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Transaction vs.Subscription: The Next Battle Royale?

2 Aug, 2014 By: Thomas K. Arnold

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.

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