Stephanie Prange is the editor in chief of Home Media Magazine. The Yale University graduate joined what was then Video Store Magazine in 1993 and was instrumental in transitioning the publication into a tabloid newsweekly. She spearheaded the publication’s reviews section, as well as aggressive coverage of the home video sales market. She also helped launch the magazine’s Web site in 1996. In her position as editor-in-chief since 2006, she has spearheaded the launch of such projects as the daily blast, transmitted via email each day to readers, and Agent DVD, a consumer publication aimed at genre enthusiasts who attend Comic-Con International in San Diego. She has freelanced for The Hollywood Reporter, The Los Angeles Times and parenting publications. She has an M.A. in journalism from the University of Southern California.
I recently heard a report that, while liquor sales are doing well during this recession (as they always do), consumers are increasingly opting for the lower-priced booze. Instead of Grey Goose vodka, they are buying Popov. Instead of Gentleman Jack, they are opting for Black Velvet whiskey.
The same thing seems to be happening in the video industry. Wal-Mart used to be the low-price leader on packaged home media, offering the best value with DVDs priced close to the $4 it would take to rent it at the local Blockbuster. But as the recession has cut into consumers’ budgets, increasingly kiosks such as Redbox, with its $1 rentals, and Netflix, with its unlimited streaming plus disc rentals for $9 a month, are looking good by comparison.
Cable VOD, with prices around $4, also is struggling. Both Time Warner Cable and Comcast, the top cable operators in the country, each reported quarterly declines of about 200,000 subscribers for premium channels, including VOD.
“I have to imagine that the continued proliferation of Redbox kiosks and Netflix offerings is drawing consumers looking for cheaper alternatives that are just about as convenient as VOD,” Eric Wold, director of equity research with Merriman Curhan Ford in New York, told Home Media Magazine. He commented on a survey from research firm Light Reading that said 30% of respondents had switched providers due to video service price issues.
While analysts may wax poetic about Netflix’s technological advantage, I contend one of the primary drivers behind its growth during this recession is price for the amount of service. I know people who have dropped cable altogether in favor of Netflix. Subscribers have access to a slew of TV shows and older movies, as well as the traditional by-mail rental of the latest hits for a price that is much less than the typical cable bill.
As for Redbox and other kiosks, no retailer I know of can beat a $1 rental. That’s likely one of the reasons Wal-Mart is refusing to sell a buyer more than five copies of new releases (a move obviously aimed at Redbox, which has kiosks in its store) and has kicked out rent-sell-buy kiosk company e-Play. The low-price leader doesn’t like the lower-priced competition. I wouldn’t be surprised if the retail goliath gets into the kiosk business itself. That would make them a low-priced leader in the rental business as well.
Redbox and Netflix may have innovative business models, but it’s really price that is growing their businesses. To quote a political maxim, it’s the economy, stupid.
Recent moves by retailers Wal-Mart, Target and Best Buy to variously limit the number of copies customers can buy and eject rent-buy-trade kiosk e-Play from stores are putting the kiosks in a business-model box.
It’s a box in which they can only offer their $1 rentals (and not trades or sellthrough) a month or so after titles hit retail shelves.
Now kiosk company Redbox in its various lawsuits claims a conspiracy between retailers, distributors and studios, and they will have to prove that in court if they want to get out of the box. They may be able to work around the margins by getting copies from retailers that are not cutting buys, but that is a lot harder than walking from the Wal-mart counter to the kiosk to load new release discs.
Again, whether or not this is some sort of conspiracy will need to be proven in court, but it may be that retailers have a legitimate business reason for limiting kiosks such as Redbox and e-Play (which this week suspended operations and pulled tests at Wal-Mart and Best Buy).
The kiosk relationship may not be as beneficial to Wal-Mart as it has been in the past, noted Pali Equity Research analyst Richard Greenfield in discussing the buy-limit policy.
“We believe Wal-Mart has facilitated Redbox’s workaround efforts over the past year mainly due to the return store traffic,” Greenfield said. “Initially, those benefits to Wal-Mart far outweighed the cannibalization Redbox was having on Wal-Mart’s retail DVD sales at the back of the store. However, as Redbox grew exponentially as a consumer brand and with consumers learning that they could rent from one Redbox in a Wal-Mart but return to another location (where they do not even need to go into a store, such as a 7-Eleven with the Redbox sitting outside), cannibalization has grown and the return-trip benefit is slowing.”
After the e-Play withdrawal, I couldn’t help but think Wal-Mart was once again acting in its own best interest. Perhaps a kiosk capable of selling and trading used discs wouldn’t be such a good idea in a store trying to sell new ones. Selling affordable new release entertainment via disc has been a Wal-Mart staple for some time, and those discs don’t look nearly as affordable when they are available used or as a rental for $1.
And maybe that’s why Wal-Mart and other retailers — including Blockbuster, which while rolling out its own kiosks is delighted with a kiosk window because it protects its high-priced rental business — are putting kiosks in a box. They don’t like the competition.
While most of the headlines about Netflix’s boffo fourth quarter emphasized the growth of streaming, a little-reported footnote is that the company held the line on revenue-per-subscriber via Blu-ray premiums.
The chain’s Blu-ray subscribers increased to 1.23 million in 2009 (There are 12.3 million overall), each of which paid a surcharge of $1 to $3 per month based on the number of Blu-ray Disc titles rented. The surcharge helped increase gross-profit-per-average-paying-customer to almost $5, the highest in two years, CEO Reed Hastings said.
Now, on the streaming front, quantifying profit is a little more elusive. There’s a feeling that Netflix customers like streaming. Hastings says it’s a draw that has helped the company add millions of subscribers (many at the low $9 a month price). He said he expects two-thirds of subscribers will be streaming at least 15 minutes per month in the next 18 months. But he can’t quantify the value of streaming.
“We don’t have a good control set of subscribers that don’t get streaming,” he said.
What does that even mean? What’s with the “at least 15 minutes” measure? That’s not even enough to watch a single TV episode. And speaking of TV episodes, I’d like to know how much of the streaming is TV episodes rather than movies. If Netflix is merely competing with linear episodic television, it’s like shooting fish in a barrel and really has no bearing on the movie or packaged media business.
Is most of the profit Netflix realizes because it offers packaged media rentals, too, especially Blu-ray? Or is streaming as important as the analysts make it seem? Is Blu-ray disc a kind of unheralded Cinderella that is doing all the work with no credit?
In Netflix’s next report, I’d really like to see how Blu-ray measures up against streaming — and whether subscribers would pay for streaming only. Then we’d know which is the real princess of profit and which is just the ugly stepsister wearing a shoe that doesn’t fit.
When Netflix offers a streaming-only option, we’ll know it’s true value — and whether Netflix can profit without packaged media. Without the crutch of packaged media, it’s hard to say whether Netflix’s streaming service can stand on its own.
Whenever I contemplate new technology from Apple, I like to think of my daughter Sydney (11), and what she would do with it. She got an iPod Touch (8GB) for Christmas and hasn’t put it down much since. She LOVES Apple devices and has had an iPod of some sort since she was 8.
Apple this week unveiled its much-hyped iPad, a 9.7-inch touch-screen device that allows for Web browsing, plays movies, music and games, and can run more than 140,000 applications. The iPad is half an inch thick, weighs 1.5 pounds and has a battery life of 10 hours. The device will be available in late March at $499 for a 16 GB model, $599 for a 32GB model and $699 for a 64 GB model. The device has Wi-Fi, however Apple is also releasing versions with both wireless and 3G, with pre-paid data plans available through AT&T. Those models will come in April and will be priced at $629, $729 and $829. Apple also introduced a new iBooks application for iPad, as well as a version of iWork.
Now, just about the only thing Sydney can’t do with well her Touch that she could do with the iPad is read online books. She watches movies on the Touch, plays music and emails her friends through our Wi-Fi connection at home. Still, if we got her the lowest-priced model iPad she’d double her gigabytes for $300 more and have a much bigger screen on which to watch movies.
But where would she be able to use it? Certainly not at school. I wouldn’t let her haul around a screen in her backpack that looks like it would crack the minute she dropped it on the floor. And I can’t exactly see her pulling it out to email someone or listen to music. The Touch is a better device for that.
She might be able to use it at home to watch movies in her room on a bigger screen than the Touch when the other two HDTVs and the laptop are in use. But that’s not often.
Now, if Sydney were in high school or college, she could replace her laptop with the iPad, but I’m not so sure it measures up in terms of capacity and speed. It’s lighter, but you pay for that in power.
As devices go, the iPad looks pretty cool, but is it the kind of hybrid device that will revolutionize media? I just don’t know. For every iPhone and iPod success from Apple, there’s always the cautionary tale of AppleTV. That device was going to revolutionize media in the home but quickly became a footnote.
Back in 1993 cable video-on-demand seemed poised to kill the video rental store. During the Bell Atlantic-Tele-Communications Inc. merger that year, Bell chief Raymond Smith declared that video stores would be “no longer viable” in five years. Well, 1998 rolled around and video stores were still alive and kicking. Even today, more than 16 years later, the habit of renting a physical good hasn’t gone away, though it occurs increasingly by mail or through a kiosk.
And what of cable VOD?
Well, it’s certainly picked up, boosted by the gift of day-and-date releases with disc. Total VOD growth was 63% in the fourth quarter of 2009 compared to the year before, and up 20% in the previous three quarters, according to data from DEG: The Digital Entertainment Group. Combined spending on VOD and electronic sellthrough was up 32% to $2.1 billion in 2009, according to DEG.
Cable VOD is certainly a growing part of the business, but companies such as Redbox, Netflix and Blockbuster create the lion’s share of rental transactions, increasingly through the Internet.
Cost may be one of cable’s drawbacks. It’s certainly more per rental than Redbox and Netflix. But what it offers in convenience one would think would overcome that downside.
Another problem I think is image. Recently, we had a recurring problem with channels on our system not showing up. The technicians were very nice the several times they came to our house to “fix” the problem (it finally fixed itself). Still, with nowhere else to turn but satellite and our bundled phone and Internet with the cable company, we felt powerless. Many years ago, I remember ordering a pay-per-view showing from my cable company that never showed up. These experiences color consumers view of their cable company.
Don’t get me wrong. I don’t hate my cable company. In fact I think they do a pretty good job, and I enjoy our cable service. But because we already pay our cable company $90 a month (about $1,000 a year), spending $4 or $5 more per rental on top of that bill makes it a real shocker, especially in this economy. I probably wouldn’t remember paying $4 to rent a flick at Blockbuster. That monthly cable bill, too, may be a drawback.
The technology has gotten better, but it also could be improved. A TV remote isn’t exactly my favorite way to navigate. In fact, to make that easier, Cablevision last year launched an interactive tool that allows its iQ TV subscribers via the remote control to more easily find on-demand movies and TV programming. Pressing the “C” button on the remote control allows customers to use a virtual keypad to enter in search terms and quickly find programming based on a show's title, genre, performers, network or other attributes.
And then there’s the competing channel of the Internet. Cable companies are trying to ameliorate the Internet effect with initiatives such as TV Everywhere, under which consumers who subscribe to cable can get the same content on the Internet. Those moves seem to be going in the right direction, and if cable customers who rent a VOD movie could stream it again via the Internet in a certain window, that might make the service more desirable as well.
Ultimately, it’s kind of a mystery to me why cable VOD hasn’t been a bigger player. I guess many consumers unconsciously understand and value something they can hold in their hands and like perusing the aisles, looking at their Netflix queue or visiting the kiosk at the local grocery store. It may all come down to a matter of habit — but habits do change.
One of the biggest home entertainment themes of this year will be windows — which supplier offers them to what outlet and when. But it’s anyone’s guess how it will all shake out, and it’s never been more complicated, with numerous outlets looking for a piece of the studio pie.
Warner had the first big announcement of the year with its agreement with Netflix for a 28-day window for new releases. The windowing of Redbox by Fox, Universal and Warner — currently embroiled in the courts — already is having an effect on which titles the kiosk retailer carries, according to analysts and industry observers. Cable companies, meanwhile, are trumpeting same-day video-on-demand releases with disc, albeit at a higher rental price than Redbox’s $1.
We in the home entertainment business have been living with windows for a long time. At one time we had a pervasive “rental” window, which fell for the most part about five to six months after the theatrical release. Then the DVD format came along and the rental window dissolved, with every title priced for sale (five to six months after theatrical) to consumers more interested in collecting movies than ever. Also, the window between the theatrical and DVD releases began to shrink, with movie theaters crying foul.
Now, old is new again. The theatrical business, like the rental video business, is experiencing a resurgence, and studios, which had grown comfortable with the DVD sellthrough window as it was, are looking to change the terms to keep disc sellthrough robust.
But will the consumer bite? Certainly, consumers would like to purchase certain films on disc, especially Blu-ray Disc, which offers superior picture and sound. But will they be so interested in seeing a movie at home as soon as possible that they will buy instead of wait a month to rent a title they don’t necessarily want to own? Will consumers even notice the window?
As far as the theatrical window, that, too, may continue to move. A disc sale still has an advantage over a ticket sale, in that the studio gets $15-$20 upfront, rather than a portion of the theatrical take. As a consumer I would ideally like to buy the film as I leave the theater (especially when I have kids in tow who are asking why the movie is not yet on disc).
Windows always have been a negotiation between studio profitability and consumer demand. The terms of the new deal are up in the air.