Follow the Consumer

The PricewaterhouseCoopers study we wrote about here is extremely interesting and provocative on many levels, but the underlying message is simple, clear and one we’ve heard myriad times before: Given their druthers, consumers prefer their entertainment cheap (ideally, free) and easy.

That’s why they are drawn to Netflix, which is the hands-down winner on both fronts.

Two findings stand out and should be of keen interest to anyone in the home entertainment business. One is that 57% of respondents, a clear majority, prefer on-demand viewing versus live broadcast. Our need for instant gratification, I believe, is what’s kept our business alive for so long — and while a good chunk of this “I want it now!” crowd will turn to streaming, there’s still a big segment of the population out there that 1) doesn’t have a web-connected TV and 2) wants to watch movies on the widescreen, not on their computer. This explains why cable and satellite delivery remain the primary sources of video consumption — and at the same time gives the physical media crowd something to exploit.

Cable and satellite remains popular largely because everyone’s familiar with it, and it’s a relatively simple process. But both advantages are shared by DVD and Blu-ray Disc. We’re all very, very familiar with discs, and while on-demand viewing gives us essentially the same control over what we watch, discs provide us with far better picture and sound — something I think we as an industry still need to more aggressively promote.

Another finding I found interesting is the fact that social-media platforms such as Facebook and Twitter, an integral part of so many lives these days, aren’t being deployed to finding online video anywhere near as much as one might think. From our story: “Just 4% of respondents said they use social media for suggestions of online video programming — only slightly better than Netflix and Hulu at 5%. This compares to 59% of respondents who rely on a family member or friend for programming ideas.”

To me, that underscores the No. 1 challenge of digital distribution: discovery. And to our friends at the studios who are involved in digital distribution, this should be a call to arms: We need to devote more resources, both brainpower and dollars, toward finding a better mechanism for consumers to find what they want to watch — with the underlying premise being that quite often consumers don’t quite know what they want to watch. We need to come up with a way that lets viewers search movies not by title, actor or category, but by, say, spectacular crash scenes, intense kisses, compelling soliloquies (anyone for Dennis Hopper in True Romance?), or epic battles.

Elsewhere in the study, the fact that just 10% of respondents like “binge viewing” of TV series is a bit surprising. I would have thought more people watch entire seasons, or even series, of TV shows from start to finish, but what’s not clear from the study is what exactly constitutes binge viewing. I can’t see myself spending an entire weekend watched nothing but “Dexter,” 16 hours a day — but watching the entire series over the space of three or four months, an episode a night, with periodic breaks to get in a movie or two, that’s more like it.

The strong yen for original programming is interesting as well, and coincides with the growth of YouTube, the accolades for Netflix shows, and other indicators that consumers — particularly the young’uns — are watching more and more programming that’s generated outside the Hollywood system.

If there’s a lesson here for studio executives, it’s this: When discussing the intersection of entertainment and technology, we’re focusing far too much on distribution and not enough on content creation. We need to look at technology as a lot more than simply new and better ways to get our traditional content into consumer homes (or smartphones, or tablets). We need to look at technology as a way to create new and different content that doesn’t begin at the movie theater or on the TV screen, content expressly created for these new distribution mechanisms.

Our YouTube channels should go beyond promoting our films and TV shows — they should be used to create an entirely new and, hopefully, additive entertainment experience.

Q4 Off to a Strong Start

It’s still September, and yet for home entertainment marketers the fourth-quarter selling season is already well under way.

Lionsgate scored remarkably well with Now You See Me, which was released Sept. 3. A week later came the first of the big tentpoles, Paramount’s Star Trek Into Darkness, which was seen as something of a harbinger for how the rest of the quarter would go.

All eyes were on that title, and by the time the week was over, I honestly couldn’t tell who was more excited: the folks at Paramount or everyone else. The consensus is that Star Trek Into Darkness has been a runaway hit — and like the groundhog who pops his head out of the ground in February and doesn’t see his shadow, studio executives are almost giddy at the prospect of an imminent warming trend in the disc business.

Taking a look at what happened this summer in theaters, it’s easy to see why. The summer was front-loaded with hits, and while the second half of the summer was a disappointment to our friends over in theatrical distribution, the first half was strong enough for Hollywood to chalk up yet another record year at the box office — and those early hits bring good tidings to the home entertainment crew because their theatrical runs are decidedly over and they’re all primed for home video release.

What the Hollywood Reporter aptly called “a schizophrenic summer at the U.S. box office” ended with ticket sales of $4.75 billion — a new record and tidy 7% more than the previous summer record of $4.4 billion, set in 2011. And, according to the Reporter, admissions reached about 560 million, “the best in four summers.”

This all bodes well for home video. The tentpoles came early: Iron Man 3, released in May, topped the domestic summer chart with $409 million (and $1.2 billion worldwide). Man of Steel (June) brought in a cool  $291 million ($657.3 million, worldwide) for Warner, while Paramount's clever zombie hit World War Z (another June release) fared much better than most anyone expected, grossing more than $200 million ($530 million worldwide). And then there’s Star Trek Into Darkness, a May theatrical release, which turned its $229 million domestic showing into what by all accounts was a bang-up start to the video-selling season.

Add to that what the Hollywood Reporter calls “a healthy crop of midrange and smaller films,” like Now You See Me, and you’ve got all the makings of a strong fourth quarter for our business.

Let’s just hope the momentum continues.
 

The End of the Road

I wonder, sometimes, when we’re going to hit the end of the road in various product types. I thought we had hit the end of the road with high-definition TV, but then along comes 4K. Is this the end? Is this as good as it gets? Or will there be an even sharper image down the road — and down the road from that, until we get to ... a difference only a microscope can detect?

Seriously. Think about it. A generation ago, we reached a point where record players — oh, I’m sorry, hi-fi systems — got as good as they were ever going to get. It was in the early 1970s, I seem to recall, when the vinyl-playing machines reached their ultimate state of the art. Needles were as tiny as they could be; cartridges (those things that held the needle) were as sophisticated as they were ever going to get; tone arms were as light as a feather, minimizing damage to the fragile disc, which lost a little of its substance each time it was played.

Of course, when record players reached their zenith and consumer electronics manufacturers realized they could no longer build a better mousetrap they turned their attention toward building something different — and thus was born the compact disc, which relied on a laser beam, a “virtual” needle, if you will, with no weight and no damage to the disc.

Typewriters — same thing. The IBM Selectric, with its ability to instantly “erase” characters by striking over a letter with a magical substance that seemed to pull the ink right off the page, was the standard for years and years — until typewriters, no matter how good, were rendered obsolete by word processors and computers.

Musical instruments? We hit the end of the road there many years ago. Pianos and violins have remained fundamentally unchanged for hundreds of years, while electric guitars peaked in the 1950s and ’60s.

Back to TVs. As with so many products near the end of the road in terms of quality, we have seen lots of experimentation in recent years — as though manufacturers know we’ve about hit the wall in terms of picture quality and are desperately searching for some other reason to get people to buy new TVs.

The short-lived 3D hype reminded me of Quad Sound in the final days of vinyl — a grand concept, but horrible go-to-market execution and a small, niche audience.

And now we have Sony Electronics all excited about a “curved-screen” TV that has me scratching my head and wondering, wasn’t it just a decade or so ago that we got away from the old bulky curved-screen analog TVs and were all wowed by flat-screens?

Ah, the end of the road. Sometimes it seems more like a loop.

Best Buy: Slowly Winding Down

Best Buy’s transition into a digital distributor of entertainment received a hefty vote of confidence when the chain reported better-than-expected financial results, with its stock price soaring more than 10% after the company announced a widening of its second-quarter profit to $266 million, up from $12 million last year.

Gross margins, too, expanded to 26.5%, topping estimates of 23.3%. CEO Hubert Joly, a veteran turnaround expert who ran hospitality and restaurant giant Carlson — which includes businesses such as Radisson and T.G.I. Friday's — before he took the Best Buy job late last summer, was immediately hailed for his cost-cutting and other efforts, including instituting a price-matching policy, establishing dedicated “store-within-a-stores” for Samsung, Apple and Microsoft, and investing more money on training programs for employees.

And yet the numbers are deceiving. By gutting its entertainment section, the company has saved on expenses but also cut loose a huge revenue source. As Erik Gruenwedel reports in our story in this week’s issue, Best Buy posted a nearly 30% drop in same-store entertainment sales for the second quarter, with packaged media now accounting for just 5% of its $7.8 billion domestic revenue for the three months that ended Aug. 3.

Lost in the media hoopla over the sharp uptick in profit was the fact that overall, same-store sales fell as well, albeit by just 0.6%, while overall revenue was down 0.4%.

Joly’s strategy appears to be something of a slow march to the bottom. He’s shrinking Best Buy’s business, but cutting costs even more. And as long as he can stay ahead of the game, profits should continue to increase, at least in theory.

But he needs to be careful. Margins may continue to inch up, but by turning his back on packaged media and focusing on digital he’s not just reducing revenue, but also limiting choice — which is never a good thing to do when you’re dealing with consumer goods. And eventually there may come a point where margins may be fine, but the actual dollar amount of profit begins to decline — slowly at first, then more rapidly, as more and more consumers steer clear of Best Buy entirely because there’s no longer anything unique about Best Buy stores.

We saw the same thing happen with Blockbuster, when it began relying more and more on the same hits you could find everywhere else.

There are those who say Joly simply wants to do what Amazon does so well: Follow the consumer. But Amazon, with its pure online presence, can be much more nimble and quick than Best Buy, still saddled with a network of huge stores — and expensive leases.

The cynic in me questions whether Joly even wants to grow Best Buy’s business. Maybe he realizes he’s up against overwhelming odds, so all he really wants to do is manage the chain’s decline as best he can and jump off before things really head south.

I don’t profess to know the long-term solution to Best Buy’s woes. Maybe there isn’t one. I’m also not sure whether the chain wants to remake itself as a multi-brand version of Apple Stores or a brick-and-mortar Amazon — two objectives destined to fail because both Apple Stores and Amazon already exist and are doing just fine.

But I just don’t see the current trend, of soaring profits and declining revenues, continuing for much longer.

Blu-ray Saves the Day – Again, and Again, and Again

One of my favorite things about my job as publisher of Home Media Magazine is getting the chance to play reporter again. Writing the weekly chart story, blogging about industry issues and digging into a meaty news story is about as good as it gets for this old dog, and one of my personal goals is to free up more of my time to jump back into the trenches more frequently.

I’m a journalist first, and a businessman second — and I guess it’s always going to be that way.

A highlight of my editorial duties is writing the quarterly “state of the industry” story based on consumer spending numbers compiled for, and distributed by, DEG: The Digital Entertainment Group. I had the misfortune of being on vacation, out of the country, when the half-year numbers came in, so I grudgingly took a pass this time around, with senior reporter Chris Tribbey taking up the mantle — and doing a fine job, I should add.

That said, I’ve noticed a pattern in our quarterly numbers stories — a pattern that holds true regardless of whether total spending is up, down (as it’s been until recently) or flat.

The pattern is this: DVD sales continue to decline, but Blu-ray Disc and digital sales continue to post impressive increases, with the biggest lift, in terms of sheer dollars, always coming from Blu-ray Disc.

In our latest story, the headline — at least for the online version — reads, “DEG: Blu-ray, Digital Making Up for DVD Revenue Declines.”

I’d bet that same headline, with minor variations depending on whether overall spending is up or down, could have been used for virtually every quarterly numbers story we’ve run in the last five or so years.

Putting all this in perspective, it appears to me that had it not been for Blu-ray Disc, the home entertainment industry easily could have nosedived when our entertainment options proliferated like mushrooms with the emergence, mostly post-2005, of YouTube, MySpace, Facebook, online gaming, apps, the iPhone and the iPad.

And yet what do we keep reading in the mainstream press about Blu-ray Disc? I can’t even count the times Blu-ray has been lambasted as a failure and lampooned as a relic of the pre-digital era.

Clearly, the facts speak otherwise. Blu-ray Disc sales is a healthy, thriving and growing business. And instead of looking back on the gaga days of DVD, when the packaged media business was posting double-digit gains, year after year, we should marvel at Blu-ray Disc’s own success story: coming of age in the Great Recession and consistently posting significant gains quarter after quarter, year after year.
 

Netflix’s House of Cards

I found it quite interesting that Netflix’s stock price plunged — by as much as much as 11% in after-hours trading July 22, even though the company appears healthier than ever.

Its subscriber count was up from last quarter, revenue continues to trend upward, and a week earlier Netflix snagged more than a dozen Emmy nominations for original series such as "Arrested Development" and "House of Cards," the first Internet series to be nominated in major categories.

Attribute this apparent dichotomy to the fact that Wall Street is a demanding beast, with high expectations. Netflix reported it added 630,000 streaming customers in the United States in the second quarter, a healthy number, by any measure — except, of course, to analysts, who had expected an average of 700,000.

And yet analysts aren’t exactly being “tiger parents” with unrealistic (and, perhaps, unattainable) expectations. Netflix’s own high-end forecast was 880,000.

While the Street and analysts fret about subscriber growth rates, they ignored the 800-pound gorilla buried in the financials: Netflix lost nearly 500,000 disc subscribers in the quarter. It was the first uptick in packaged-media attrition since Netflix began separating disc and streaming results in 2011.

So what, right? Wall Street, analysts, media, pundits and Netflix management have been preparing packaged media’s obituary for years. The only problem with their “perfect” streaming world is that packaged media is what keeps Netflix’s bottom line from turning the same color as its red logo.

Indeed, Netflix generated a $109 million contribution profit on $232 million in revenue from DVD, Blu-ray Disc and hybrid streamers in the quarter. That’s nearly a 47% contribution margin, and more than twice the 22.5% contribution margin heralded by Netflix on its domestic streaming business.

In fact, packaged media represented the bulk of Netflix’s overall operating profit when factoring in technology, marketing and rising content costs associated with streaming. And don’t forget, Netflix’s ambitious international expansion, which it claims is being supported by domestic operations, lost $66 million in the quarter.

Michael Pachter, research director with Wedbush Securities in Los Angeles, contends Netflix neglected to attribute $137 million in G&A and technology spending toward streaming expansion both domestic and abroad. If this spending would be properly allocated, Pachter writes, domestic streaming would generate an operating profit of only $65 million for the second quarter, while domestic DVD would generate an operating profit of $79 million.

And Netflix plans to bow service in Holland by the end of the year, furthering expansion costs that must be minimized elsewhere in the business such as packaged media.

Yet, when asked during Netflix’s inaugural live video webcast July 22 about management’s apparent indifference toward disc rentals, CEO Reed Hastings — as usual — shrugged off concern. He reiterated that 7.5 million subscribers opt for packaged media from Netflix, which he said carries any conceivable title worth renting — more so than SVOD.

In their letter to shareholders, Hastings and CFO David Wells wrote, “The world is moving from linear TV to Internet TV, and Netflix is leading that evolution.”

And that may be true. But until it gets there, Netflix would be wise not to ignore its by-mail disc roots.

“The company’s lack of concern about declining DVD subscribers is baffling, and management optimism about contribution profit from domestic streaming growth is misguided,” Pachter wrote in a July 23 note.
 

4K Should Be the ‘New Normal’

There’s an old saying: Once bitten, twice shy.

I hope that doesn’t apply to the home entertainment business.

Yes, we got burned pretty badly on 3D for the home, which sputtered and ultimately failed — not so much because consumer demand wasn’t there but because consumer demand wasn’t great enough for people to put up with all the hassles of actually watching movies on 3D in their home.

The blame for that, as I’ve written about previously, rests squarely on the shoulders of the consumer electronics industry, which rushed out a parade of incompatible formats with constantly changing specs. They also tried to sell the public on the notion of high-priced glasses that run on batteries — an expensive, arduous proposition no one could quite grasp, given the simplicity of the cheap plastic glasses handed out in theaters.

But the 3D-for-the-home debacle is no excuse to sit on our hands and watch the 4K juggernaut take off with no one from our industry on board. As one reader, a veteran video retailer with whom I’ve corresponded off and on for the better part of 20 years, said in a recent email, “If you have not see the 4K sets … you should. They are the real deal. … I was blown away. If you don’t want one, it’s because you haven’t seen one.”

I’ll admit, when 4K first came on the market I was skeptical, since for all these years we’ve been led to believe that high-definition in its purest form — 1080p — was the clearest picture you could possibly imagine. Heck, that was the whole premise for Blu-ray Disc: DVD, as good as it looked on our old TVs, was no match for the new breed of thin high-definition widescreens that hit the market like a clap of thunder in the middle 2000s. Thanks to high-definition, you could see every pore, every freckle, on a human body; I remember when The Wizard of Oz was restored and issued on Blu-ray Disc the picture was so clear technicians had to remove the suddenly visible strings holding up the flying monkeys, while Dorothy’s unblemished face all of a sudden looked much more like that of a normal teenager.

But as my friend, Dan Crider, writes, 4K is the real deal. It’s the new normal in movie theaters, and as of last month consumers could finally buy 4K TVs for less than $1,000.

Amazon is already selling a 4K “Ultra HD Media Player” from Sony for $700. The device has 2 terrabytes of internal storage and comes preloaded with 10 4K movies, as well as the capability of using the soon-to-be-launched 4K Media Streaming Service, which will allow consumers to “rent” 4K movies for $7.99 or buy them for $29.99. The size of the movie files is surprisingly small, thanks to revved-up compression technology from a company called EyeIO.

As Crider notes in his email to me, “20 to 50GB is very doable. For starters, it fits on a standard two-layer Blu-ray Disc. Even at 100GB, three-layer BDXL discs can accommodate them, so there is no need for a new format.”

I know packaged media is passé and old school, but despite the bruising format war when high-definition first burst on the scene in 2006 it can be argued that Blu-ray Disc extended the lifespan of the physical disc by at least 10 years.

4K could be another life-extender — but we have to take action and soon.

Don’t Expect Things to Get Better for 3D

The demise of 3D for the home appears to be upon us. ESPN has announced plans to scrap its ESPN 3D channel by the end of this year, and a well-known title from a well-known studio recently racked up an anemic 3% of its total sales from the 3D version.

I think back to the words of the late, great film critic Roger Ebert, who wrote in 2010, the year 3D for the home began its big push, “3D is a waste of a perfectly good dimension. Hollywood’s current crazy stampede toward it is suicidal. It adds nothing essential to the movie-going experience. For some, it is an annoying distraction. For others, it creates nausea and headaches.”

Ebert, of course, was writing about the 3D fad in general. I don’t exactly agree with him — I thought Avatar and Alice in Wonderland were mesmerizing in 3D, and I even got a kick out of watching one of the “Final Destination” movies in 3D, complete with the flying entrails.

But for the home, I’d say the 3D experiment has been a colossal failure — and not because of it “adding nothing essential” to the viewing experience, but, rather, due to the ineptitude with which it was launched.

Let me make clear, right away, that I am not faulting the content side. I think our industry handled the advent of 3D quite well. For those who bemoaned, and now want to blame, the lack of product, consider this: 3D was never meant to be a whole new viewing experience, like Blu-ray Disc or, before that, DVD. Rather, it was always intended to be a selective experience, one that is not universally applied. Watching Avatar and Final Destination in 3D was a kick; watching, say, any mystery or crime thriller, from The Big Sleep to The Departed, in 3D would have been as annoying as heck. I think the studios did a good job managing the content flow, recognizing that not every movie is meant to be seen in three dimensions.

Fault for the 3D-for-the-home debacle, instead, rests with the consumer electronics industry. Not only was there no single, universal 3D format, there were dozens of incompatible devices. I even remember one year at CES seeing a prototype of a glasses-free TV from Toshiba that looked like a giant scratch dollar on a Doberman.

And then there was the issue of the glasses. I’m sorry, but speaking as a consumer, I get pissed off every time I have to change the batteries on my remote. I spent $500 on a high-end universal remote not so much for the convenience as to relieve me from the burden of having to constantly change the batteries on three separate handhelds. And now you’re asking me to do a battery check on the glasses every time I want to watch a movie in 3D?

That wasn’t the worst of it. The glasses kept changing, with new and supposedly improved models coming out every month, it seemed. Multiply that by a dozen manufacturers and you’re going to have a hard time keeping track of which glasses go with which TV, even if the manufacturer is the same.

I had that problem with my Panasonic TV. It’s 3D enabled, but I have yet to be able to watch a movie in 3D on it. Even the clerks at Best Buy couldn’t figure out which glasses worked for it — and when I finally found a supposedly compatible pair online, I found out they were discontinued.

Don’t expect things to get better anytime soon — or ever. The CE industry has already moved on to the next thing — 4K, which supposedly makes images on our current crop of high-definition TVs look like grainy old photos.

I can’t wait for the studios to start releasing movies on 4K. I simply cannot wait …

PlayStation 4 a Sure Winner

Even though it’s been such a long time since the debut of the PlayStation 3, PlayStation fans have demonstrated their loyalty by snapping up new games in record numbers. Sales north of 1 million are routine, and as of March 2012, consumers had snapped up nearly 600 million games on top of the more than 1.2 billion games for the PlayStation 2, which Sony and its legion of game-making licensees wisely continued to service. Indeed, nearly 300 million of those PS2 games were sold after the PS3 was launched.

PlayStation fans haven’t tired of their PS3s, largely due to the fact that most gameplay is now online — an observation that comes not just from the obligatory stats and figures (which give PS3 the edge over Microsoft’s Xbox largely because the network is free), but also from my own experience, watching my three boys literally grow up with their PlayStations. In fact, I still have now-17-year-old Justin’s original PlayStation console somewhere in our garage, along with the last game I tried to master, the original Spider-Man. 

In the past, my boys would have a friend or two over and play against each other, taking turns. Now, they have virtual parties — even conversing with each other, as though a dozen of them were all together in a single room (God forbid!). Even the youngest, at 11, routinely plays with friends from school — and from time to time widens his social circle, under close scrutiny from Dad.

Brand loyalty and a free network of ever-changing online “friends” aren’t the only things the PlayStation 4 has going for it. Sony made a brilliant move in issuing its next-generation console at a list price of $399 – undercutting the new Microsoft Xbox One by $100. That’s a big deal, folks, given that most game players are teens or young adults and generally aren’t high earners. I’ve always felt that the PlayStation 3, which bowed at $599, succeeded in spite of itself, given its high price tag. PlayStation 4 won’t be saddled with that burden.

According to senior reporter Chris Tribbey’s story in this week’s magazine (see XX), the PS4 also comes with second-screen capabilities for Android and Apple devices and remote play with the PlayStation Vita portable gaming device. And all sorts of video applications will be available at launch, including Flixster, Redbox Instant, Netflix and Hulu Plus.

PlayStation 4, slated to come out just before Christmas, is going to be big. Real big.
 

A Second Opinion on Second Screen

That’s an interesting new report from research firm Edelman Berland, the one that found 96% of people have simultaneously used a second device — generally a smartphone, tablet or laptop — while watching something on TV.

Granted, that doesn’t mean virtually everyone is always texting, playing games or watching something else while plunked down on the sofa in the family room, watching a movie on Blu-ray Disc or DVD.

But even those of us who, when we watch a movie, want to devote our full attention to it, have from time to time checked our email or sent a text in the middle of a show — although in my case, I always make sure to at least hit the “pause” button beforehand.

Proponents of “second screen,” I’m sure, see this as a validation of what they are doing — allowing consumers to interact with content they’re watching on the big screen through interactive companion content on the little screen.

And the folks at Edelman, in turn, validate that perception, through talking points such as “the need for shared entertainment experiences is truly global.”

But quite honestly, I’m still not convinced “second screen” is all it’s cracked up to be.

Yes, it’s a generational thing — when people of my age watch a movie, we want to watch a movie, with no distractions.

For younger people, like my two teenage and one preteen boys, it’s a whole other situation. Yes, we gather around the TV at night to watch movies or TV series — on disc, of course (as the publisher of this magazine, I wouldn’t have it any other way).

But invariably we are joined by iPhones and iPads, and there’s a lot of finger-tapping action going on throughout whatever it is we’re watching.
But the boys aren’t using their second screen for companion content. The oldest boy is texting his girlfriend, the middle one’s clicking through YouTube videos and the little one is playing Clash of Clans or some other iPad game.

Not a single one of them has ever — I repeat, ever — viewed so-called “companion content.” And their concept of “shared entertainment experiences” is limited to playing games together online with friends or swapping links to oddball YouTube videos.

Maybe they’re just behind the curve. After all, my youngest only recently discovered the joys of UltraViolet and the ability to watch the movie I just brought home on Blu-ray Disc on his iPad.

But maybe, just maybe, the whole “second screen” concept is following in the footsteps of BD-Live and then 3D for the home.

In the words of Gertrude Stein (and, more recently, President Obama), maybe there’s no “there,” there.