Northern Exposure16 Dec, 2013 By: Erik Gruenwedel
Canadian Home Entertainment in Digital Transition
The Canadian market, including cable TV, has been in a flux ever since Netflix emerged in September 2010, quickly adding more than 1 million streaming subscribers (about 3% of the country’s population) and forever impacting the region’s home entertainment industry.
This year, Media Technology Monitor found that 25% of English-speaking Canadians had signed up for Netflix, based on surveys of 2,013 adults between March 6 and April 14 — up from 13% in the spring of 2012. The Toronto-based research firm found that 75% of respondents watch online video — driven by YouTube (66%), on-demand TV shows (38%), movies (30%), news or sports (23%).
While 60% of Canadians bought a DVD movie in 2012, that percentage has eroded as retailers shrink shelf space and digital access grows, according to Best Buy Canada. When the U.S. parent abandoned packaged-media shelf space in stores, Best Buy Canada followed — albeit slowly and with a twist: It began rolling out a line of branded kiosks in the spring.
The departure of Blockbuster Canada and Rogers in the brick-and-mortar rental (and sellthrough) business earlier this year left Montreal-based Jumbo Video, scattered independents, supermarkets and odd retailers to distribute packaged media. Filling the void: digital distribution.
In September, CinemaNow began offering a disc-to-digital service in Canada. The platform allows users to use their DVD movies to unlock access to digital files in the cloud from their home and watch them on more than 1,000 connected devices.
Meanwhile, Warner Bros., Universal Pictures, Sony Pictures and Paramount Pictures partnered with theatrical chain Cineplex, offering moviegoers a “SuperTicket,” which includes rights to digital copy, exclusive bonus features and free concessions, in addition to the movie ticket.
In January, Cineplex became the first theatrical chain and retailer in Canada to offer UltraViolet on home entertainment releases. The chain sells and rents movies online, in addition to its theatrical business.
“We believe the best way to experience a movie first is on the theater’s big screen, but when you want to see it again, UltraViolet gives you the added choice and flexibility to watch movies whenever and wherever you want,” said CEO Ellis Jacob.
Dan Fellman, president of domestic distribution at Warner Bros., said the strategy is aimed at transforming the movie theater into a movie retailer.
“This is an innovative and interesting way to expand the DVD business,” Fellman said in an interview. “You’re reaching a consumer that you know is a moviegoer. It’s like one-stop shopping for the same consumer.”
Megan Colligan, president of domestic distribution and marketing at Paramount, said studios are developing new strategies as they reassess business models.
“There’s going to be more experimenting to come,” Colligan said. “You can’t do what you did 10 years ago and have the same results.”
Separately, Kaleidescape in September launched its digital media store in Canada — backed by a multiyear license agreement with Warner Bros. Digital Distribution and featuring UltraViolet functionality.
“This really is the best of both worlds,” said Igor Kivritsky, owner of Vancouver-based audio video retailer Hi Fi Centre. “With just a click of a button, users can download movies in the highest audio and video quality available without compromising their viewing experience.”
The shift to digital in the Canadian market has left some consumers unable or unwilling to adapt, according to Martin Caines, director of merchandising for Best Buy Canada. Caines said Best Buy’s move into kiosks, which also offer sellthrough, is an attempt to reach out to that demo.
“With few remaining locations to rent or purchase physical movies, we saw an opportunity to bridge this gap,” Caines said.
Meanwhile, Redbox has aggressively sought to fill the disc rental void, ending 2013 with 1,000 kiosks deployed in Canada. It plans to add another 1,000 units in 2014, according to Galen Smith, president of parent Outerwall.
“It’s been a slower install process than expected,” Smith told analysts this month. “But if you think about the competitive landscape, the traditional brick-and-mortars, Rogers and Blockbuster are now both closed. So we see there is this opportunity to fill this gap with our kiosks, and we can do it very efficiently.”
R. Scott Tilghman, senior analyst with B. Riley & Co., believes Redbox’s brand and considerable retail footprint portends rocky days for Best Buy kiosks.
“I suspect … that this [Best Buy] kiosk business will be de-emphasized considerably,” Tilghman wrote in an email. “I understand it is largely franchised with some very unhappy franchisees and not [a business] Best Buy will give much attention to going forward.”
The Canadian pay-TV market — like its U.S. counterpart — continues to see erosion of video subscribers. Shaw Communications dropped 29,522 video subscribers in the quarter ended Aug. 31. Rogers Communications shed more than 10,000 video subs — bringing to more than 30,000 subs lost since the beginning of the year.
While U.S. multichannel video program distributors appear unfazed (at least publicly) to video sub losses, in Canada, subscriber shrinkage due to competing low-cost rental alternatives such as Netflix and kiosks is a growing concern.
“For the pay-TV industry in Canada, employment, income and housing starts are the most important factors,” said Erik Brannon, analyst for North American television at IHS. “Although there are positive signs in the economy, pay-TV operators in Canada have their work cut out for them to maintain positive video subscriber growth.”
At the same time, there is also government action seeking to force cable operators to unbundle channel offerings with an a la carte selection — a regulatory threat some believe is credible.
“We don’t think it’s right for Canadians to have to pay for bundled television channels that they don’t watch,” Canadian industry minister James Moore told CTV. “We want to unbundle television channels and allow Canadians to pick and pay [for] the specific television channels that they want. That’s a cost that’s imposed onto consumers that’s unfair, where they have to pay for services that they’re not interested in. We think it’s time to modernize that and move forward.”
Vancouver’s Telus Corp. offers a la carte channels with its Optik TV service, and Vidéotron GP and Bell Canada Enterprises market similar packages.
A la carte channel offerings in the United States remain largely political rhetoric, with most media companies, including Time Warner, 21st Century Fox, Disney and Viacom, strongly against the idea. They believe it would hamper consumer choice and result in lower-quality programming and higher cost to the consumer.
Tony Staffieri, CFO of Rogers Communications, concurs, telling an investor group in New York last week that Canadian government efforts to bring increased regulation and competition to the MVPD market aren’t working.
Specifically, government officials would like to see another entrant in the market offering wireless connectivity to consumers by forcing existing carriers to make their facilities available at favorable rates to the newcomer. The rationale is that another wireless carrier would keep rates down and not impose data usage caps.
“That concept doesn’t seem to be getting much traction,” Staffieri told investors Dec. 9 at the UBS Global Media & Communications confab in New York.
Rogers, along with other high-speed Internet providers, began capping monthly data usage to subscribers shortly after Netflix arrived. Video streaming can rapidly eat up data usage, which cause MVPDs in turn to up fees to consumers.
“The economics of the country just don’t support more facilities-based [broadband providers],” Staffieri said. “We do have a concern that the government may be going down a path of mandated [data] rates determined on their view of the market. I think that not only in the wireless segment but everywhere else where we’ve seen them implement that, it isn’t a good long-term strategy.”
Canuck Digital Sales
To combat SVOD, Canadian cable operators and third parties continue to launch proprietary transactional VOD and digital sellthrough platforms. This month, CTV, Canada’s No. 1 private broadcaster, upgraded its apps enabling authenticated viewers to access more live programming, in addition to VOD.
Rogers upgraded its broadband-enabled NextBox 3.0 DVR, which features recommendation software it claims is on par with SVOD services, an app that allows users to remote control the device from a tablet, and transactional VOD access to TV shows and movies.
“We have the largest video library in Canada,” Staffieri said. “We have more titles than Netflix Canada. NextBox 3.0 is going to be a key enabler.”
With Rogers planning to launch IPTV service in 2015, Staffieri said NextBox 3.0 would act as a conduit linking set-top technology with a cloud-based service.
“We see IPTV as a migration from the existing set-top box platform,” he said.
Meanwhile, RIM earlier this year launched a digital service on its BlackBerry World platform in the United States, United Kingdom and Canada offering VOD and electronic sellthrough of movies and TV shows from all the major studios playable on the Z30 smartphone, which features a 5-inch screen. The handheld also features an HDMI output enabling users to watch video on a TV screen.
“There are not [a lot] of resident Canadian digital services in the market,” said Charlie Millar, director of global licensing and multimedia services with BlackBerry.
Miller said BlackBerry negotiates with studios on the digital access of new releases, which usually occurs on the retail street date, but can be earlier.
“It’s on a case-by-case basis,” he said.
Notably, BlackBerry digital releases do not include UltraViolet functionality, a feature Miller said has not thus far resonated with Canadian consumers, according to focus groups.
“From a consumer perspective in Canada, UltraViolet is nascent,” he said. “They are not aware of what UltraViolet means, and that’s a concern for me as a digital retailer because I don’t have my consumers asking me for this product.”
By comparison, Millar said there is strong demand for digital movies and TV shows. He said Canada rates as BlackBerry’s biggest market for digital entertainment.
“Canada, per capita, is our strongest market for our video store,” Millar said.