EST the Emperor's New Clothes?

I may get strung up by my feet for suggesting this, but I am beginning to wonder whether electronic sellthrough, or Digital HD, is something akin to "The Emperor's New Clothes."

Every three months, DEG: The Digital Entertainment Group releases a new set of quarterly numbers, derived mostly from the studios, that show consumer spending on the various forms of home entertainment.

Each time, disc sales are down, EST sales are up and we hear lots of crowing about how consumers are finally grasping the concept of buying movies, TV shows and other filmed content as downloadable files instead of on physical discs, and what a great thing this.

Freed from the burdens of manufacturing and distributing physical discs, not to mention dealing with returns, the studios are crowing about how great the margins are, how lucrative this new business model is, and how consumers will no doubt soon be abandoning disc purchases altogether in favor of buying filmed content electronically.

But I question whether this brave new world will ever materialize, and whether all this happy talk about EST's remarkable gains is really just something we all want to believe so badly that we have somehow convinced ourselves that the more we talk about it, the more likely it is to become true.

The plain and simple fact is that while EST sales do keep inching up, they still account for a tiny fraction of overall home entertainment purchases — 18% to 82%, I believe the latest set of numbers indicate.

And while pushing EST through early release windows and digital lockers is certainly the smart thing to do, I believe a fair amount of caution is in order.

For starters, the disc business is still quite healthy. Sometimes I think those of us who live on the coast get too caught up in technological advances and trends — 3D, anyone? — to stop and think what mainstream America is doing. And the numbers suggest an overwhelming percentage of people still prefer to buy discs instead of downloads, in large part because of the old "if it ain't broke don't fix it" axiom but also because there's something about ownership that almost mandates a physical object. If we're going to buy something, we want something tangible, not ethereal.

Secondly, I think there's a misconception about the correlation between the rise of digital delivery and the decline in disc sales. Disc sales aren't going down because people are finally starting to realize they can buy movies as digital downloads without having to worry about cluttering up their homes with more "stuff"; they are going down because 1) younger people simply don't have the same desire for owning something that we older folks do (as seen in everything from music to cars and the rise of Uber and Lyft) and 2) the alternatives to ownership are so easy and cheap. Why spend hundreds of dollars on a boxed set of a hot TV show like "Breaking Bad" when I can access the same content at any time on Netflix?

If, as some pundits believe, eventually we will obtain all of our content electronically, then our home entertainment business will be in big, big trouble. If studio executives were stunned to discover people weren't rebuying their libraries in the transition from DVD to Blu-ray Disc, I believe they will be absolutely shocked to discover how few people are going to buy movies electronically that they already own on disc — particularly since so many of the films we have collected over the years are instantly accessible through Netflix.

That's why it behooves our industry to support, market, and promote discs as much as we can, as diligently as we can — lest this business wakes up one morning and finds itself stripped to its undershorts.

 
 

Good-Bye Mrs. Kotter

Back in the mid-1980s I managed a bike shop — Ernie’s Pro Bikes — on trendy San Vicente Blvd., in the swanky Brentwood suburb of West Los Angeles.

Actress Marcia Strassman, who died Oct. 24 at age 66 following a seven-year battle with breast cancer, parlayed a brief but mundane role at the end of each episode as Gabe Kaplan’s understanding wife on the hit ’70s sitcom “Welcome Back, Kotter,” to cult status.

Even at 5-10 with sparkling eyes and lean figure, Strassman didn’t necessarily stand out. She didn’t need to. Her air of normalcy in a town awash with manufactured vanity — a welcomed respite, especially at Ernie’s where she would pop in on occasion for no apparent reason. An unhappy marriage ventured during one visit.

Strassman had just caught lightning in a bottle for a second time with the Honey, I Shrunk the Kids movie franchise — again playing the wife character to lead actor Rick Moranis. 

While she really wasn’t interested in cycling, the colorful bikes, Lycra clothing and related accessories intrigued her. She would pull up on a shop stool and ask oddball questions like why male cyclists shaved their legs? Or how do the gears on a bike work?

When I told her I could show her a few shaving tricks, she blushed and smiled. She once vented her frustration out loud on the pay inequalities with the 1992 sequel, Honey, I Blew Up the Kid. She also joked having “made it” in Hollywood by virtue of a “hunky” personal driver assigned during filming.

If Los Angeles is indeed a constellation of plastic, Strassman seemed an odd fit. Like a lot of LA stories, Ernie’s is no more — replaced by a trendy eatery du jour. But the memory of Ms. Strassman remains.

Subscription Fever Could Break

Recent news is awash with content owners and producers breaking the cable cord and following the Netflix model of online subscription streaming. Companies such as HBO, CBS and Lionsgate are looking to the Web to create a new avenue to the consumer.

It is particularly interesting that both a broadcast network, CBS, and a major cable network, HBO, are looking to the Web to capture viewers. They represent the entrenched establishment of television programming. Both CBS and HBO have made fortunes via the traditional cable and broadcast route.

CBS Corp. Oct. 16 announced the launch of “CBS All Access,” a $5.99-per-month standalone subscription streaming service that doesn’t require a concurrent pay-TV subscription. That came on the heels of an announcement to an investor group by HBO’s Richard Plepler that the company will launch a standalone over-the-top video service not requiring a cable/satellite/telecom subscription (as opposed to the current HBO Go service) in the United States in 2015. It all makes me think of the World Wrestling Entertainment announcement at the Consumer Electronics Show last January. The wrestling company unveiled a grand plan to go directly to its consumers via a 24-hour streaming network, with a $9.99 a month subscription offering live PPV events, reality shows, original shows, documentaries, classic matches and more than 1,500 hours of VOD programming.

My question is what does this all add up to for the average consumer? Say I’m a wrestling fan ($9.99 a month) who wants to have access to CBS programming ($5.99 a month) with a basic Netflix subscription ($7.99 or more a month) in addition to my basic internet/cable access cost and goodness knows what other programming.

It seems to me that cord cutters may get more specific choices, but may end up paying more than what they would with your average cable package. As any restaurant customer knows, a la carte menu items often end up costing more than the buffet.

Charting 35 Years of Change

I'm writing this from the outdoor patio at the Ritz Carlton in Marina Del Rey, Calif., where I have just finished speaking on a panel discussion on OTT, subscription streaming and how Netflix, in the words of one panelist, "is eating everyone's lunch."

Reflecting on the 35 years that Home Media Magazine, originally Video Store Magazine, has been covering home entertainment, the changes in our business truly have been monumental since the late Stuart Karl launched a trade magazine to cater to the growing flock of video rental stores that were popping up in the wake of that pivotal moment the year before when Andre Blay licensed 50 movies from 20th Century Fox and released them on videocassette.

The very concept of "streaming" would have seemed like something out of “Star Trek” to the early readers of Video Store Magazine back in 1979, those Neanderthal days before the Internet and the personal computer.

"Connected" meant ties to organized crime, "content" meant you were satisfied and "digit" anything made you think of fingers and thumbs.

And yet, at the same time, lots of things have not changed — fundamental, bigger-picture things that call to mind the saying, "The more things change, the more they stay the same."

The studios, as lords of filmed entertainment, still want ultimate control over that entertainment — and they prefer clean, neat sales transactions directly to the consumer, with no middle-man, no sharing of the spoils. In 1979 they battled mom-and-pop rental stores over the right to rent; today, they're pushing electronic sellthrough to consumers in love with Netflix and that infernal subscription streaming genie the studios wish they could somehow cram back into the bottle.

On the distribution side, there's still someone who's eating everyone else's lunch — Netflix today, Blockbuster a generation ago.

And among consumers, there continues to be a rabid appetite for entertainment that seems to be increasing now that our TVs are connected and our smartphones function as mini-home theaters.

That, and a burning desire to have that entertainment delivered on demand as cheaply and as simply as possible. VHS opened the door to consumers being able to watch what they want, when they want, where they want. DVD made things even easier, with its low sale price (no need for a return trip to the rental store) and random access. Netflix simplified the process even more with its by-mail subscriptions — heck, now you didn't even have to leave your home. And with subscription streaming the process of watching on-demand entertainment is even easier and cheaper than it's ever been.

What's going to be the next step in this steady progression of ease and simplicity? I have no clue — and yet I can't wait to find out.
 

4 Types of Digital Disruption

Digital changes are shaking the industry like earthquakes, and I see at least four major disruptions facing the home entertainment industry.

1. Breaking windows — After taking on appointment TV by offering original episodic programming all at once (“House of Cards,” “Orange Is the New Black”), Netflix is planning to offer digitally for streaming feature film product traditionally offered first at the cineplex. The Weinstein Co. inked a deal with the online service to release the Crouching Tiger, Hidden Dragon prequel to Netflix streaming subscribers at the same time it hits theaters. Also, Adam Sandler, a longtime draw at the movie theater, signed a deal to bypass that venue and offer his uniquely crude humor on smaller screens via Netflix streaming.

2. Business model bustup — As has long been noted, the revenue model that has underpinned the entire Hollywood ecosystem is under assault. The theatrical business looks shaky. The summer box office disappointed, as consumers found other things to do (including watching digital content). Meanwhile, studios can no longer count on bigger and bigger, or even the same, bags of money coming from the sale of discs as consumers decide to stream rather than buy their content. Meanwhile, advertising upfronts are taking a hit in the TV business as time-shifting and social media disrupt the traditional advertising model.

3. Talent revolt — Those who create content are looking for a bigger piece of the revenue pie and greater creative freedom as the distribution model shifts. Sandler isn’t the only star looking to find a new partner in the digital world. Comedian Chelsea Handler broke up with E! and is looking to create the next form of talk show in the digital realm on Netflix. It’s happening in the music arena as well. According to a report in the Los Angeles Times, at a recent industry event musician Jimmy Buffet asked the CEO of the music streaming service Spotify if he would pay talent more than the traditional labels.

4. Entertainment in new forms — And there’s the possibility that the entertainment of the future won’t resemble the feature film and episodic TV model of the past. What makes 30-minute or hour-long episodic TV or a roughly two hour film the most popular models for visual entertainment? Until now, that kind of entertainment has been shaped by the distribution model, i.e. how long folks can stand to sit in a theater seat, etc. On the web, small-bite entertainment may play a bigger part. Witness the success of sketch comedy online. Also part of the new entertainment model: watching folks play and comment on video games. Witness the outlandish success of Twitch, worth nearly a billion dollars to buyer Amazon.

Yes, the entertainment ground is shifting.

Why You Need to be in the Land Grab for Digital Video Buyers

“It’s the eco-system, stupid”... to misquote a phrase from political elections long gone by.

Approximately 12 million to 15 million consumers in the United States buy digital video to own, while more than 100 million consumers still regularly buy DVDs and Blu-ray Discs.

But those scales are shifting.

According to DEG: The Digital Entertainment Group, consumer spending on discs dropped 8% in the first half of 2014 to $3.3 billion, compared with the first half of 2013.

While electronic sellthrough enjoyed a 37% jump in the period, growing to $671 million, this gain was far short of making up the declining physical dollars. Fortunately, subscription streaming revenue is growing too, albeit with lower margins.

As spending shifts from physical to digital, two things are clear. First, it’s vital that the overall video industry sustains purchase-to-own as a viable long-term behavior. If the video industry follows what happened in music, tens of millions of buyers will forever abandon their purchase behavior. While people still consume more music than ever, the number of actual buyers is a fraction of the past, and profitable revenue models remain elusive for most.

Second, digital service providers and retailers who want to capture and sustain these video buyers need to act now. Once a video consumer locks into a given digital ecosystem, such as Apple iTunes, Amazon or Vudu, it becomes increasingly difficult to lure them away. The more devices in a common ecosystem and the more titles owned in a digital library, the more committed the customer becomes. Of course, Apple has known this for some time, using their iTunes ecosystem as both a value-add to their devices, as well as a retention tool.

By measure of the massive advertising campaign Google has recently launched for their Google Play platform, it appears they are ready to go all in for these digital buyers as well. This battle is clearly not all about content. It’s about locking the customers into the device, content or service ecosystem.

Assuming many or even most of the 100 million physical video buyers will eventually become digitally active, there are still many millions of digital video buyers yet to be captured. But you need to capture these buyers before the competition does. This will take investment in marketing to increase awareness and communicate differentiation as well as in content discounts and free promotional content.

However, sitting on the sidelines putting short-term margins above the strategic imperatives will cede digital buyers perhaps forever. At a minimum, these buyers will be far more expensive to lure away later than to capture now.

Don’t miss the digital land grab. It’s on now.

Friday Street Date? Shelve It

Recently some in the music industry have started talking about a uniform worldwide Friday street date for all album and singles releases. To get out in front of this issue, now’s the time to say that a standard Friday street date would be bad for home video and video games, and any consideration should be shelved straight away.

In the United States, street dates for music are usually on Tuesdays, just as they are for home video and for a number of video game titles. Music is released on different days of the week in other countries —Mondays in the United Kingdom and Fridays in Germany, for example.

According to the International Federal of the Phonographic Industry (IFPI), the international music industry organization, a uniform worldwide street date of Friday would benefit the music industry by allowing coordinated global promotional campaigns for new releases. It would be good for consumers, in IFPI’s view, by letting them know that wherever they are in the world the week’s new releases will be available just after midnight local time on Friday.

There may indeed be benefits to a uniform worldwide street date — and the Entertainment Merchants Association would be happy to have a dialogue about that — but Friday is a terrible choice for the day of the week.

“Why?” you might ask. “Movies release theatrically on Fridays quite successfully, and wouldn’t it make sense to have other entertainment products released just as the weekend is starting to attract consumer dollars to our industries?”

There are plenty of reasons:

• A Tuesday street date is operationally efficient and promotes a better in-stock position of new releases during the high-demand weekend, therefore maximizing both sales and profits. Retailers, distributors and content providers gauge consumer demand in the first couple days of release and have time to then ensure that retail stores are properly stocked for weekend sales. A Friday street date would mean that restocks would occur, if possible, during the weekend, incurring warehouse overtime, overnight shipments, and weekend shipping costs.

• A Friday street date doesn’t leave room for logistical errors. Digitally released titles are at risk of late onboarding and QC issues that can now be corrected before the peak weekend demand. In addition, making titles available well in advance of the weekend helps ensure that Internet capacity and capability aren’t taxed with consumers all downloading or streaming on Friday.

• Most of the largest retailers of home video and game products enjoy additional store traffic from the midweek street date and profit from sales of other non-video products purchased during store visits.

• Many independent specialist retailers also realize a surge of mid-week business, balancing their operational and labor costs through the week.

• A Friday street date would mean that the popular Sunday circulars would support only the following Friday and Saturday sales (that is, if the consumer keeps the ads around that long). And many mid-to-lower tier titles would never be promoted in weekly retail ads if that were to be the case and would, as a result, not warrant shelf space. The home video and video game industries cannot afford lower category productivity, which will ultimately lead to reduced shelf space and spiral sales further downward.

• If the music industry adopts Friday as a common street date, it is highly unlikely the home video and video game industries will follow. This will result in further inefficiencies in shipping — as movies, music and games often are shipped in the same cartons — and in increased costs in all three industries.

• Consumer confusion would likely result due to the many years of branding Tuesday as the new release day for all packaged media.

The Tuesday street date for music, home video and (to a lesser extent) video games has been the standard for years because it works. While the past has a vote, and not a veto, we should not abandon a successful practice unless the alternative is found analytically to be superior. A Friday street date is clearly not and should be summarily rejected.

 

Redbox Instant Was Doomed from the Start

There’s only one thing that surprised me about Redbox pulling the plug on its streaming video joint venture with Verizon Communications, Redbox Instant by Verizon: Why did it take so long?

Back when I attended the big press conference at the Consumer Electronics Show in Las Vegas in January 2012, announcing the JV (it didn’t actually launch until March 2013), I had trouble understanding the business model.

Generally, if you take aim at a competitor — in this case, Netflix — you build a better mousetrap, as they say. Apple entered the cell phone market with the iPhone; Sony jumped into the video game business with the PlayStation.

But from the very start, Redbox Instant appeared to be a poorly conceived venture that consistently failed to take advantage of Netflix’s chief weakness: a limited selection of content, particularly on the movie side, which despite its grand success remains a depository for studio castoffs.

Of course, if Netflix couldn’t strike a deal with Hollywood for better product, what would make anyone think Redbox could do it? But even if the two services had similar (weak) content offerings, why has Netflix exploded while Redbox, well, appears to have imploded?

One factor was that Netflix already had an established base of customers accustomed to the subscription model, through its hugely successful disc-by-mail rental service. All Netflix had to do was migrate those customers over to streaming by making the viewing experience even easier and simpler, which it was able to do by eliminating the hassle of having to send back a disc.

The other advantage Netflix had was in brand awareness. When Netflix launched its streaming service, it was already known for sending movies and other content directly to consumer homes, albeit in physical form. Redbox, on the other hand, was known for its vending machines, a model in which consumers had to go somewhere to get their entertainment.

Netflix also marketed the hell out of its streaming service, to the point where Netflix became as iconic a name in home entertainment as Blockbuster had once been. Redbox hooked up with a cell phone company known for smartphones and data plans, not movies.

Redbox’s unique selling proposition was this: Subscribers didn’t just get unlimited streaming of movies and TV shows, they also got four DVD rentals a month from Redbox’s network of kiosks.

Big whoop. If you’re trying to sell someone a new car, you don’t throw in free horse-and-buggy rides.

In the official notice on its website announcing the demise of Redbox Instant by Verizon, the company said, “The service is shutting down because it was not as successful as we hoped it would be.”

That, my friends, is an understatement — and, in retrospect, Redbox has only itself to blame.

At the Starting Line

As I nervously put my foot on the accelerator of a Ferrari to celebrate the Blu-ray, DVD and digital HD launch of Paramount Home Media Distribution’s Transformers: Age of Extinction, the home entertainment industry was also at the starting line for the most important season of the year, the fourth quarter. The adrenaline is likely flowing in home entertainment marketing departments.

As has been widely reported, the box office punch over the summer wasn’t as strong as it has been in past years, and that can affect performance on home entertainment. Still, what doesn’t take off with lightning speed at the box office can often make up ground in the home entertainment arena. Consumers distracted by vacations and summer pursuits often discover what they have missed at the box office on disc or digital.

The acclaimed Chef from Jon Favreau is a smaller-budget film about a man’s rekindling of his passion through cooking that many consumers will likely discover at home. Titles may become gifts to put under the tree, to stuff in a stocking or to offer up at the staff holiday party.

At the start of the fourth quarter, a lot is riding on the marketing acumen of home entertainment executives. In addition putting reporters in the driver’s seat of some very expensive and fast cars and staging cooking demonstrations by filmmakers (Favreau cooked up some Cuban sandwiches for Chef), marketers have designed an array of exclusive extras for retail clients. Look at any of our merchandising sections and you will see T-shirts, exclusive featurettes, toys and many other enticements rolled out at top retailers to draw consumers to buy discs or digital HD.

Home entertainment marketers are working closely with retail accounts to offer that something extra that will spawn an impulse buy. Here’s hoping their efforts help disc sales take off.

Stopping the Steady Slide

How do we stop the steady slide?

When I heard that U2’s new album was being given away free to every iTunes account, I thought to myself how far the music industry has sunk – to the point where albums, once the cash cow of the business, are essentially worthless.

It was actually a slow and steady process, and one in which music industry leaders have only themselves to blame.

Back in the glory days of vinyl LPs, eight-tracks and cassettes, kids like me had a great sampling mechanism for new music. It was called the single, and it cost 89 cents at the Wherehouse. We’d buy singles of songs we liked on the radio; if the flip side was good, as well, we’d spring $3.66 for the album down at Tower.

The model changed with the introduction of the CD in 1982. Record industry moguls, smelling money, jacked up the price of the CD single to $3.99; when consumers, outraged at the steep price hike, stopped buying them, they killed off the single completely and focused on raising album CD prices to make up the difference. That’s when consumers revolted and, with the birth of the Internet, took to swapping music files online through Napster and other sharing sites.

The record industry took a hard line against this practice, suing their customers and raising the price of CDs even more, to over $20. Ultimately, their plan backfired; consumers kept finding new ways to share music for free and the music industry’s profits plummeted until finally they caved and began selling music downloads themselves, at a fraction of the price they had been getting for physical discs.

The leaders of our industry watched and learned. When the movie industry launched a new format, the DVD, the price of movies went down, not up, and consumers responded by buying boatloads of movies and building massive home libraries.

And yet our industry’s fatal flaw was believing that the DVD gravy train would last forever and migrate over to the next advance in physical media, the Blu-ray Disc. They overlooked the fact that quality, as the music experience had shown, wasn’t nearly as important as they had thought. Music downloads don’t sound nearly as good as CDs, but to the average consumer that doesn’t matter: They gladly give up quality in return for cheaper product and ease of access.

And that’s our next big stumbling block: How do studios maintain the profit margin when consumers are perfectly OK with spending less than $10 a month to stream movies over Netflix, even if the quality isn’t as good as disc and the selection is limited to catalog product?

Keeping new releases out of the subscription streaming cycle has worked so far, but there are only so many hours in the day, and the novelty of Netflix has yet to wear off. This has led to a precipitous decline in disc sales, with consumers no longer hell bent on immediately rushing out and buying the latest hot new movie release when there’s plenty of stuff they still haven’t seen on Netflix.

The sale of movie downloads — EST, Digital HD, whatever you want to call it — is supposed to save our business, but despite early windows the practice still hasn’t caught on as studio heads had hoped. It’s still a fringe business, and there are those who believe it will never really flourish until the price comes way down, to $5 or less, a move that would destroy margins and put a serious dent in Hollywood’s revenue stream.

That’s why the studios continue to support the disc business, while looking everywhere they can to cut costs.

Will we eventually suffer the same fate as the music business, where content is essentially being given away? I hope not, but the truth is, we’re almost there. To counter this, studios need to find some way to transform the subscription business into a transactional business, although there are those who say it’s already too late.

If it is true that every challenge presents an opportunity, I hope we find it. I’ll be thinking of possible solutions, as well — perhaps while listening to my free U2 album on my iPhone.