equity, it has been written, is strategically crucial, but famously difficult to quantify.
Dish Network found that out the hard way through its purchase of Blockbuster Video, which it bought out of bankruptcy solely for the purpose of the “Blockbuster” brand name. Turns out, consumers didn’t care beans about Blockbuster — the iconic video rental chain was part of the past, gone, forgotten, buried, rather than a familiar friend to be forever associated with movies and entertainment.
Networks, too, are finding out, the hard way, about the vapor value of supposedly beloved brands. NBC brought back “Ironside” because it figured the 1970s crime show, with Raymond Burr, was still front and center in the hearts of TV fans. Not so. Few people younger than me even remember the show, and those who do vastly preferred watching the original on disc — thanks, Shout! Factory — instead of the reboot, which lasted all of four episodes.
And yet reinvention still seems to be the proverbial business plan that wouldn’t die. Movies continue to get remade, often with quite a bit of success. The Amazing Spider-Man reboot came out just 10 years after Spider-Man and became almost as big a hit as the original. The same thing happened with Batman Begins (2005) and Batman (1989).
One might argue that in the case of the superhero movies, they were all good films. But the “Ironside” remake wasn’t that bad, either, and the initial game plan for Blockbuster in the wake of the chain’s $320 million purchase by Dish seemed quite sound: if nothing else, it gave the satellite company a brick-and-mortar presence to promote its service.
In the end, though, I suppose it all gets down to giving consumers what they want, what they need, what they’ll spend good money on. Consumers had left Blockbuster, and filed away the chain’s name in their brains under “nostalgia,” long before its purchase by Dish.
Similarly, the “Ironside” remake might have been a pretty decent show, but it simply wasn’t what people wanted to watch at that time — a fate the network probably realized in mid-January when it scrapped plans to reboot another old crime TV show, “Murder, She Wrote,” which had been announced amid much fanfare the previous fall.
In the music industry, there’s an old phrase that holds, “It’s not the singer, it’s the song.” In truth, sometimes it’s both — and sometimes, it’s neither.