Déjà vu in the Digital World

Many years ago, during the maturing of the video industry, smaller video store chains consolidated to form behemoths such as the Blockbuster and Hollywood (later Movie Gallery) video chains. These big chains were able to garner more favorable terms from the studios on the titles they bought on VHS and, later, disc. Blockbuster, at one point, even had a content acquisition arm that picked up films for distribution in Blockbuster stores.

Now, I’m experiencing a bit of déjà vu in the digital arena. Phone behemoth AT&T is looking to acquire DirecTV, giving them access to more screens on which entertainment can be consumed. That comes on the heels of the announcement of a prospective deal between the Comcast and Time Warner cable companies. Meanwhile, Netflix is both lamenting the end of strict net neutrality — the FCC’s program making a level delivery field for online programming — and is making exclusive deals to make sure its content gets better treatment at the services that deliver it. Like Blockbuster, Netflix is also embarking on owning the content it delivers: “House of Cards,” “Orange Is the New Black,” etc.

I guess this is the digital business maturing, consolidating and jockeying for advantage in a developing digital world. But it also seems that what’s old is new again. The players and the format (digital) are different but the process seems similar. The content delivery players are trying to bulk up and gain advantages over their competitors, while also dabbling in the content ownership realm dominated by the studios that supply them with content.

And that’s why I’m getting déjà vu. What’s old is new again, as companies try to dominate the entertainment delivery highway. Blockbuster or Netflix, Hollywood —which at one time owned Reel.com, one of the first entrants in the digital realm — or Amazon Prime, the competitors change but the essential business is similar. And, judging by the past, we are in the era of consolidation.
 

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Disc Sales Far From Frozen

Just as pundits are praising the digital delivery revolution and the death of physical media, along comes a hot title called Frozen, which has topped disc sales charts nearly every week since its March 18 release, when it tallied sales of 3.2 million units on its first day.

Walt Disney Studios, which includes Walt Disney Studios Home Entertainment, reported a revenue jump of 35% ($462 million), due to higher disc unit sales (boosted by Frozen and Thor: The Dark World).

But Frozen isn’t the only strong title spurring unit sales. Even TV content — which has been the lifeblood of subscription websites such as Netflix and Amazon and the darling of the digital revolution — is selling on disc. HBO April 30 reported a first-quarter income jump of 11%, with content revenue increasing 13% largely from packaged-media sales of Game of Thrones: The Complete Third Season. Time Warner CEO Jeff Bewkes said first-month disc sales of the third season of "Thrones" were the highest of any previous HBO original content. Consumers want to own TV series as well as hit features.

While DreamWorks Animation CEO Jeffrey Katzenberg lamented the disappointing theatrical performance of Mr. Peabody & Sherman (a good movie, by the way, which may yet be discovered in the home entertainment market), disc sales continued to stream in for previous DreamWorks Animation titles. Turbo contributed revenue of $22.3 million for the first quarter, having reached an estimated 4.8 million home entertainment units sold worldwide. The Croods contributed revenue of $41.7 million, primarily from domestic pay-TV and home entertainment, reaching an estimated 7.1 million home entertainment units sold worldwide. Rise of the Guardians reached an estimated 5.5 million units sold, and Madagascar 3: Europe's Most Wanted reached an estimated 9.1 million units sold. There is hope for Mr. Peabody & Sherman yet.

Who is buying all those discs if packaged media is dead? The collector.

Even before the advent of DVD, consumers collected titles they really loved on VHS. It’s a habit that continues, even with all the digital offerings available. The collector still prizes — and wants to own on physical media — quality content.
 

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Online Companies Starting to Feel the Pinch

Online companies are starting to feel a margin squeeze. The era of extreme low pricing, supported by temporary laws and technology advantages that came about with the advent of the online explosion, may be coming to an end.

Netflix April 21 announced it is raising the price of its $7.99 monthly streaming subscription by as much as $2 to new customers, in part to offset rising content costs for such original series as “House of Cards” and “Orange Is the New Black.” The price hike affects only new subscribers for now, but there are plans to incorporate existing subs in coming years.

The change follows competitor Amazon’s recent move to raise the price of its Prime Instant Video annual fee $20 (the program includes access to Amazon’s streaming video programming in addition to free two-day shipping).

Amazon prices are going up in certain states as well, and not because the company itself hiked its prices. Certain states are starting to collect sales taxes from online sales by Amazon and others to bolster ailing budgets, and it may hit Amazon’s bottom line. A recent study out of Ohio State University indicates that online buyers are very price sensitive. In the study, researchers focused on five states — California, New Jersey, Pennsylvania, Texas and Virginia — that began a permanent collection of taxes on Amazon purchases between 2012 and 2013. Results showed that the introduction of the “Amazon Tax” resulted in a decline across all states of 9.5% in the value of products (net of sales tax) purchased on Amazon, and that the total dollar amount spent on Amazon, including taxes, decreased by 2.8% in the wake of the law’s implementation.

Until now, online companies Netflix and Amazon have been able to reap the benefits of what they sell (via subscription or otherwise) without paying some of the cost their competitors and suppliers incur. Netflix benefitted from content it had not paid to create and from an Internet infrastructure it hadn’t built. Amazon had a leg up on brick-and-mortar stores subject to state sales taxes because during its meteoric rise it was exempted from sales tax on items sold on its site. Now that states are starting to apply sales taxes to Amazon as well as brick-and-mortar stores, that era is waning.

The free ride seems to be coming to an end, and online services will have to adjust — by raising prices.

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"Mom, Remember When TV Began?"

“Mom, remember when TV began?”

That’s what my 16-year-old said to me the other day.

“No,” I replied. “I’m not quite that old. I do remember when cable started, kinda. I remember when MTV still played mostly music videos.”

“Well,” she said, “YouTube is sort of like that for me. I watch shows on the web.”

Some of her favorites are a gal in Austin who tests product claims and recently toured the new Trader Joe’s store. (My family in Texas has been waiting for that for years! It’s one less reason I can gloat about living in California — still got the weather though.) 

She also watches various gamers comment as they play games, which is a phenomenon I confess I don’t much understand. It seems similar to watching paint dry. But then I doubt my parents got why we watched music videos.

What I’ve come to realize is, not only are kids watching entertainment on different screens — tablets, phones, laptops — they are watching a radically different kind of entertainment.

I first noticed this with the “Fred” phenomenon a few years back. For those not “in the know,” Fred was an online nerdy character who basically talked in a squeaky, childlike voice about his life in short, sketch-like segments. Imagine if the characters Urkel from “Family Matters” or Screech from “Saved by the Bell” had an online forum. The YouTube channel even spawned a feature based on the character created and played by Lucas Cruikshank. It came out on disc after airing on Nickelodeon.

In one sense, my daughter is correct. YouTube and other online outlets are similar to the advent of TV. They are spawning new forms of entertainment, rather than just a way to transmit traditional formats such as feature films and episodic TV.

It makes the job of the creative community even more difficult. They have to cut through the clutter. But my hope is it will focus the attention of studios and creators on making better entertainment. That, I think, never goes out of style.

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Why 'Frozen' Is So Hot

My neighbor and I took our 8-year-old and 11-year-old daughters to see Frozen in the theater last month. My 15-year-old daughter had already seen it and, for my 11-year-old, it was the second time seeing it. Both had raved.

Thus, my neighbor and I, both moms, expected to be particularly wowed. But while we both liked the movie, our enthusiasm didn’t quite match that of our daughters.

This made me ask myself, and my daughters, ‘Why Is Frozen So Hot?”

As a preface, let me just say this was before the film won Oscars for Best Animated Feature and for Best Original Song for “Let It Go.” The tide of praise from the pint-sized set had been building for some time before that.

From my 11-year-old on the climax of the film (SPOILERS): “I liked how instead of a kiss from a boy, it was a hug from a sister,” she said. “I liked how it was about sisterly love and not meeting a boy. I liked how it was about how sisters can help you after you get stabbed in the back by a boy.”

From the 15-year-old: “I liked that the guy she ended up with wasn’t super hot,” she said. “He’s not like Prince Charming. He’s not a prince; he’s just some guy. He’s just like a clumsy guy that’s cute and adorable. It feels more real because you are more likely to meet a guy that’s like that, than a guy that’s a prince.”

Reluctantly, because she is the older sister after all, my 15-year-old admitted that she liked that whole sisterly love thing as well.

“She gets saved by her sister,” the teenager pointed out.

While “Let It Go” — a blasting ballad of self-realization — was definitely a hit with the girls, their favorite song was “Do You Want to Build a Snowman?” the song that outlined the longing for sisterly connection after the two siblings are separated.

Both got the irony of the song “Love Is an Open Door,” in which the younger sister is taken with a young man and opens her heart after meeting him just once.

In fact, the 15-year-old said her favorite running gag was “You’re getting married to a guy you just met?!”

Why was that so funny?

“Because that’s how it is in every other Disney movie,” my teenager said, helpfully. “Your only goal in life was to get married. I’d like to get to the point where the regular princess movies are multi-cultural, and there isn’t a guy.”

There isn’t a guy!

This may be the first generation of girls not looking for a prince.

Sorry guys!

But take consolation in the fact that the girls are just looking for “some guy,” a regular guy, a realistic guy, and that may ultimately be the hottest thing of all.

 

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Digital Music Rocked by Music-Based Netflixes and Neil Young

While movie and television content owners have been grappling with Netflix and other subscription services eating into their lucrative sellthrough business for at least a decade, Apple’s iTunes is starting to smart from the same phenomenon in the music business.

It’s the same old tune that has been playing out in the video industry since its inception. At the heart of the issue is whether consumers want to own content or just rent it for a bit. As any longtime observer of the video industry knows, the business has been through periods when the rental (or subscription) model was on the upswing or when the sellthrough model (notably during the DVD boom) took the upper hand.

Now Apple’s iTunes, which made hay by upsetting the traditional brick-and-mortar, physical CD sales business, is facing a challenge of its own. Reportedly, Apple is asking record labels to give them new release exclusivity, blocking availability on such streaming services as Spotify and Pandora. The reason some speculate is that folks are not buying downloads as much as they used to. Song downloads fell 12% through the first eight weeks of the year, according to data from Nielsen Soundscan. Meanwhile, streaming services are gaining, as consumers use them to listen to music on cell phones — and that isn’t primarily an Apple device anymore as consumers have increasingly taken to Androids.

In my personal experience, I know teenagers who listen to streaming music on their tablets or cell phones on a daily basis. I know home audio system aficionados who stream music throughout their home on a daily basis with high-end systems, such as Sonos. These same folks used to download songs to play on their iPods or attach an iPod to speakers for home use.

I think it’s really a question of whether consumers want to digitally own (i.e. pay for) individual songs or albums if they have temporary access to them elsewhere. Apple’s iTunes certainly has had success with exclusives, notably Beyonce’s most recent album, and that may have helped its digital sales. Now iTunes seems to be looking for similar exclusives. “Exclusive” is just another word for “window,” a tactic employed in the home entertainment business for many years to combat Netflix and other streaming services.

Meanwhile, another video industry-like déjà vu is happening in the music industry courtesy of musician Neil Young. He was at this month’s South by Southwest music festival to introduce PonoMusic, an online music store purportedly with better sound quality than that offered by digital services such as iTunes, Spotify and Pandora. Sound like HD to anyone? I remember listening to a music DVD and noticing how much better it sounded than even a CD. HD was even better. I still think digital music in general sounds tinny and devoid of color like a faded painting, so kudos to Neil Young for trying to increase the sound quality.

While the home entertainment industry doesn’t always mirror the record business, music consumption does often offer lessons from which our business can learn. The video industry might benefit from keeping an eye on the audio industry.

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Awards Season Always Hits Home Media

The home entertainment market has always reaped the benefit of awards season. By the time films are nominated or win Academy Awards, Golden Globes or any of the other plaudits dotting the season, many of the films are on the way to or are already out on disc or digital.

This year sports a bumper crop of great films getting the critical nod, both on film and television, and studios, retailers and digital platforms are poised for the home media harvest. It’s a time to bring out past winners as well as celebrate current hits. It’s also a time to put the spotlight on catalog titles that showcase the talent — both in front of and behind the camera — spotlighted by awards season.

In years past, studios’ DVD campaigns were an integral part of awards season. The launch of Universal’s Seabiscuit during that film’s 2004 awards run comes to mind as one of the particularly celebratory disc events. While the hoopla helped launch the DVD, it didn’t hurt that it boosted awareness for the title during Oscar season.

Even prior to the advent of DVD, numerous rental outlets sported special stickers and signage for lauded titles on tape. Rentailers would often host Oscar parties or design special sections, bringing some of that Hollywood glamor to the local video store.

Even the mighty Netflix sought to bask in Oscar’s shine. The online subscription service in 2012 scored a coop by picking up the Weinstein Co.’s Academy Award-winning hit The Artist for its streaming subscribers in the window with disc and VOD.

Early Digital HD could benefit from the Academy Awards this year. For instance, Fox’s 12 Years a Slave, which has picked up nine noms at this year’s Academy Awards (among other plaudits), appears on Digital HD before the March 2 ceremony, with the disc coming out the Tuesday immediately following, offering home viewers a one-two punch of home access before and after the awards.

Times and formats have changed, but the part home viewing plays during awards season has remained much the same. The promotion and distribution of lauded titles now happens online and via VOD as well as in store, but consumers still have a desire to view the acclaimed films they hear so much about during awards season on home media.

 

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Digital Delivery: Salve or Salvation

The studios’ quarterly results reported this week offer a somewhat clearer picture of what studio executives are thinking about digital delivery’s contribution to the future of home entertainment.

Perhaps the most optimistic vision came from Time Warner CEO Jeff Bewkes. He noted the number of consumers who had used UltraViolet, the cloud-based service backed by most of the major studios, including Warner Bros.

“They love it,” he said. “We think more and more consumers will enjoy its benefits as retail support continues to increase.”

Bewkes said the improvement for UV contributed to a 50% increase in year-over-year electronic sellthrough throughout the industry, a number reported by DEG: The Digital Entertainment Group at the International Consumer Electronics Show in Las Vegas.

“That helped drive an increase in domestic consumer spending on home entertainment for the first time in eight years,” Bewkes said.

On the other hand, Walt Disney CEO Bob Iger was much more cautious. He said home entertainment’s scant 1% uptick in consumer spending in 2013, driven by increases in digital distribution, didn’t yet warrant a victory parade. He cautioned that packaged media’s 13% sales decline in 2013 wasn’t completely offset by digital sales.

“But, I think it’s still early in terms of just how significant that all could be,” Iger said.

Some noted higher revenue from television content deals with subscription video-on-demand services such as Netflix and Amazon Prime. Fox made a killer deal on the discontinued AMC show “The Killing,” while offering Amazon Prime exclusivity on the FX show “The Americans.” Sony caught a good break on its subscription video-on-demand revenue (as well as retail) for Golden Globe-lauded “Breaking Bad.”

In the midst of all this, Redbox, the kiosk company and leading physical rental outlet, appointed a new president, Mark Horak, a longtime Warner home entertainment executive. It’s a smart move for the biggest physical disc and outlet presence in the nation. With his studio background, Horak can help Redbox negotiate an uncertain digital future, while holding on to the rewards of physical media. It also helps that he is a smart and savvy executive who has seen many of the vicissitudes in the home entertainment industry, allowing him to negotiate future changes, including digital delivery.

Will digital be home entertainment’s salvation or just a salve as disc declines? The smartest and most experienced executives in the industry are on the case, both on the studio and retail fronts. But the answer to that question is still unclear.

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It's a Pie Contest

No, I’m not hungry while writing this (well, maybe a little). I’m referring to a metaphor oft talked about when the entertainment industry hits a crossroads. Each new delivery mechanism for entertainment inevitably is seen as a threat to the old order — and its piece of the revenue pie.

Television was seen as a threat to movies, but ended up growing the pie. The VCR was seen as a threat to content of all kinds, yet it gave birth to the video industry, and ended up growing the revenue pie for all content producers. At one point DVD was assailed for threatening the existing home entertainment industry, which was based on analog tapes (really!). Certain observers were concerned that the move to digital would prompt widespread piracy and kill the home entertainment industry. Instead, DVD turned out to be one of the best products ever launched by the studios, and brought in so much revenue (growing the pie) that movies got the green light in part based on projected DVD revenue.

2014 seems to be yet another round in the continuing entertainment pie contest. How that pie will be sliced — and whether it will grow yet again — is still in question.

The television delivery model — until recently composed of broadcast and cable — is facing a new threat from “over-the-top” delivery services. Netflix, Hulu, Aereo, HBO Go and many other services yet to be announced are vying for the television market. Now that content can be delivered to the television via the Internet, broadcast and cable delivery services have a new competitor — or (more accurately and ominously) new competitors.

Web delivery of content opens the pie to the biggest array of pie slicers yet, competitors with avid, and specific, fan bases. At the recent International Consumer Electronics Show, World Wrestling Entertainment announced its own Internet network.  That network includes live pay-per-view events, reality shows, original shows, documentaries, classic matches and more than 1,500 hours of VOD programming — all for $9.99 a month. It costs more than Netflix, but hey, those wrestling fans are rabid! Wrestling fans may reconsider their cable service if they can get what they want online.

But don’t count out the old guard yet. They are fighting this battle in the courts, as they did with the Betamax case that spawned the video industry. Net neutrality (meaning new upstarts such as Netflix get the upper hand) suffered a setback. The old guard won one, and is vying to control the Internet channels of the future.

But in truth there is no telling how this pie will be sliced — or if it will grow, as it has at all past crossroads. Here’s hoping that this new change will again grow the pie instead of just slicing it up in new ways. That way content producers — and creative folks — all win.

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The Disconnect With Connected Entertainment

This holiday season both of my kids got tablets. They are pretty much out of the toy stage.

Their wish lists were full of electronic devices, even though we already had two computers, a laptop, a Chromebook, various iPods and four cell phones.

When they got the tablets, I thought it would draw the teenager away from the phone and the 11-year-old away from the iPod.

Instead they gave new meaning to the term second screen. They watched content and played games on their tablets while texting on the phone and playing games and chatting on the iPod.

When the television was on, they achieved what I would term “third screen.”

In the first two days after receiving the tablet my teenager said she had already watched five movies via our UltraViolet account. My 11-year-old had discovered various games to play and had shared her discoveries with friends via wireless on the iPod.

I couldn’t help but think of that as I scrolled through news of studio and other on-demand content flowing to new devices and perused all of the gadgets at the Consumer Electronics Show.

During a panel on the future of entertainment, Paul Berry, founder and CEO of Rebel Mouse, noted that in his family, group viewing is rare.

“Each of us has our own device, and we plug in our headphones,” he said.

Boy, did that sound familiar.

With digital content growing exponentially, and the number and types of screens to watch it in the home and on the go also soaring, communal viewing is becoming ever more rare.

The variety is just too tempting. When each family member can find something they want to watch online at any time, family movie night is no longer a group activity.

Still, there were occasions over the holidays when we all sat down to view a Blu-ray Disc together, often prompted by the kids, who seemed to crave that communal viewing experience common during the holidays of my childhood.

I guess even the most connected kids occasionally yearn to connect outside the digital world.

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