I Bet VHS Is Tanking Vs. VOD, Too!

Blu-ray Disc just can’t catch a break. In the most recent salvo against packaged media, SNL Kagan bemoaned the falling fortunes of DVD, maintaining the format’s wholesale revenue to the studios dropped a “shocking 43.9% in 2010” — a figure the studios say is simply not true.

“Consumers are now opting to sign up for streaming and/or rental services, like Netflix Inc.,” according to Kagan. “They are using VOD services more and more, as they discover these services can be cost effective. Unfortunately for studios, the revenue from VOD has not yet offset the resulting drop in DVD sale revenue, which was their top earner for more than a decade.”

Wow. What a revelation! The aging format DVD is waning. I bet they would have found that VHS revenue to studios was falling off versus Netflix and other VOD services with the advent of DVD as well.

The report declined to mention how much of a margin the current-generation disc format Blu-ray contributes. Buried a few graphs down was a mention of Blu-ray: “It is important to note that this does not include Blu-ray revenue, which grew significantly in 2010.”

Blu-ray revenue has not offset the decline in DVD revenue either, but to omit its contribution to the studios’ bottom line and only concentrate on the decline of the previous-generation format’s revenue — and use a number the studios say is seriously out of whack with reality — is disingenuous.

When queried by our reporter, a spokesperson noted that Kagan is preparing a Blu-ray report as well. Let’s hope that report will offer a more well-rounded, and accurate, view of the packaged-media business.

No doubt rental services — including online subscription rentals both physical and digital via Netflix and $1 disc rentals via Redbox and other kiosks — are enjoying growth. But to claim that VOD, and only VOD, is competing with DVD is just plain wrong. Physical rentals as well as next-generation Blu-ray Disc sales also are competing successfully for home entertainment dollars and increasingly are taking the place of DVD sales. Indeed, there is a DVD included in many Blu-ray combo packs that I doubt Kagan noted as a DVD sale.

Comparing any current home entertainment option to the heyday of DVD is just plain silly. Consumers never again will collect catalog that feverishly, having already bought much of what they want to own. In the rush to declare the disc dead, sometimes the facts are muddled.
 

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Disc Isn’t Dead; Kiosks Are Doing Fine

The NPD Group recently reported that about 80% of consumers watched a movie on DVD or Blu-ray Disc in the past 90 days and that consumers still spend 80 cents of every home video movie dollar on renting or buying discs. Last week kiosk companies Redbox and NCR released numbers showing they are doing just fine. These developments fly in the face of naysayers who claim the disc is dead. I often reply to these gloom-and-doom purveyors, “If disc is dying, why is Redbox growing?”

Redbox doesn’t yet have a digital option. Neither does NCR’s Blockbuster Express. But they both seem to be surviving.

Another case in point is the growth of Blu-ray Disc purchases throughout the past few years. Granted, DVD sales are flagging, but the high-definition format is chugging along.

Most outside industry observers unfairly compare the current disc market with the heyday of DVD, when consumers could buy most films, including catalog hits, for the first time at an impulse price. The value was irresistible to many consumers, and they got that purchase with a better quality picture and package as well. VHS wasn’t exactly library friendly. It was bulky and deteriorated over time. That sort of windfall may never happen again, but that doesn’t mean consumers don’t like the disc.

Much of the streaming hoopla around Netflix and Hulu involves TV shows, not movies. TV DVD may be suffering a hit from that, but the TV DVD buying binge, too, was goosed by catalog to which consumers had never before had access. If you already own the entire series of “Buffy the Vampire Slayer” on DVD, you probably don’t need to buy it again. Many TV shows weren’t even shot in high definition, so buying them on Blu-ray is of little advantage.

The disc is merely a victim of its own success. Expecting consumers to buy the same movie over and over and over again has its limits, no matter how many special editions a supplier puts out.

The disc’s appeal is reflected in the growth of kiosks and Blu-ray. My bet is if Netflix turned it’s back on disc, Redbox and other kiosk companies would grow even faster. Both would coexist with Netflix streaming mostly old catalog fare and TV shows, and kiosks renting top hits, some earlier than Netflix and at a higher price. Videophiles who really want to see Avatar in 3D or hits like Tron at home would buy them.

Many industry pundits have said the disc will stick around for a long time as home entertainment options grow. Recent numbers back that up.

 

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The Neverending Story: Windows

Just when we thought the studio window story was finally settling down, it’s baaaaack.

After a spate of conflict last year, the studios that had wrangled with Netflix and Redbox privately and in the courts finally nailed down windows on new-release discs and settled into a more comfortable, if not wholly friendly, relationship with the two rental companies.
Somewhat satisfied they had safeguarded content in the disc rental realm, the studios this year turned their attention to the window between theatrical release and disc release to try to wring more profit from the content pipeline via a new scheme: premium video-on-demand.

Studios hope to entice consumers to pay a higher price (about $30) to view a new title prior to disc release and 60 days after its theatrical bow. Pushing them, no doubt, into this new venture is the same thing that pushed them to  re-examine disc rental windows: declining sales.

It’s no secret that the theatrical business — following the exciting steroid injection of high-priced 3D theatrical revenue — has hit a slow patch. This makes it vulnerable to a re-evaluation by the studios, just as declining DVD sales made studios rethink their relationship with packaged media.

It’s debatable as to whether the theatrical business is just undergoing the usual title-related slowdown or a seismic shift. Certainly, when DVD sales first began to falter, many blamed the quality of the titles.

But it may be the same thing that has hurt the disc sellthrough business that is inflicting damage on the theatrical take: lower-priced, more convenient alternatives, including home theaters and streaming. The home theater experience — with the penetration of HDTVs and Blu-ray Disc — almost approximates going to the movie theater. Indeed, it’s much more comfortable to watch a movie at home. As for streaming, it’s not quality but quantity that may be hurting theaters (and not just via piracy). Streaming consumes an ever-increasing piece of consumers’ free time. If you are watching a bunch of catalog movies or old TV shows on Netflix, you won’t have time to go to the movies. Time, unlike online content, is limited.

As for premium windows, they are all about timing. They bank on consumers who have a lot of free time paying a premium to see the latest thing. In this economy and with the explosion of content online, I’m just not sure those consumers are as prevalent as they once were.

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Digital: The New Frontier

Going digital.

That’s certainly the buzzword for home entertainment these days. But just what exactly does it mean?

The best answer: Lots of different things to lots of different people.

You’ve got cable video-on-demand, or VOD, the most financially lucrative component in the digital distribution of movies and TV shows. Hot on its heels is Internet video-on-demand, or iVOD, which is largely used for streaming on the go and the growing mobile market.

Electronic sellthrough, or EST, is the laggard, accounting for only about $683 million of the total home entertainment business, according to the latest numbers from DEG: The Digital Entertainment Group.

On top of that, there are all sorts of other digital distribution methods, such as Hulu, which offers both free ad-supported TV shows as well as a subscription model with more current content; Vudu, which is owned by Walmart and offers transactional VOD; and Google TV, with its YouTube division. And let’s not forget Netflix, with its streaming plan (that also happens to include unlimited physical disc rentals), and Amazon, with its own competing subscription streaming plan.

This digital explosion gives studios “the opportunity to redefine how we engage with consumers, how we offer our content and opens the door to a number of new business models,” said Darcy Antonellis, president of Warner Bros. Technical Operations. Warner recently offered The Dark Knight on Facebook, for instance.

Indeed, the digital evolution may lead to a bigger revenue pie for the studios.

“We expect to see continued growth in nearly all home entertainment platforms, as consumers spend more dollars than ever on entertainment of all types — Blu-ray, EST, VOD, streaming, social games, apps and mobile; all of this comes at improved margins to the studios,” said Lionsgate president and co-COO Steve Beeks.

There may also be brighter days ahead for the tiny EST business.

“With the launch of UltraViolet (the cloud-based digital copy locker system) establishing a common digital distribution platform later this year, prices potentially coming down on digital sales, more marketing devoted to digital sellthrough, and studios adding more value to the sellthrough product by making HD available and building in smarter extra features, we see the balance tilting even more toward owning and collecting digital movies,” noted David Bishop, worldwide president of Sony Pictures Home Entertainment.

Jamie McCabe, EVP of worldwide PPV, VOD and EST at 20th Century Fox Home Entertainment, agrees that EST has yet to hit its stride.

“The sellthrough experience, either physical with digital or digital alone, should evolve the most as the consumer who purchases will receive broad privileges to enjoy the content across a rapidly expanding footprint of devices,” McCabe said.
Most agree that packaged media will continue to coexist and complement the digital landscape.

“From the customer’s standpoint, these businesses (physical and digital) are coming together,” noted Ron Sanders, president of Warner Home Video. “In many cases, consumers want a combined physical and digital experience — the packaged-media product in their homes and a digital copy in their home networks.”

Navigating the digital landscape still is murky, especially when you throw exclusive content into the mix, such as webisodes. One studio home entertainment president, when asked about who’s running the digital show at his studio, responded, “Good question.” His confusion is understandable. At some studios, digital falls under home entertainment; at others, it bypasses home entertainment; at still others, it’s parceled out, with the most profitable chunk, cable VOD, falling under the TV group.

The only certainty: Despite all the tirades in the consumer press about packaged media’s imminent extinction, digital distribution will only really take off when content owners allow it to. Even so, the studios are taking consumer trends into account.

“Consumers expect to have easy access to their content, whenever and wherever they want, so I think the future for digital delivery is about getting all of the elements in place to make that a reality,” said Thomas Gewecke, president of Warner Bros. Digital Distribution.

“We must evolve along with consumer behavior and try new platforms and distribution models,” said Bob Chapek, president of distribution for The Walt Disney Studios. “It is the only way we can remain relevant and continue to monetize our content in this digital era.”

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What Happens Without Blockbuster?

Last week a representative from the United States Trustee Program — a branch of the Justice Department — filed a motion saying Blockbuster doesn’t have the funds to bankroll its fiscal reorganization and should therefore liquidate under Chapter 7.

The industry already went through a liquidation with then-second-ranked rental chain Movie Gallery. Whether Blockbuster would survive in any form is in doubt.

That begs the question: What will the home entertainment business look like without a big, publicly traded video rental chain?

Perhaps independent video rental chains and stores — unburdened by the kind of debt that drew Blockbuster into financial trouble — might be able to stage a comeback, renting former Blockbuster locations on the cheap. Coming on the heels of Borders’ bankruptcy and store closings, a Blockbuster liquidation would lower rents.

Kiosk leader Redbox might be able to raise prices and get a better deal from studios that think their business model devalues content. Netflix, too, might be able to raise prices for physical rental to boost its streaming business.

As for the studios, they lose the biggest brick-and-mortar-store chain ally in keeping rental prices higher than Redbox and Netflix. Thus, the studios might opt to throw much more support behind the next-highest-priced rental product, cable and Internet transactional video-on-demand. The studios also might accelerate the high-priced rentals afforded by premium VOD shortly after a movie hits theaters.

Still, for consumers, it will mean less immediate access to a breadth of physical disc rentals that they have heretofore had. A Redbox kiosk can hold only so many titles.

My mother recently commented that she wanted to see The King’s Speech, but it is no longer playing theatrically in her area of Texas. Theatrically, the limiting of title selection to first-run movies has been long-standing. Unfortunately, that means consumers who want to see arthouse-type fare may lose their chance if they don’t act quickly after a film is released. They must wait for the home video release.

With Blockbuster’s exit from the store rental business, consumers may have to wait even longer to find the titles they want — unless they want to pay a premium to see the content on VOD in the home. Whether this is good or bad for the overall home entertainment business’ bottom line remains to be seen.
 

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We Plan to Salute ‘Digital Drivers’

Stephanie Prange Home Media Magazine

It is no secret that digital delivery of content has taken great strides in the past few years, and Home Media Magazine has been covering developments in this part of the business in every issue. Now we plan to take yet another step in elucidating the digital delivery world. In our upcoming March 28 issue, Home Media Magazine will single out our industry’s digital leaders, the executives at the studios and content services who are charting the course for digital delivery of movies and TV shows. We are calling them “Digital Drivers.”

Never in the history of the business have there been so many different ways to consume such content, in addition to physical media. From cable video-on-demand to online streaming and downloading to Apple apps such as those offered for the first time by Warner Bros. Digital Entertainment, the digital delivery arena is growing remarkably.

Our aim is to provide a roadmap of the players in the digital business who are key to licensing content both to service providers and from the studios. The philosophies and deals are in constant flux in this ever-evolving corner of this industry. Windows, prices — both to consumers and service providers — and players are adjusting constantly.

Thus, we are hoping to start an annual snapshot of this part of the business through its key executives. We invite everyone in the industry to offer input for our “Digital Drivers” section via our website, at www.homemediamagazine.com/news/digital-drivers-form, where readers can nominate their choices for digital players. Readers also may e-mail me with their suggestions and why each particular digital driver is a key player in the delivery of online movies and TV shows.

As part of our section, we also hope to offer a primer of phrases in the digital business to outline the alphabet soup of terms such as EST and iVOD.

While perhaps no one has the definitive road map for the future of digital delivery — and how content holders will continue to profit and grow the business of making great content — our aim is to help make that map more clear through identifying the “Digital Drivers” in our business.
Blu-ray Disc continues to be the gold standard in content delivery. However, digital delivery of content, too, will be part of our future, and we plan to cover it with the same thoroughness with which we have been covering the video business for more than 30 years.

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The Passing of an Era

Stephanie Prange Home Media Magazine

It’s the passing of an era. The kiosk has taken the video store’s place in rental market share, according to The NPD Group, with subscription services such as Netflix holding the biggest chunk of the rental market.

Consumers no longer trek to the local video store to choose an evening’s entertainment at the same rate they did in the past. Instead, a disc or two just shows up in the mail, or mom picks up a $1 rental while buying groceries. The communal experience of going to the local video store with the family or a group of friends to see what’s available and to agree on entertainment for the night is no longer an integral part of the American zeitgeist. Perusing the recommendations of the local store clerks or asking the customer in the aisle next to you, “Have you seen this? Is it good?” are a thing of the past. Movie rentals are no longer a destination pursuit.

It’s been a gradual shift. My 12-year-old, who once recalled “those boxy things we used to watch movies on” (VHS), owned most of the movies she wanted to view. My 8-year-old doesn’t remember a time when movies weren’t on little discs. Neither of them really did what I did as a kid, which was to go with my parents or a group of friends to the local video store to pick a movie to see for the night.

Home entertainment is increasingly an individual pursuit. Dad might be watching an action flick on the big screen while Mom updates her Facebook page and the kids use the Web to chat with friends or stream a TV show on their phone.

Each time I pass the deserted Blockbuster location near my house, I feel a bit sad. No store has yet opened in the empty spot, which still sports the trademark blue and yellow paint. You can just make out the ghostly outline of the Blockbuster logo.

Perhaps the video store will have a second act. Blockbuster may yet reinvent itself as it comes out of bankruptcy. Certainly, there are scrappy independent rentailers who have managed to weather change and forge a business that coexists with kiosks and Netflix.

But I do think the era of the communal video store trip is waning. The competition for each family member’s eyeballs is pulling Mom, Dad and the kids in different directions. The exploding variety of entertainment available is making the habit of hitting the video store a thing of the past.

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Going to CES with a Really Old Blackberry

The ball-thingy fell out of my Blackberry. I tried to fix it, but various little plastic and metal parts kept falling out.

Should I get a new ball-thingy for my Blackberry? Should I get a new phone/e-mail device? My employer settled on the latter, but — unfortunately — it wouldn’t be available until after the Consumer Electronics Show.

Thus, I was stuck with a cumbersome, but working, black behemoth of a Blackberry with the old click wheel at CES. How embarrassing!
I might as well have walked around with a cell phone the size of a banana (if you don’t remember, see the last few scenes of My Best Friend’s Wedding).

It got me thinking about planned obsolescence, you know the idea that companies create things to become obsolete so you have to buy another version.

It has worked quite well in the home video business. Studios that sold classics to folks on VHS were able to get them to buy the same movie on DVD and perhaps yet again on Blu-ray Disc. Extra features via “special editions” offered other chances to prompt the public to buy yet again. The promise of 3D Blu-ray could extend that format even further, leading consumers to buy films they have in 2D in 3D as well. On the cusp of CES, Walt Disney Studios Home Entertainment announced plans to release at least 15 movies in 3D Blu-ray in 2011, including animated classics The Lion King and Beauty and the Beast, and current theatrical releases Tron: Legacy and Tangled.
But what comes after Blu-ray?

Streaming and download options, obviously, are the brave new world of home entertainment. But how will planned obsolescence look in that realm?

Certainly, download and streaming speeds will improve, offering better and better picture and sound quality that will someday match Blu-ray Disc.

Consumers will have to store their digital purchases on a hard drive of some sort or in the “cloud,” amongst the amorphous digital field controlled by outside servers.

In that environment, will anyone really want to “own” a movie or TV show?

As content becomes ephemeral, unattached to physical technology, many of the old models may fall by the wayside.

We are already seeing the concept of windows change. For instance, should the studios allow consumers to see movies in their homes shortly after they hit theaters — for a price? Perhaps, that is the new world of obsolescence — windows. If you want to get the latest title in the highest quality, you will need to buy into an earlier window. Still, windows are just part of the equation.

Digital technology is sure to offer more options than ever before for HOW consumers see a movie or TV show — on a small screen or large, with a low-quality picture for mobile or on high-definition for the big screen, just after it has left theaters or broadcast or many months or years after the last promotional spot has run.

The technologies that deliver movies are more diverse than ever, as are the options for consumers in viewing a particular movie or TV show. What may be obsolete to one consumer accustomed to seeing the latest content could be just the ticket to another who likes to view content on demand on a mobile phone, no matter how old it is.

Planned obsolescence in the content world could one day become obsolete.
 

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‘Shelf Space’ Issues for Streaming?

The recent dustup between Comcast and Netflix tech partner Level 3 Communications has brought to light a growing issue in the anything, anywhere, anytime brave new world of digital delivery.

Level 3 is protesting a new fee imposed on it by Comcast for transmitting movies and other content (the volume of which has jumped due to its new deal with Netflix).

Comcast claims it’s merely a distribution pipeline with limited resources, much like shelf space on the store floor. To expand that “shelf space” for Level 3’s new Netflix content, Comcast says it needs more compensation to deliver the greater flow of content. Level 3 says Comcast is doing its cable customers a disservice by not giving them what they want regardless of the content source.

Retailers for some time have charged fees to put products on endcaps or give them special placement. Shelf space is limited at a brick-and-mortar store and, in order to offer a broad range of products, the store may not necessarily be able to stock as much of a given product as consumers would like. The Internet, ostensibly, was supposed to be different, with consumers calling the shots on what they wanted to buy without restrictions. The new controversy calls that promised Internet nirvana into question.

In the case of Level 3, Comcast claims it is being asked to greatly increase the content delivery network’s allotted “shelf space” for its new Netflix traffic at no extra charge. Complicating the issue is the fact that Comcast itself wants the prime “shelf space” for its own cable and Xfinity service, which increasingly competes with Netflix streaming.

The key is how much traffic Comcast owes Level 3 at what price. It’s unclear just how much the extra traffic is costing Comcast, which is the heart of the problem.

Perhaps the upcoming FCC vote on this issue, dubbed “net neutrality,” will find some common ground. It may be that the Internet needs some sort of traffic cop to balance the wishes of consumers and streaming companies against the cost to companies that deliver that streaming and other services via the Web.

Unfortunately, the Internet’s “shelf space” may not be as easily defined as that of Walmart or Target. Which companies or persons bear which costs may be very difficult to determine.

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Is There Any Money in Streaming?

Drowned out by the Wall Street hype about the growth of digital delivery, industry pundits (myself included) have often wondered if the economics of streaming content would ever work out.

Netflix’s bow of a $7.99 streaming-only subscription in the United States this week, on the heels of Hulu’s rollout of its “premium” service at the same price (after a price drop), may finally enlighten us. Each move starts to give the industry some way of quantifying the streaming offerings out there.

I was a big critic of Netflix’s decision to offer streaming at no extra charge at the outset, concerned that when you offer something for free, consumers are reluctant to pay for it afterward. I may be proved wrong in my initial reluctance to giving customers something for free. But I think most would agree that the ultimate test is a streaming service that makes a profit without leaning on the old-fashioned disc rental business (in the case of Netflix) or on free, unlimited access (in the case of Hulu).

Still, Netflix has somewhat muddied the streaming waters by offering the streaming-only service at the same time it raises prices for disc rentals. If you want to rent Blu-ray discs from Netflix, there’s an even steeper premium.

Each is taking a big gamble, and it will be interesting to see which has its finger on the pulse of the consumer. We are getting much closer to finding out if there is actually any money in streaming.

One anecdote from my own life: My mother recently signed up for Netflix. She checks e-mail only about once a month, so the idea of her streaming anything seems remote. When she gets wind of the fact that the price may go up, I’m not so sure she will stay on. Will other disc renters feel the same way? Will the sub price for streaming plus disc rentals plus the premium for Blu-ray make some re-evaluate Netflix’s offering? A dollar or two to rent a disc from Redbox may start to look really inviting.

In a poll at hackingnetflix.com, by Nov. 23 nearly half of respondents said they wouldn’t change their Netflix plan, while about a third said they would downsize their plan to save money and about 10% would drop DVD rentals to go streaming-only; 10% said they would quit Netflix.

Still, the jury is out, and I give credit to Netflix and Hulu for trying to quantify their product. I’m ready to get past the hype and move toward digital profit. The ultimate goal is an entertainment industry in which content owners, creators and distributors can make a decent profit.

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