Wall Street (Again) Fumbles Movie Rental Story

The day (Sept. 10) Netflix shares set an all-time valuation record (above $311) based on news Virgin Media would enable its subscribers to separately access the streaming pioneer, a pair of Wall Street analysts declared death on Redbox’s disc rental business model.

Both extremes underscore the effects of Wall Street’s war on packaged media, including movie sellthrough and rental, and its desire to declare digital distribution winner — however prematurely.

Virgin Media said it would rollout Netflix to its 1.7 million multichannel video distribution subscribers in the United Kingdom  — access they have to pay for separately. While it was noteworthy that for the first tme a MVPD agreed to expose its subscribers to Netflix (over-the-top streaming services are seen as direct competition), the reality is that most of those subs can already access Netflix.

It would appear that Virgin Media knows that, and is more interested in being an ISP — selling subs the broadband connectivity required to stream TV shows and catalog (not new release) movies. But that didn’t stop investors from driving Netflix’s stock further into the stratosphere — ignoring billions due in content license agreements and profit at break even.

Then Pacific Crest Securities analysts Andy Hargreaves and Corey Barrett issued a note saying Redbox’s parent, Outerwall (formerly Coinstar), faced a looming financial squeeze due to its kiosk movie rental subsidiary.

Specifically, Hargreaves and Barrett contend fewer people are renting DVD and Blu-ray Disc movies, which they say will drop Redbox revenue up to 30% annually over the next few years.  They buttress their POV with data from The NPD Group that showed disc rental revenue fell 37% over a five-year period through 2012.

The analysts say Redbox rental volume would need to increase about 5% annually to support Outerwall’s current stock price — a premise the Pacific Crest duo deem unlikely.

What Hargreaves and Barrett ignore is the fact the NPD data referred to total disc rentals, which also included by-mail and video stores. It’s no secret what Netflix thinks about its by-mail disc rental business — despite the fact the segment generated nearly 50% of the service’s operating profit in the most recent fiscal period.

Meanwhile, Redbox revenue increased 4.5% to $479 million in its most recent fiscal quarter. Its share of the disc-rental market passed 50% for the first time.

B. Riley & Co. analyst Eric Wold, who is bullish on Redbox, said the Pacific Crest note makes the false assumption that declining disc rentals are primarily due to consumer migration to digital channels such as transactional VOD and streaming.

“While I agree that overall revenue generated by the DVD/Blu-ray market will decline in the coming years, that is not due to a technology switch from discs, but rather a switch from older rental channels [Blockbuster, video stores, etc.] to the comparatively smaller Redbox channel,” Wold said.

Indeed, Wall Street scuttlebutt that transactional VOD will supplant disc rentals is nonsensical. If the $3.99 to $4.99 nightly rental fee for a new release movie at Blockbuster or video store is considered a premium, why would someone pay just as much (or more) to access a movie at home through their cable channel when it can be rented at Redbox for $1.20 ($1.50 for Blu-ray)?

As disc rental revenue declines due to shrinking physical access (beyond kiosks), the number of rental transactions should remain unchanged. That’s because Redbox doesn’t care what people used to pay for disc rentals, it only cares that people rent a movie from a kiosk.

“For the population base that could not afford renting discs for $5, offering VOD for $5 and also requiring broadband access (vs. a $20 DVD player) doesn’t make their lives any better,” Wold said.

 

 

Disc Sales Enter Era of New Reality

So what’s really going on here? The news that Osama Bin Laden had been killed put everything else on the media’s back burner, including the Southern tornadoes and, of course, our own industry report on first-quarter sales and rental numbers. The few stories that did surface blew right through the box office correlation – disc sales were down 20%, while the collective box office earnings of those films was down 25% —  and jumped right back into their “discs are dying” mantra.

“Down, down, to obsolescence town – that might just be the broad-view takeaway from Los Angeles-based Digital Entertainment Group's recent sales report, which suggests new DVD sales in the U.S. plunged 20% over the past 12 months,” said Time magazine.

"Disc sales drop 20% as streaming video begins to take over,” observed USA Today.

And a blog posting in PC World proclaimed “DVDs are one step closer to extinction.”

Most stories reported the decline in box office value, as well as the absence of the Easter holiday shopping season in the first quarter of 2011. But no one gave either of those factors any credence, and why should they? It didn’t fit in with their preconceived notion that the disc business is dead.

The truth is, box office is very much a factor in the home video business, especially now that the business is primarily sellthrough. Back in the old days when rental dominated, mediocre theatrical performers tended to perform better on video, but these days, there’s a direct connection, and one that makes sense – if you’re not going to spend $10 to see a film in the theater, you sure aren’t going to plunk down $15 to own it.

The advent of Netflix and Redbox may have triggered a resurgence in rental, and here the old formula still works: total consumer spending on rental rose slightly, even with the down box office.

That said, we are seeing a new reality in disc sales. The novelty of being able to own every movie the day it comes out on home video, at an affordable price, has worn off. We as a society now realize we don’t want to own every movie that comes out, even if it’s priced at $15, or $10, or even $5. We simply don’t have the room.

And in the children’s animated category, the new reality has hit harder than practically anywhere else. Whereas in the past the video-to-theatrical ratio was in the high 60s and even low 70s (meaning an animated feature film that grossed $300 million in theaters could be expected to generate, on average, about $200 in consumer spending on disc sales), the VTR now is down to the low 30s.

Children’s titles are still inherently more “ownable” than most films, but the competition for 8-year-old eyeballs has gotten increasingly intense. There’s YouTube, Club Penguin, hundreds of game apps for Dad’s iPhone, and more.

As Francois de La Rochefoucauld, the famous French author of maxims and memoirs, once said, “The only thing constant in life is change.”

 

DVD Isn’t a Problem at Marvel and DreamWorks

Just as the pundits had all but put the final nail in the coffin of packaged media, both DreamWorks Animation and Marvel executives noted how pleased they have been with disc sales of Madagascar 2 and Iron Man, respectively.

“It’s important to note that 2008 was our most successful non-‘Shrek’ year ever,” said DreamWorks CFO and President Lew Coleman, during a conference call with investors Feb. 24. “[Sales of Madagascar: Escape 2 Africa are a] clear indication that the home video market for us remains encouraging.”

Marvel CFO Kenneth West, in a conference call on the same day, said: “Despite the negative comments we have heard regarding retail sales performance within the DVD market … both The Incredible Hulk and Iron Man DVDs have been performing at or above our expectations.”

And mind you, this is in the context of the worst recession home entertainment packaged media has ever experienced in it’s three decade lifetime.

The hits are still selling well on disc. It’s the catalog business that has fallen off at the big studios — that and individual titles that don’t measure up to the hits of the previous year. If you’ve got The Dark Knight and Iron Man, disc sales don’t look so grim. Meanwhile, Prince Caspian makes things look a bit worse compared to Pirates of the Caribbean 3 the year before.

Why has catalog slumped? It’s because the studios are hitting the back of the vault on DVD releases. The future of catalog is on Blu-ray, which hasn’t yet had a chance to ramp up. Give the disc some time, and sales levels will return. Until then, it is foolish to pretend that consumers don’t like packaged media. They just can’t buy The Godfather or Indiana Jones and the Temple of Doom more than once on DVD. Studios are planning that they buy them on Blu-ray again in the future.
 

Home Video: Bargain in Tough Times

It’s just our luck to schedule our third annual High-Definition Disc Conference on the same exact day the Hollywood Forum hosted a special dinner presentation, “Wall Street Meltdown’s Impact on Hollywood.”

If Wall Street is in panic mode, then Hollywood is not far behind, despite the entertainment industry’s historical resilience to troubled economic times. These past few weeks we have heard story after story of studio layoffs, marketing budget cuts, reduced picture outputs and overall malaise, as the down economy no doubt conjures up images of bread lines and soup kitchens among those whose parents, in many cases, weren’t even old enough to live through them.

Hollywood’s hype machine is running at full speed, and the “sky is falling” mentality that’s hit the mortgage and banking industries already is spreading like a dark cloud over the Hollywood Hills.

Whoa, everyone. Let’s rein in the doom and gloom for just a spell and take a look at what’s really going on out there. Yes, the nation is in an economic tailspin, but so far at least our industry hasn’t been hit all that hard. Consider the following:

DreamWorks’ Madagascar 2 busted even the rosiest projections to open with $63.5 million, beating even Disney’s Wall-E, which opened to $63.1 million over the summer — long before the economic smog settled in.

Wal-Mart, that great harbinger of middle America’s shopping habits, reported a more-than-respectable 2.4% gain in same-store sales during October, the terrible month of slashing and burning that affected everything from the Dow to our 401ks. The same day, the giant retailer announced a big expansion of its Blu-ray Disc inventories.

And Marvel Entertainment’s third-quarter net income rose more than 40%, boosted by the strong theatrical performance, and vibrant home video sales, of Iron Man.

These are challenging times, to say the least. But if you look hard enough there’s always that proverbial silver lining. Analysts were quick to attribute Wal-Mart’s strong financial showing — and a similar uptick in sales at McDonald’s — to consumers searching for bargains. The success of Madagascar 2, meanwhile, was chalked up to the desire for escapism through entertainment.

Hmmm. Bargain and entertainment. That’s got home video written all over it.
 

Digital and Disc Can Play Nice

I don’t subscribe to the false assumption that each digital delivery milestone means the death of disc. Digital content is certainly making inroads with consumers and, in the mobile world where picture quality isn’t terribly important, it serves a growing need.
Over the holidays, my 11-year-old daughter put digital copies (that came packaged with the discs) of some of her favorite films on her new iPod Touch. As we traveled from store to store, she enjoyed watching Coraline in the car. In the waiting room at the doctor’s office, she took a look at Horton Hears a Who!

But over the holidays, she and her sister also watched Pirates of the Caribbean: Dead Man’s Chest on our big-screen in Blu-ray quality. Many other families must have been gathering around the TV to view a disc this holiday season, judging by the record rentals at Redbox. For a communal, home entertainment experience, you just can’t beat Blu-ray on the big screen.
My 11-year-old — who is supposedly part of the generation that will shift the entertainment paradigm — doesn’t see digital and disc as an either-or proposition. She uses both — often while e-mailing her friends at the same time.

At this month’s Consumer Electronics Show in Las Vegas, we began to see how digital and disc can play nice together.

Announcements of cloud-content management, such as Disney’s KeyChest initiative, shared the headlines with the promise of 3D on Blu-ray Disc. Blu-ray is the best way to replicate the theatrical experience in the home, and it can bring the 3D phenomenon setting records in theatrical revenue home, too.

I like the idea of having high-quality copies of movies for the big screen, but on the road, I’d like to have a digital copy, too, rather than lugging around a cadre of discs. The combination of digital and disc has made Netflix a very successful retailer. The studios have put digital copies in their packaging because consumers value it.

Theaters, Blu-ray and digital delivery serve different needs, and they can and will coexist.

On another note, I was sorry to hear that Video Business, our worthy and vigorous competitor for nearly 30 years, printed its last issue Jan. 4. The editors and reporters at VB kept us on our toes, and we will miss their contributions.

 

Scribe Touts DVD’s ‘Strong Showing’

At last, a reporter who gets it.

I’m talking about Mark Dawidziak, the television critic for the Cleveland Plain-Dealer, who interviewed me recently for a column he did on the appeal of TV DVD.

For starters, Dawidziak is not drinking the Kool-Aid of the tech companies and their analyst shills that the whole world is fast migrating to digital downloading. No way.

The Midwestern scribe, if you can believe it, actually is a fan of DVD and packaged media, if for no more noble a reason than that it gives consumers optimum control over their home entertainment consumption.

“Although separated by 50 years, seven states and 2,400 miles, my brother in Redondo Beach, Calif., and my daughter in Cuyahoga Falls, Ohio, share the same view of cable and broadcast television,” Dawidziak writes.

“They don’t watch it. They don’t need it. They don’t like it.”

Instead, “my 62-year-old brother and my 12-year-old daughter are part of a growing segment of the population happily taking care of their own programming needs. DVDs, particularly boxed sets of vintage series, are filling the viewing hours once supplied by the networks.”

The columnist also opines that packaged home entertainment could be in for substantial future growth, given the surge in sales of HDTVs, which he correctly asserts are tailor-made for Blu-ray Disc.

And even though DVD sales are slightly off from last year, Dawidziak isn’t joining the chorus of reporters who believe — or, rather, want you to believe — that the sky is falling.

Instead, he puts things in remarkably clear perspective. “DVD sales through August were down just 2.5% from the same time last year,” he writes. “Factoring in higher-than-expected Olympic ratings in August and economic woes, that’s a very strong showing.”

Yes, Mark Dawidziak of the Cleveland Plain-Dealer — the daily paper read by my boss, by the way — understands our business. We could use more journalists like him.

 

 

Going Blu in Suburbia

The neighbors are turning Blu.

While this isn't by any means a scientific study, anecdotal evidence in my Orange County, Calif., neighborhood shows consumers are warming to Blu-ray Disc.

In the past month, two households have picked up players and, for the first time, started asking to borrow Blu-ray Discs instead of DVDs.

And they didn't buy the popular PlayStation 3 game console, either; they got standalone Blu-ray players, which do one thing and one thing only — play movies. Obviously, they are buying them for the Blu-ray capability and plan to buy Blu-ray movies.

Another indicator is the attitude of my children, who immediately ask if a title I bring home is Blu-ray or just plain-old DVD.

As we hold our breath waiting to see if consumers will embrace the new high-definition disc, it's comforting to me to see changes in my little section of the world.

When my neighbors started renting from Netflix, I began to believe in the staying power of the online DVD rental service (particularly since there was a Blockbuster Video less than a mile away).

Other indications also are good for Blu-ray.

A study from ABI Research found 75% of respondents planned on buying a Blu-ray player by 2009.

Also, an In-Stat survey reiterated the pull of packaged media, with more than half of respondents saying they preferred hard goods when buying movies or TV shows. Even younger viewers in the study preferred packaged media, with its cover art and extras.

“That bodes well for Blu-ray,” In-Stat analyst Gerry Kaufhold said.

Blu-ray disc unit sales in the first half of 2008 were up 340% from the first six months of 2007, according to Nielsen VideoScan data. And, looking at our weekly numbers since then, Blu-ray seems to be gaining momentum on a week-by-week basis as well.

Driving to work this week, I heard a commercial for Dish Network's “TurboHD,” which touted 1080p resolution “as good as Blu-ray.” That's not a bad thing. When big competitors start comparing themselves to Blu-ray, you know it's on its way to success.

Direct-to-Video Continues to Thrive

Universal Studios Home Entertainment is going all out with its next direct-to-video sequel, The Scorpion King 2: Rise of a Warrior, out Aug. 19. Studio president Craig Kornblau calls it the studio's “most ambitious” DVD original to date, with production values “that deliver theatrical-style action, adventure and excitement.”

What's more, the prequel to the 2002 theatrical hit comes with its own making-of documentary, gag reel and deleted scenes, along with several featurettes, including one on the visual effects.

The release underscores how serious studios are about their respective DTV initiatives. In Universal's case, DTV has been a goldmine, with three sequels to “American Pie” and another three to “Bring It On” selling a combined total of more than 10 million units, for nearly $200 million in consumer spending.

Kornblau says it's a natural: Thousands of people buy tickets to see movies in theaters, and then storm back to see theatrical sequels. “Clearly, consumers have a huge appetite for more stories from these franchises that they love,” Kornblau told me for a story in this issue (see story, page 30).

But think of how many popular movies do not spawn theatrical sequels, for whatever reasons. Maybe the franchise loses its flair just enough to no longer warrant an expensive theatrical picture; maybe when the film was produced, no one was thinking sequel — or prequel, as the case may be.

The latter was the scenario for Universal's successful Carlito's Way: Rise to Power DTV prequel, which premiered on DVD in 2005, 12 years after the original Carlito's Way opened in theaters. The film didn't attract many critical raves and featured a cast of mostly unknowns, but on home video it was a big success.

American Pie, on the other hand, spawned two very successful theatrical sequels before it went into DTV land.

The way things are going, it wouldn't surprise me at all if one day we see a Spider-Man 7 premiering on DVD and Blu-ray Disc instead of on the big screen. And you know what? My kids would love it.

The other day I brought home 10,000 B.C., and the three boys stayed on the couch after the final credits. “Daddy,” Hunter, the youngest, cried. “Can we see 10,000 B.C. 2?”

Comic-Con a Forum for Home Media

San Diego Comic-Con International has for many years been a forum for studios to try out the latest theatrical releases on the most avid moviegoers. In recent years it has become a platform for TV shows looking to connect with rabid fans as well. The line for the “Heroes” and “Lost” presentations in the massive Hall H stretched completely around the convention center into the Seaport Village area.

Lately it has become a place where retailers and studios can court fans of home entertainment.

Blockbuster took a spot in the Warner Bros. booth to promote its new digital kiosk being tested in the Dallas area. Consumers can download rentals of movies, rather than picking up the DVD, at the new kiosk.

Best Buy sold not-yet-released DVDs at the New Line Cinema booth, which sported an elaborate display for the direct-to-video Lost Boys: The Tribe, released July 29, after the show.

MGM and 20th Century Fox Home Entertainment hosted a red carpet screening for the direct-to-video movie Stargate: Continuum on the USS Midway aircraft carrier in the San Diego harbor.

Sony offered BD Live demonstrations at its booth.

And presentations on Fox's “Futurama” DTV movies, the Cinema Libre-distributed Indyfans, and Warner's “Charlie Brown” collection also highlighted home entertainment.

Certainly, many major home entertainment announcements didn't happen at Comic-Con. Iron Man's release on disc is still up in the air, as are plans for The Dark Knight and the fourth “Indiana Jones.” The much-anticipated Blu-ray Disc release of The Matrix Trilogy came after the show.

But for studios wishing to take the pulse of movie enthusiasts' interest in home entertainment, Comic-Con is proving to be an essential event.

Studios have found that if you can please the Comic-Con crowd, you're on your way to success.

Thus, I found it heartening that many in TheDigitalBits.com editor Bill Hunt's panel raised their hand when he asked how many had purchased a Blu-ray player. If Comic-Con attendees are the cutting edge of entertainment, the fact that so many of them have gotten on the Blu-ray bandwagon is indeed encouraging for the future of our business.

iPorn: The iPhone 3G Makes Adult Content Mobile

It was probably a safe bet the people in the line last Monday morning snaking around the Apple store in the upscale Fashion Island Mall in Newport Beach, Calif., weren't thinking much about adult entertainment.

Or were they?

While the majority likely wanted to snag — and brag about — Apple's white-hot second-generation iPhone 3G armed with twice the networking speed of its predecessor and at half the price, many coveted the new open-platform software that caters to 500 (including 125 free) proprietary and third-party applications, scores of them adult.

Apple said it sold 1 million iPhones in the first 72 hours after the July 11 launch. Only The Dark Knight is hotter. While there is one Bruce Wayne, there are countless users who will take their iPhones where no U.S. mobile phone has successfully ventured: adult videos and photos.

Indeed, words such as “sex” and “porno” ranked in the top 10 of search terms from more than 14 million mobile Web browsers, according to a survey by Crisp Wireless, a wireless mobile publishing network.

Why should you care? For better or worse, where porn goes, so does home entertainment.

Beset with shrinking DVD sales and excess supply (much of it electronic, free and pirated), the adult market believes the new iPhone and other “smartphones” (with Internet connectivity) can revolutionize the industry much the way VHS saved it in the 1980s.

“It's like going from dial-up to broadband,” said one industry expert.

Since U.S. cellular carriers won't distribute adult content directly due to age-verification issues and decency laws, consumers of adult content are left with third-party Web sites that require a credit card, heretofore tough to access due to limited networking capacity and browser speed.

The iPhone 3G changed all that.

Now, adult sites such as YouPorn, Phonerotica and PornAccess rank among the top destinations accessed by smartphone users, according to M:Metrics, a mobile media measurement company.