Kevin Tsujihara: A Wise Choice for Warner CEO

Kevin Tsujihara’s selection as the next CEO of Warner Bros. didn’t surprise me in the least. As the studio’s longtime head of home entertainment, he’s proven that he knows how to make money. Home entertainment is still the biggest source of revenues to the studios, and Warner Bros. has been tops in market share since even before I began writing about home entertainment more than two decades ago.

But Tsujihara’s selection was not just a matter of dollars and cents — not by a long shot. In a Hollywood ecosystem where imitation is not just the sincerest form of flattery, but a way of life, Tsujihara has always been a maverick. He’s not only stood out from the home entertainment pack, he’s inevitably stood out ahead of it. He’s earned a reputation as a deliberate disruptor who’s never been afraid to try new things and if they don’t always work out the way he had hoped, well, that’s OK, let’s move on to something else.

And yet he’s not so much a gambler, a risk taker, as he is a shrewd and savvy entrepreneur — albeit one who has learned to operate in a corporate environment. He’s a leader of the pack who also happens to work and play well with others.

Tsujihara doesn’t so much roll the dice on emerging and even future technologies as he plays the field, carefully picking and choosing what he considers to have the best chance at success. He’s not looking to transform the business so much as he is out to reinvent it, rebuild it — in a sustainable way. And if one accepts sustainability as Hollywood’s true holy grail, then Tsujihara’s real trump card is twofold: He’s got the vision to see what lies ahead, and the courage, guts and acumen to follow through and get us there, in some way or another.

Tsujihara pioneered the concept of day-and-date video-on-demand. He was one of the first to recognize the power and potency of social media by first selling movies on Facebook and then spearheading the acquisition of social movie fan site Flixster. His latest triumph is still a work in progress: leading the industry charge to UltraViolet, a critically important next step in the ongoing evolution of home entertainment that allows customers to acces digital versions of their purchased content from the cloud.

UltraViolet at once future proofs physical media and creates a whole new business model for electronic sellthrough, which has been a slow go for the Hollywood studios.

Many observers have already said that in choosing Tsujihara as their next CEO, Warner Bros. board members made the best choice. In truth, they made the only choice if their studio — and others like it — are to survive, and even thrive, in the digital era.

Studios Are the King Makers

Netflix executives, during the past month or so, may have been wishing all the attention were still focused on their old nemesis Blockbuster. As long as Blockbuster was around, Netflix looked like the new, younger kid; the cool kid; the entrepreneur; the next big thing. Netflix represented the future, Blockbuster the past.

Unfortunately, Netflix had to grow up sometime, and its growing pains are starting to show in the company’s stock price, which has dropped precipitously as it has raised subscription prices to offset greater costs and grow its streaming business internationally.

There are a lot of advantages in being the new phenomenon on Wall Street, which is looking for outsized growth, even if it does come by undercutting an older, established business weighed down by debt like Blockbuster. While Blockbuster struggled to move with an enormous debt shackled to it, Netflix could bob and weave and build a better rental mouse trap, one that didn’t involve cumbersome real estate or a debt load and that got great pricing on streaming licenses from content holders who had not yet realized what streamed content was worth.

Now the entertainment landscape has shifted, and Netflix is in the spotlight. The company can’t get the kind of pass offered to new ventures; it will have to grow and prosper under the weight of expectations — and new, higher licensing fees for streamed studio content.

Oh, for the good old days when Blockbuster took much of the heat, Netflix executives must be thinking. But those days may be past for Netflix, which may now find out that the studios can be king makers in the distribution pipeline. Content holders favor whichever distribution avenue will offer them the most profit, and will wring ever more money from distribution pipelines that use their content.

Content is king, and the studios that own it can make or break a distribution partner. In the case of Netflix, I think executives may be finding out they have more in common with Blockbuster and other past studio distribution partners than they thought. Just as Netflix overtook Blockbuster, there are competitors in the wings targeting Netflix.

Why Is Blu-ray Quality Overlooked?

Last week I wrote a column about the loss of quality in the digital delivery realm, and since then I’ve received some assenting feedback.

“I agree with you 100%,” said one respondent. “I’m in the custom integration business and I have to spend time with each customer explaining to them the quality difference between streaming and Blu-ray. Sometimes I get the glossed over look when people think disc is dead and streaming is high-definition. It’s a war and the Blu-ray disc Association, Hollywood, etc., had better treat it that way. My kids have no problem with physical media so I know that isn’t a stumbling block.”

Others chimed in as well, pointing out the compression of digital files.

My question is: Why isn’t the industry doing more to drive home the quality of Blu-ray as opposed to the current state of digitally delivered files?

Last month we published a comprehensive white paper on Blu-ray Disc at 5, extolling the format’s quality and continued growth despite the headwinds of a terrible economy and a worthy predecessor in DVD. We, as an industry, should be doing more of that.

The digital delivery market naturally will have a cheering squad on Wall Street that is willing to repeat over and over again, “Disc is dead! Disc is dead!” After all, investors are always looking for the newest thing and tend to shun established and mature businesses. They just aren’t as exciting and won’t produce the kind of outsized stock growth that Wall Street craves.

But their (somewhat self-interested) enthusiasm for digital delivery doesn’t mean Blu-ray isn’t the best way to see a movie in the home.

Recently, I discussed this question with an industry observer who noted that many catalog titles actually are doing quite well on Blu-ray. He, too, wondered why the industry isn’t putting more effort into pushing and growing the market for the format.

Certainly, these aren’t flush times at many studios, which have instituted layoffs in recent weeks. But not promoting a quality, growing product won’t make things any better. There’s only so much cost-cutting studios can do to boost the bottom line. I agree that selling catalog at a hefty price to streaming services that go to consumers’ iPads and cell phones will help plug the profit hole, but so will selling consumers on the big-screen quality of Blu-ray.
 

Show Me the Money

Granted, the latest disc sales numbers for the first quarter, which should be released later this week, don’t look good. And the barrage of media reports alleging that the packaged-media business is on the ropes seems to be intensifying, with even the movie-biz website The Wrap calling the DVD business “dying” in a story today.

But once again, I need to plead with everyone to stomp on the brakes. Packaged media may no longer be Hollywood’s bread-and-butter, as it was beginning in 2001, as DVD transformed us all from movie renters into movie buyers. But it is still the dominant method we use to consume entertainment into our home, and in all likelihood will remain so at least for the foreseeable future.

An NPD Group study released earlier this week put things into perspective: Consumers may be talking about streaming and downloading movies, but when it comes time to take action they’re still plunking down their money for a Blu-ray Disc or DVD (to read the original story, click here). The study, conducted in March, found that nearly 80% of consumers watched a movie on DVD or Blu-ray Disc during the past 90 days, and that nearly 80 cents of every dollar spent on home entertainment goes toward the purchase or rental of physical discs. Respondents said 78% of their home video budgets went to the purchase and rental of Blu-ray Disc or DVD, including online and in-store retail purchases and rentals, while 15% was spent on video subscription services like Netflix. Digital video downloads, paid streaming, transactional VOD and pay-per-view accounted for just 8%.

I’d like to further point out that almost since the day this business began, we’ve been using the collective box office strength of movies available on home video to gauge the strength of the home entertainment business. And if you tally up what the movies that came to Blu-ray Disc and DVD in the first quarter of 2011 earned in U.S. theaters, and then compare that to the total for films issued on disc in the first quarter of 2010, you’ll find the drop in box office is virtually identical to the decline in disc sales.

Digital may be cool, sexy, hip, and with it. But to borrow a line from the movie Jerry Maguire, “Show me the money.”

Entertaining Ownership Again

In recent years it has become more fashionable to rent rather than to own. The dream of an “ownership society” has turned into a nightmare, with consumers tied down to underwater homes or losing them to foreclosure.

At the same time, consumers have become less committed to owning entertainment. Rental services, such as Redbox kiosks and Netflix, grew as consumers became less interested in plunking down $10 to $25 to own a DVD or Blu-ray Disc. They instead looked at inexpensive $1 rentals at kiosks or (until recently) $10-a-month subscriptions to Netflix as the more economical and useful way to keep themselves entertained.

But there are disadvantages to the rental model. As with a rented house that you can’t paint bright orange, renting or streaming titles constricts consumer options. Redbox and Netflix don’t offer the perfect catalog for each individual. They are not customized collections. The offerings are limited by studio deals, windows and, indeed, whether or not someone else may be first in line to get a particular title. In the case of Netflix, consumers via their subscription are paying for a whole lot of streaming titles they never will want to see. Such as in the cable business, they don’t have an a la carte option.

Owners have the advantage of possessing just the content they want. They buy their favorite movies and can access them at any time, either via disc or — as is the hope with the studios’ newfangled digital locker UltraViolet — digitally via the cloud.

Ultimately, ownership is a very efficient way to get consumers the movies they want. Until now, the only way to have that custom collection was to buy discs. The studios are hoping to make that ownership option more palatable in the digital realm via the fully interoperable ecosystem of UltraViolet. No more wondering if your digital copy will play on a particular device. No more disappointment when Netflix or Redbox doesn’t offer your favorite comedy.

Consumers don’t really want to watch any movie any time; they want to watch the movies they want to watch any time. And ownership that extends to the cloud, if it lives up to its promise, may be the best solution for that

Sony Classics Announces Actors’ Showcase ‘Carnage’

Carnage is the kind of film that makes fans of the dramatic arts’ tongues wag. It’s a filmed presentation of a Tony Award-winning play by Yasmina Reza, adapted by Roman Polanski, starring four of the hands-down best actors alive: Christoph Waltz, John C. Reilly, Jodie Foster and Kate Winslet.

Sony Pictures Home Entertainment will release the Sony Classics film, which was nominated for two Golden Globes (for Foster and Winslet’s performances), March 20 (prebook Feb. 16) on DVD ($30.99) and Blu-ray ($35.99).

The story concerns two New York couples who come to meet because the son of one couple punches the son of the other. One couple, played by Waltz and Winslet, at first seem like stereotypical uppity Manhattanites, he on his phone every two minutes to discuss some Wall Street conundrum, she pressed and polite, eager to keep up appearances and smooth away her husband’s rudeness. Foster and Reilly, on the other hand, play, on the surface, a more down-to-earth couple, consisting of a bleeding-heart liberal who pushes fairness and justice upon her peers, and a working-class man who has worked his way up into the upper middle class and carries its associated manners but also a certain internal darkness.

The film takes these four and places them into a room, bouncing their conflicting views and veneers off of one another until all niceties melt away and what’s left is a truer, harsher view of humanity through these people.

“When the gloves come off, it’s pretty revealing,” Reilly said of the characters.

With a film such as this in which nearly all of the action takes place in one room, between four characters, two weeks of rehearsals took place before anything was shot for the film. But don’t expect any of that rehearsal footage to make the home video release, according to Waltz.

“If I had a say in these things, I would do away with all this ‘behind-the-scenes, making-of’ rubbish,” Waltz said. “It’s nobody’s business. Why would you poke your nose in our rehearsals? Where do we then have our safe space where we try and make fools of ourselves and just fathom what it is we need to do?

“… It’s a huge drag, and I try to avoid making-ofs, EPKs, blah blah, ‘Can you explain your character?’ … Why would I? I would be doing myself and the story and, most of all, your experience watching the film, the greatest disservice possible. I’m just there to incarnate … the character that has no body when it was written.”

If there’s one particular sequence of Carnage sticks out in many viewers’ — and the actors’ — minds, it’s when Winslet’s character throws up the peach cobbler the nervous other couple has been foisting upon them. Her character runs off, mortified, to clean herself off, while the others stick around to deal with the mess.

“It was days of that. It was horrible. It was really gross,” Reilly said. “Everyone’s like, ‘Poor Kate, she had to vomit.’ I had to clean up Kate’s vomit.

“… Needless to say, I haven’t had cobbler since I made the movie.”

Regardless, Reilly said the cast of heavy-hitters got along smoothly.

“There wasn’t a diva in the bunch,” he said.

Both Waltz and Reilly had only the highest praise for Polanski, whose resume includes classics from Chinatown to The Pianist.

“If you look at his movies, the only thing that really kind of strings them all together is like, they’re excellent,” Reilly said. “They’re really well-made and beautifully photographed. … He has a lot of variety as a director. I thought this was a really gutsy movie for him to make.”

When asked what Polanski brought to his performance, Waltz replied: “Precision. Exactitude. Concreteness. All the qualities that I adore and that I really strive for and that I’m grappling with and fighting with, and where I derive all my inferiority complexes and all that.”

Perhaps that precision is why the film’s DVD and Blu-ray don’t include any deleted scenes.

“It’s all there,” Reilly said. “What we said is what’s in the movie.”

The DVD and Blu-ray do include a making-of of sorts in the form of an “Actor’s Notes” featurette, as well as a red carpet featurette and another dubbed “An Evening with John C. Reilly and Christoph Waltz.”

Cannes 2012 Acquisitions

• Film Movement has acquired Room 514 at the Cannes Film Festival. The directorial debut from Sharon Bar-Ziv premiered at the Rotterdam International Film Festival and won a special jury mention for Best New Narrative Director at the 2012 Tribeca Film Festival. The film, which is in Hebrew with English subtitles, will see a limited theatrical opening in the Q4 of 2012 with a day-and-date cable VOD premiere. Film Movement also has acquired North American rights to French/Israeli film A Bottle in the Gaza Sea. Film Movement plans a Q4 theatrical release and a day-and-date cable VOD release.
• TLA Releasing has acquired worldwide rights, including theatrical, non-theatrical, TV, home video, VOD and digital rights to  the comedy-drama Elliot Loves, from director/writer Terracino. The gay-themed film follows a young Dominican-American man named Elliot as a 9-year-old who is best friend to his single mother, and as a 21-year-old looking for love in New York City.
• IFC Films has acquired North American rights to dark comedy Sightseers, from director Ben Wheatley (Kill List, Down Terrace); and Save the Date, a romantic comedy starring Lizzie Caplan. IFC films are distributed on disc by MPI Media Group.
• Sony Pictures Classics nabbed North American rights to No, a drama about Chilean dictator Augusto Pinochet, starring Gael Garcia Bernal, and Susanne Bier’s Love is All You Need, starring Pierce Brosnan.
• Kino Lorber acquired U.S. rights to documentary Meet the Fokkens, which follows two 69-year-old twin sisters who formerly were prostitutes in Amsterdam and eventually started running their own brothel.
• The Weinstein Co. acquired U.S. rights to documentary The Oath of Tobruk, documenting the fall of Egyptian dictator Moammar Gaddafi, as well as The Sapphires, an Australian film starring Chris O'Dowd (Bridesmaids).
• Phase 4 Films acquired North American rights to romantic drama See Girl Run, with Robin Tunney and Adam Scott. The film will be released day-and-date in theatres and on VOD this year.
• Music Box Films acquired North American rights to Sean Baker’s Starlet, about a young porn actress who befriends her 85-year-old neighbor. The indie studio plans a fall theatrical release.

Please send any Cannes acquisition announcements to bgil@questex.com.

A Fair Exchange

The May 2 Showtime pay-per-view fight between Floyd Mayweather Jr. and Manny Pacquiao may not have proved to be the most engaging live event ever, but it certainly made a bit of history in live Web broadcasting.

As the fight took place on pay-per-view, with many potential viewers fighting the rush in PPV traffic rather than watching a fight, Periscope members broadcast the event live from their cell phones. The Periscope service, which offers live streaming, shut down those “broadcasts” as soon as they were nabbed for piracy, according to Periscope executives. But the point — and the danger — was clear. Even live broadcasts, the last bastion of television, could be taken over by Internet video.

As observers in the home entertainment realm over the years, we’ve seen that access to content, other than that delivered by the studio at the theater or a broadcast service via the television, is desirable and profitable. Consumers crave control over what content they can access and when. That desire will never go away. But it’s up to content owners to extract a price for that access, for the fighters, players and actors, for the grips, for the directors, for the special effects team, for everybody who works to produce content.

Our annual Digital Drivers section attempts to outline and recognize some of those key players that are guiding that negotiation between content producers/owners and consumers. We are very proud of this piece, and hope it offers a bit of clarity in the murky digital future.

The Originals Game

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.

Home Entertainment Doing Fine Despite Misguided Media Criticisms

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.