Erik Gruenwedel, senior editor Before joining Home Media Magazine in 2003, Gruenwedel was a reporter at Billboard, focusing on the legal issues. During his 15-year print career, Gruenwedel has written for the bicycling, homecare. advertising (Adweek), and spa and poolindustries. He has a degree in journalism from Cal-State Northridge, as well as an MBA from Pepperdine University.
Emmys Final Score: Cable 1 Netflix 0
In the end it wasn’t even close. Netflix came to the 65th Annual Primetime Emmy Awards with high expectations following 14 Emmy nominations — the first ever for an Internet-based subscription service.
With majority of those nominations (nine) for political drama reboot “House of Cards,” scuttlebutt suggested Netflix would score big in the high-profile categories, including Outstanding Drama, Lead Actor (Kevin Spacey) and Lead Actress (Robin Wright).
It didn’t. The subscription video-on-demand pioneer, which has marketed itself in part as an agent of change within the traditional TV landscape, took home just one Emmy during the Sept. 22 primetime awards telecast: Oscar-winning helmer David Fincher for Outstanding Directing for a Drama Series.
Clearly, with the monies invested in billboard and related national marketing, in addition to grassroots political-style lawn signs in greater Los Angeles, Netflix had hoped for more than a directorial nod.
And some might say the Emmy directing award should not be confused with similar accolades presented at the Oscars and Golden Globes. Indeed, Fincher only directed two of the 17 “Cards” episodes, including the pilot. “Cards” won two other Emmys for castings and cinematography, which were awarded during the separate Primetime Creative Arts Emmy Awards on Sept. 15.
HBO, which Netflix management has oft mentioned as both erstwhile mentor and foe, again took home the bulk of Emmy hardware, including a combined 27 trophies for “Veep,” “Boardwalk Empire,” ‘The Newsroom” and Liberace biopic Behind the Candelabra.
AMC Networks again scored big for perennial Emmy favorite “Breaking Bad,” which nabbed Outstanding Drama and Outstanding Supporting Actress (Anna Gunn). Notably, series creator Vince Gilligan attributed the show’s longevity in part to Netflix.
"I think Netflix kept us on the air," Gilligan told reporters back stage, alluding to streaming access to past seasons. He should have also mentioned packaged media since season boxed sets of “Bad” consistently rate high at retail. Amazon ranks seasons one through three among its top-selling DVDs.
Regardless, the Emmys once again underscored what cable has brought to TV in terms of quality serialized drama. And while Netflix invented binge viewing and isn’t afraid to spend big on original content, it’s still chasing the cable networks' creatively.
"It just seems like there's a real swing in the cable world," Bobby Cannavale, who edged favorite Aaron Paul (“Breaking Bad”) to win Outstanding Best Supporting Actor Award for HBO's "Boardwalk Empire," told Reuters.
"[Movie] studios don't make dramas, so the best place to do drama is you go to HBO or Showtime, or you go to AMC or FX, and I think that was sort of reflected today."
Margin’s Ugly Call
Outerwall said margins at subsidiary Redbox would fall below expectations in the second half of the year as consumers rent movies for fewer days, among other issues.
By definition, margin is the difference between the cost and the selling price of something. For Redbox, the selling price would be the number of nights it can charge $1.20 for a particular disc at a kiosk. Outerwall’s profit margin in the first half of 2013 shrunk to 6.2% from 8.2% in the same period of 2012. And it’s expected to fall further.
Culprits include Redbox promotions and a shorter rental period per disc, according to CEO Scott Di Valerio. He said the kiosk vendor would report increased revenue in the third quarter, including record rentals in July, but the profitability (margin) of those rentals is lower.
That’s because while more people are renting movies from kiosks, they're returning them the next day, instead of days later. With the margin on a nightly $1.20 rental razor thin, Redbox makes its money through volume (renters) and extended rental nights. Previously, the average kiosk rental generated more than $2 in revenue. When a consumer returns a disc in less than 24 hours, that revenue (and margin) falls.
Pitfalls of Teaser Pricing
Redbox (and streaming services such as Netflix) has shifted the rental paradigm, transforming the $3.99 video store transaction into a low margin commodity. Kiosks and subscription video-on-demand services have reduced the cost of the rental transaction, replacing it with a big-volume business model predicated on the belief that if a movie/TV show rental is priced at next to nothing, people will flock, rentals or subscribers will balloon and profit will follow based on increased volume.
If you’ve ever had someone ask you at McDonald’s, "Would you like a drink with that?," then you get the idea. Redbox is silently asking customers, "Would you like to keep that another night? It’s only $1.20 more." And Netflix every month is cajoling, “It’s only $8 a month. Isn’t the entertainment we provide each month worth that?”
This mindset has been a boon to the consumer, but it’s a delicate balancing act for Redbox and the home entertainment industry. Studios and media companies loudly herald the incremental revenue SVOD is generating via multimillion dollar license deals. Redbox, too, is paying select studios hundreds of millions to secure street date releases.
Yet, this business model is dependent upon SVOD and Redbox continually growing their subscriber bases and/or maximizing the time a disc is gone from the kiosk and in the home. Any deviation from these prerequisites, and the bubble bursts.
“Unfortunately, this demonstrates the leverage in the Redbox model, but on the negative side,” said B. Riley & Co. analyst Eric Wold. “The more you can push customers to multiple nights, larger baskets, etc., the more you leverage that cost.”
Analysts say Redbox needs to adjust its promotional strategies going forward to offset the single night shift and negative margin hit. Consensus suggests Redbox is not operating on the margin fringe as much as it is operating a business model that requires a certain level of risk predicting disc demand ahead of time, which doesn’t always pan out correctly.
“They make outsized profits when revenue is higher than budgeted and lower profit when revenue falls short. It’s a tough model to predict, but I think they need to manage a bit more conservatively,” said Wedbush Securities’ Michael Pachter.
As for Netflix, as long as they can grow their subscriber base and leverage their ballooning stock price, the party will continue. However, someday the music may stop,
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.
The Flipside to Cord Cutting
I am a cord cutter. I’ve been one since the summer of 2011 when economic reality transformed me from homeowner to renter.
Having already shunned the car in favor of the bicycle as a primary means of commuting, going down the fiscal downsize “to do” list it wasn’t hard to miss that $140 DirecTV bill.
I canceled the satellite-TV service, opting to pay the $20 monthly termination fee through the remainder of my contract — ignoring DirecTV’s myriad incentives to retain me.
From here on out, I would just pay for broadband access, watch a movie from my disc collection, rent from Blockbuster (LOL), stream on Netflix — or in desperation, read a book.
Fast-forward to the present, and I haven’t missed the bundled pay-TV experience. While I experienced initial ESPN withdrawal, avoiding the network’s East Coast bias is probably a good thing. And in February I streamed Super Bowl XLVII on CBS.com via HDMI cable.
But that streaming access is getting expensive.
When Comcast, Time Warner Cable and Cablevision collectively reported video subscribers losses of more than 1 million during their most recent fiscal periods, the multichannel video program distributors were able to offset the losses and actually improve ARPU (average revenue per subscriber unit) by gains in the number of new subscribers of high-speed Internet and telecommunications.
Time Warner Cable now generates 42% of its revenue from non-video sources. Its growth in residential broadband Internet access driven by thousands new subscribers seeking ultra-fast 30 megabits per second (Mbps) data flow speed. TWC also increased equipment rental fees, including upping cable modem charges more than 50%.
In 2012, I paid less than $1 a day for broadband access from Cox Communications, which is based in Atlanta and ranked third fastest in Netflix’s ISP speed index for July.
But getting Cox here in Buford, Ga., which is less than 40 miles from Atlanta, is not an option. My choices are limited to AT&T U-verse (11th on the Netflix index) and Clearwire (dead last).
And AT&T is charging me up to 75% more per day (introductory offer).
Cord cutting seems to be tying me to lower quality and growing bills.
Building a Cheaper Mousetrap
The phrase, “If you build it, he will come,” may have worked resurrecting the ghosts of baseball past in the 1989 movie Field of Dreams, but for streaming media devices, consumer adoption remains more of a fancy.
While industry leader Roku says it has sold more than 5 million devices linking the living room TV to the Internet, the number of households actually using the devices remains small.
That might help explain why BSkyB, the United Kingdom’s largest pay-TV operator, is offering subscribers a Roku-manufactured (patterned on the LT) streaming device for $15 — less than half the cost of Google’s new (and equally inexpensive) Chromecast.
Google’s plug-in is designed to simplify consumers’ ability to stream videos from its YouTube subsidiary and Google Play content platform via their smartphone, tablet and laptop to the TV in the living room.
Sky’s “Now TV Box” makes accessing the satellite TV operator’s proprietary subscription video-on-demand service as easy as pushing the “Now” button on the remote. Of course, access to Netflix and LoveFilm Instant are not options for obvious reasons.
The box does offer access to news, the BBC iPlayer, new-release movies and assorted one-day passes to Sky’s premium channels, including live sports, without the prerequisite bundled subscription.
With loss-leader pricing and HD (720p) playback, it would seem to make “Now TV” a no-brainer — at least Sky CEO Jeremy Darroch said as much during the company’s July 26 fiscal call.
“We’ve seen an explosion in on-demand and mobile viewing as more people connect … to broadband and watch TV on laptops and mobile devices,” Darroch said.
Maybe, but across the pond in the U.S., consumer adoption of streaming devices remains sluggish. The NPD Group found that just 6% of respondents in a recent survey said they use them. The majority connect to the Internet through a video game console or Blu-ray Disc player to watch a movie or TV show from the Internet.
“It just seems to be some consumer indifference to hooking up one of these things to the TV,” said NPD’s Russ Crupnick. “Maybe it’s because the folks who want to use services connected to their TV have an Xbox or Blu-ray player already. Or those who don’t use them don’t understand what the devices do.”
Indeed, confusion about streaming players and their role in an evolving CE market inundated with content apps appears to be muddying the waters.
NPD’s Stephen Baker said both CE and media companies are wrestling with how to best deliver content from the little screen to the big screen.
“There is still a bit of gold-rush mentality about how to make that happen,” Baker said. “Frankly, I don’t know if there are a lot of business models out there that fully embrace how to make money beyond just selling the connecting device. There’s so much opportunity around being able to disrupt the consumer’s relationship with the content. But there’s not one hardware answer to an access problem.”
The Curious Case of Netflix Originals
"House of Cards"
The Wizard of Oz had a good thing going until Toto got in the way.
Netflix and its original programming could be be operating in the same vacuum of wishful reality.
With 14 combined Emmy nominations led by “House of Cards,” “Arrested Development,” and “Hemlock Grove,” Netflix’s original series would appear to be the subscription video-on-demand pioneer’s emerging Ace card as it attempts to transform the TV landscape and grow subscribers.
Except that after door-to-door campaigns in West Los Angeles (to help secure nominations), online, billboard, taxi ads, and free publicity at the White House Correspondents' Dinner, among other chatter, no one really knows just how many people have actually watched the shows — a reality that began with Nordic black comedy “Lilyhammer last year.
That’s because Netflix won’t release the numbers — no matter how many times moderators Rich Greenfield from BTIG Research and CNBC’s Julia Boorstin asked, cajoled and pleaded with CEO Reed Hastings and chief content officer Ted Sarandos to do so during Netflix’s July 22 investor interview webcast.
The official line is that since Netflix doesn’t have advertisers, it doesn’t feel compelled to divulge ratings the way ad-supported network TV programs do. It’s a clever excuse and tactical strategy right out of the playbook of fictional House minority whip Francis Underwood (played by Kevin Spacey) in “Cards.”
“From this moment on you are a rock. You absorb nothing, you say nothing, and nothing breaks you,” Underwood tells his bodyguard.
Indeed, if scuttlebutt and conjecture equaled Nielsen households, Netflix certainly has a few winners on its hands. But hype isn’t hard data, and so the question festered.
Sarandos said all of Netflix originals are drawing “TV size audiences,” adding that those obsessed with data should look to Netflix’s renewal of a second season as a “very positive sign” regarding viewership.
“If we are renewing programs people aren’t watching, then we are creating a huge opportunity cost in our content spend,” which he said would result in Netflix not having the money to spend on content subscribers do want to watch.
Then the CCO threw a curve ball.
Sarandos said that each original series had outperformed the previous original during its initial seven-day streaming period. That meant that largely panned gothic horror series, “Hemlock Grove,” drew larger audiences than “Cards,” and just-released women’s prison dramedy, “Orange is the New Black,” outdid them all, including the reboot of Fox dark comedy, “Arrested Development.”
The seven-day window is significant since Netflix makes all episodes of its originals available on street date.
Indeed, Hastings admitted “Development” resulted in a small bump of new subscribers, which analysts speculate meant about 100,000 new subs. A modest tally considering the show’s ardent fan base and pre-launch word-of-mouth.
Perhaps “Cards,” which appears a lock for an Emmy, was nothing more than a polished serial hyped by many and observed by few.
Digital Movie Sales: Industry Panacea or Hype?
A common theme throughout the recent studio fiscal calls was the emergence of electronic sellthrough (EST) as an undercurrent to a stabilized home entertainment market.
But a question arises as to how significant digital sellthrough really is. Is EST the catalyst to a renaissance in owning movies? Or is it a big fish in a small and largely insignificant pond?
To be sure, EST generated $231 million in revenue in the first quarter, which was up more than 50% year-over-year. Studios such as Sony Pictures Home Entertainment and 20th Century Fox Home Entertainment, among others, jumpstarted laggard digital sales in the fourth quarter by releasing select titles for $14.99 up to four weeks ahead of street date.
When combined with UltraViolet functionality, EST consumers now have cloud-based access to movies on connected devices — a utility heretofore limited to packaged media. Early access spearheaded a 400% uptick in Q1 digital movie sales at some studios.
“We definitely see an appetite for ownership and incremental lift in our overall title revenue from releasing titles early ahead of physical and VOD,” said an executive who wished to remain off the record.
Yet, while the industry extols digital sales, its contribution to overall home entertainment revenue in Q1 was less than 5%. In fact, sales of Blu-ray Disc and DVD titles — which topped $2 billion — was up more than 2% from last year, according to DEG. EST generated 90% less in revenue than packaged media — the format some observers consider just a few steps behind rental icon Blockbuster in relevance.
In an age of Netflix and subscription video-on-demand, the ability to meld sellthrough with streaming represents a consumer flashpoint to the studios that cannot be understated.
“There’s a subset of consumers that want to own a title as soon as it’s out. And early EST allows them to do that,” the executive reiterated.
Indeed, total digital revenue increased 26% in Q1 to more than $1.5 billion. After sellthrough, principle drivers included SVOD (up 29%) and transactional VOD (up nearly 16%).
But Wedbush Securities’ Michael Pachter questions the true impact of EST. He agrees early access and lower prices afforded digital are appealing to a small percentage of consumers. But lifeline to home entertainment? That’s another issue.
“They are putting too much stock in that data point,” Pachter said. “I don’t think most consumers will embrace movie ownership in the cloud. But I could be wrong.”
Phyllis Diller: A Remembrance
For a stand-up comedienne renowned for her exhaustive laugh, it might seem ironic that Phyllis Diller — who died Aug. 20 at the age of 95 in her Los Angeles home — coveted silence and space.
In a 2006 interview with Home Media Magazine for her last stand-up comedy performance in Las Vegas — captured on the DVD Goodnight, We Love You: The Life and Legend of Phyllis Diller released by Image Entertainment — Diller revealed that life to her had become an exercise in escaping a cacophony of unwanted noise.
She said a recent dinner out at the trendy Mr. Chow restaurant in Beverly Hills left her feeling like she had eaten at the airport.
“You couldn’t hear anyone,” she said. “Now that I’m really old, I realize one of the things it takes a lot of money to buy is silence. In my home I have silence … and it costs a lot of money.”
Diller then let out her signature laugh — a pronounced cackle perfected over the decades that started loud and just sort of hung in the air as she exhaled slowly.
Bob Hope discovered Diller after seeing her act at a supper club in Washington, D.C. The comedienne began her showbiz career at the age of 37 after a previous life as a housewife and mom.
Diller, who would appear in several Hope movies, moved to Brentwood (a suburb of Los Angeles) and began appearing regularly in Las Vegas and on television.
While well known for an affinity for plastic surgery, big hats and wigs, and a distain for housework and a fictitious husband named Fang, Diller also had a love of cooking, vintage automobiles and art (she was an acclaimed painter).
In addition to voiceovers in recent theatrical animation releases, including Disney/Pixar’s A Bug’s Life, Diller DVDs included Phyllis Diller: Not Just Another Pretty Face (MPI) and On Location With Phyllis Diller (Standing Room Only), among others.
On Goodnight, We Love You, notable scenes included a reunion of Diller’s personal assistants over the course of 47 years, or “dust biters,” as Diller called them. She said the average assistant lasted two years.
“They were horny, got married and split,” she said with a laugh.
Goodnight, We Love You is available on DVD and electronic sellthrough at Amazon.
CBS Signs Production Deal With CEO Moonves
Apparently CBS CEO Les Moonves’ 2011 pay totaling more than $69 million (in salary and stock) isn’t enough to compensate the executive should he delve into the production of television shows, feature films and related digital properties after stepping down as chief officer.
Moonves, who is under contract to run CBS through 2015, signed a “supplemental agreement” that provides him with $3 million annually in staffing and infrastructure expenses, in addition to $1.5 million in compensation to be executive producer of original programming — if he decides to do so, according to a May 4 regulatory filing.
The compensation would be offset by whatever license fees Moonves receives should CBS pick up a program. CBS is required to pick up at least three shows over the course of the four-year contract. In addition, CBS would have first-look rights, and if picked up would pay Moonves a fixed fee plus “contingent compensation” should the film be profitable.
The contract calls for additional compensation to Moonves for original music, soundtrack and related merchandise concepts created.
The filing also noted that the agreement between CBS and Moonves is contingent on a number of undisclosed preconditions being met, adding that “there can be no assurance” that such a production deal will ever be “consummated.”
Universal Misses the Big Picture
Universal Studios Home Entertainment president Craig Kornblau should know the halcyon days of DVD sellthrough aren’t coming back anytime soon.
It’s a rental market where consumers can watch new-release discs for $1.20 a night, with studios getting pennies on the transaction.
So why assist in the destruction of sellthrough (and studios’ bottom line) by extending — not lengthening — the 28-day embargo with Redbox? Why not join Warner Home Video in doubling the embargo to 56 days? After all, it was Warner that first windowed new releases to kiosks and by-mail subscription — a practice Universal and 20th Century Fox Home Entertainment embraced.
Obviously, Universal thinks the current window has the right economics. But considering that operating cash flow at Universal Pictures plummeted more than 95% in 2011, is the status quo really working?
The studio recently said Oscar-nominated adult comedy Bridesmaids was the top transactional video-on-demand title in history, generating $40 million in revenue across multiple digital platforms, including iVOD, pay-per-view, hotel viewings and electronic sellthrough. The movie also generated $100 million in disc sales.
Those tallies — which approximated nearly 50% of the title’s domestic box office — began accumulating 28 days before Bridesmaids was officially available at Redbox.
Now suppose Bridesmaids wasn’t available at Redbox for 56 days — ignoring for the sake of argument any workaround program. A typical transactional VOD purchase generates seven times the margin of a kiosk or by-mail subscription rental. Sellthrough generates 20 to 30 times the margin of a kiosk or by-mail transaction.
Bridesmaids was a popular movie with enduring demand; why give it to the 99-cent store just four weeks after street date?
Kevin Tsujihara, president of Warner Home Entertainment Group, was asked Feb. 29 why a consumer should pay $18 for a sellthrough title when a $2 (48-hour) rental edition existed down the street. Tsujihara said the only way to justify sellthrough was by creating scarcity of supply when demand is greatest — a basic tenet of supply-side economics.
“Otherwise, $2 beats $18 every time,” Tsujihara said.