Entertaining Ownership Again

In recent years it has become more fashionable to rent rather than to own. The dream of an “ownership society” has turned into a nightmare, with consumers tied down to underwater homes or losing them to foreclosure.

At the same time, consumers have become less committed to owning entertainment. Rental services, such as Redbox kiosks and Netflix, grew as consumers became less interested in plunking down $10 to $25 to own a DVD or Blu-ray Disc. They instead looked at inexpensive $1 rentals at kiosks or (until recently) $10-a-month subscriptions to Netflix as the more economical and useful way to keep themselves entertained.

But there are disadvantages to the rental model. As with a rented house that you can’t paint bright orange, renting or streaming titles constricts consumer options. Redbox and Netflix don’t offer the perfect catalog for each individual. They are not customized collections. The offerings are limited by studio deals, windows and, indeed, whether or not someone else may be first in line to get a particular title. In the case of Netflix, consumers via their subscription are paying for a whole lot of streaming titles they never will want to see. Such as in the cable business, they don’t have an a la carte option.

Owners have the advantage of possessing just the content they want. They buy their favorite movies and can access them at any time, either via disc or — as is the hope with the studios’ newfangled digital locker UltraViolet — digitally via the cloud.

Ultimately, ownership is a very efficient way to get consumers the movies they want. Until now, the only way to have that custom collection was to buy discs. The studios are hoping to make that ownership option more palatable in the digital realm via the fully interoperable ecosystem of UltraViolet. No more wondering if your digital copy will play on a particular device. No more disappointment when Netflix or Redbox doesn’t offer your favorite comedy.

Consumers don’t really want to watch any movie any time; they want to watch the movies they want to watch any time. And ownership that extends to the cloud, if it lives up to its promise, may be the best solution for that

---

Studios Are the King Makers

Netflix executives, during the past month or so, may have been wishing all the attention were still focused on their old nemesis Blockbuster. As long as Blockbuster was around, Netflix looked like the new, younger kid; the cool kid; the entrepreneur; the next big thing. Netflix represented the future, Blockbuster the past.

Unfortunately, Netflix had to grow up sometime, and its growing pains are starting to show in the company’s stock price, which has dropped precipitously as it has raised subscription prices to offset greater costs and grow its streaming business internationally.

There are a lot of advantages in being the new phenomenon on Wall Street, which is looking for outsized growth, even if it does come by undercutting an older, established business weighed down by debt like Blockbuster. While Blockbuster struggled to move with an enormous debt shackled to it, Netflix could bob and weave and build a better rental mouse trap, one that didn’t involve cumbersome real estate or a debt load and that got great pricing on streaming licenses from content holders who had not yet realized what streamed content was worth.

Now the entertainment landscape has shifted, and Netflix is in the spotlight. The company can’t get the kind of pass offered to new ventures; it will have to grow and prosper under the weight of expectations — and new, higher licensing fees for streamed studio content.

Oh, for the good old days when Blockbuster took much of the heat, Netflix executives must be thinking. But those days may be past for Netflix, which may now find out that the studios can be king makers in the distribution pipeline. Content holders favor whichever distribution avenue will offer them the most profit, and will wring ever more money from distribution pipelines that use their content.

Content is king, and the studios that own it can make or break a distribution partner. In the case of Netflix, I think executives may be finding out they have more in common with Blockbuster and other past studio distribution partners than they thought. Just as Netflix overtook Blockbuster, there are competitors in the wings targeting Netflix.

---

A New Generation, A New Look

Putting together our “40 Under 40: The Under 40 Hot List” for the magazine this week was a revelation. In such an established business, it is interesting to see how many executive up-and-comers are working on the digital frontier as well as in the established packaged-media business.

The home entertainment industry is undergoing more change than perhaps it ever has, with a growing cadre of delivery options to bring entertainment directly to the consumer, both physically and digitally. A new generation of future leaders is helping the veterans chart a new course for the home entertainment business, and Home Media Magazine is proud to honor them.

From digital, marketing and sales executives working at the major studios and independent suppliers to siblings in the family DVD business, our “Under 40” list runs the gamut of the home media business. Also included are executives from the retail front, both in the physical and digital realm. There are Ph.D.s and M.B.A.s and executives long on experience for their relative short stint in the business. We also included some executives who oversee such creative ventures as disc extras, as well as some with pure technical know-how, who have helped push home entertainment into the digital age.

It is fitting that our celebration of the under-40 set coincides with the launch of a new, more sleek and updated design for the magazine. In updating our look, we attempted to make the content pop on new technologies such as mobile phones and iPads, as well as in physical form. The magazine is now easier to hold and read, I think. The new logo calls out the “ME” in Home Media Magazine, and that’s intentional. It’s a nod to the increasingly personal nature of home entertainment. Dad can watch an action blockbuster on the giant flat screen, while mom catches a TV episode on her iPad as she waits in line at the store. Meanwhile, the kids can catch a flick on a phone or iPod as they fly to see Grandma.

Media consumption is changing, but what doesn’t change in the value of good content.

---

Rental Has Helped Drive Business

I know Redbox’s $1 rentals and Netflix’s all-you-can-see subscription services haven’t exactly endeared them to the content creators, which much prefer selling titles directly to consumers. But rentals have long served a need in the home entertainment industry, whether via Blockbuster, independent rental stores, Redbox, Netflix or video-on-demand. Not only does this offering satisfy a customer who wants to watch a title only once, it provides a forum for lesser-known and mid-level box office films to find an audience as well as generates buzz for cult hits out of the glare of the Darwinian weekend box office sweepstakes.

Rental titles also offer the try-before-you-buy experience. I can tell you I watched a rental of many of my favorite catalog titles before I decided to collect them. Rental provides a low-cost chance to discover a gem that you otherwise might not have bothered to collect.

Most people — having been inundated with ads and three other predecessors in the “Pirates” franchise — will be able to make the decision as to whether they want to purchase Pirates of the Caribbean: On Stranger Tides. But smaller films, the kind that grow via word of mouth, often find their audience as consumers rent and talk about them. Once they come to love them, they buy them for their collection.

As studios become more cautious, putting all their eggs in the sequel and superhero movie basket, a crucial part of the movie business may get lost.

A reader recently wrote me responding to my column “Is the Movie Slate Just … Well … Bad?” (HM, July 25-31, 2011). The reader noted that “the transactional consumer, the same consumer that the studios hope to reach with their new cash cow, VOD, is interested in more than all those mega-budgeted blockbusters with all those alien invasions (Transformers 3, Cowboys & Aliens). Come on, how many bad aliens can there be!”

Lots and lots of aliens, apparently, in action and animated films that are pushing out thrillers and romantic comedies and dramas.

I’m not saying I don’t enjoy the occasional alien/superhero actionfest. I like popcorn flicks as much as anyone, and they do sell well on video. But films from Gone With the Wind to Sixteen Candles have sold well on video, too. Variety has always driven the home entertainment business. Many renters’ second choice at the video store has become the treasured disc in their collection.

---

Netflix Price Jump Always in the Cards

Netflix is looking a little less golden these days, as it instituted a price increase for customers to get both streaming and disc rentals, and competitors have stepped up their game.

Amazon, in addition to its former streaming deal with CBS, has inked a deal with NBC Universal. Walmart, through its Vudu service, has gotten into streaming as well.

Consumers should have known the free ride on streaming wouldn’t last forever. I remember, as a college student, comparing prices for trips to New York between People’s Express and Continental. People’s Express had my business until Continental decided to match their price while offering all the amenities of a major airline. I didn’t have to bring my own lunch on Continental; meals were free.

But that free meal for the same price didn’t last long. As soon as People’s Express went out of business, Continental raised prices.
The same thing is now happening in the home entertainment business. In comparison to Blockbuster’s plan, Netflix for a while had a clear price advantage. You could get disc rentals as well as unlimited streaming (something Blockbuster couldn’t match) at no extra charge.

Now, Blockbuster has gone bankrupt, and — surprise, surprise — Netflix is starting to charge separately for streaming.

Consumers may howl and complain, but the fact is, the free ride couldn’t last forever. Once Netflix knocked down Blockbuster, the company would need to raise prices to keep expanding its streaming content and its international business.

Does no one remember the original price points for Netflix before Blockbuster got into the subscription game? They were much higher. It was competition from Blockbuster and, at one point, Walmart, that pushed Netflix into the $8 streaming plus disc rental low-priced plan.

Now that Netflix has defeated most of its former competitors, naturally it is going to raise prices, pushed by the studios’ increased salivating over getting more of the streaming pie.

But nothing attracts competition like success, and Netflix itself may face an onslaught of competitors in both the streaming and physical rental (Redbox comes to mind) businesses.

While I sympathize with consumers who had been used to the great deal Netflix offered, I must reiterate the old maxim, “If it’s too good to be true …” — you know the rest.

---

Is the Movie Slate Just ... Well ... Bad?

Every couple of years, a movie or movie series comes along that re-energizes my enthusiasm for the movie business.

I felt that upon seeing The Matrix, and, even further back, upon seeing the first rough cut of Shrek.

Ironically, at a recent Fortune magazine conference, Jeffrey Katzenberg (head of DreamWorks Animation) voiced my same concerns over the recent slate of movies in theaters (see story, p. 8).

“Let me have a show of hands of people that would say the last seven or eight months of movies is the worst lineup of movies you’ve experienced in the last five years of your life,” Katzenberg said. “They suck. It’s unbelievable how bad movies have been, right?”

I guess I am not the only one worried that comic book movies and aging sequels can’t carry the entire movie business. We’ve got to have some true innovation and excitement in movies. But with all the studios running scared from an onslaught of services and consumers who believe they should get entertainment practically for free online, I just don’t see how that is going to happen.

When DVD and, before that, the video rental business, propped up the movie industry, we got hit after hit, certainly not all of them memorable, but many of them entertaining and, for the most part, worth the money.

Now, the streaming business is profiting from that catalog wave of hits, but it isn’t contributing to the studios’ bottom lines so that more such hits can be made in the future. As income shrinks, the studios have become more and more conservative in launching so-called tentpole titles. If the film isn’t a sequel to a proven hit or based on a comic book, forget it.

Talk about biting the hand that feeds them! For the most part, streaming and online services have profited from content they didn’t create. If we cannot find some way of paying those who create and finance content, that gravy train is going to stop.

While the growth of online delivery may not be the only reason the movies this year “suck,” as Katzenberg so eloquently put it, devaluing content by giving it away practically for free on the Internet isn’t the path to better content, in my opinion.

Netflix this month raised its prices for the first time in a while. It’s about time. All those customers who squawk should contemplate a future of crappy sequels at the movie theater.

---

Problems at the Studio? Blame DVD!

I’m beginning to sense a little groupthink going on in the studio system, and it closely mirrors what tech companies and Wall Street are putting out as well. I guess if Wall Street says something often enough even those who are supposed to know better begin to believe it.

The conventional wisdom? The death of DVD is responsible for all the woes in the studio system.

Now, every stereotype may have some truth to it. Certainly, the explosion of DVD hid many bad-movie sins in the early 2000s.
But to blame the falloff in revenue in the disc business — something that was inevitable once the catalog had been mined from the vault — for the decline in everything from stock prices to star salaries is just silly. This month the Los Angeles Times ran an about the dropoff in salaries for stars such as Cameron Diaz because of shrinking fortunes in comedy DVD sales.

To turn conventional wisdom on its head, perhaps we should be asking, “Why isn’t digital delivery coming in with studio profits to save the day?”

Perhaps we should be blaming the LACK of profit in streaming for poor Miss Diaz’s shrunken paycheck.

Streaming is the current darling of Wall Street, and the studios are beginning to see dollar signs there (or possibly drinking that Kool-Aid). But where are the dollars?

What I hope isn’t happening is that studios are taking the money today from services such as Netflix and neglecting the long-term value of the catalog.

And I’m not the only one.

I’ve talked to industry observers who bemoan the rush to make a quick buck off of catalog, rather than manage each title based on its inherent appeal.

The industry has been spoiled by the easy money of the DVD boom and is looking for the next quick-money fix. Could industry executives be mortgaging the studios’ future to goose revenue in this inevitable downturn?

Netflix in 2008 inked an original content deal with Starz for $30 million annually that expires in the first quarter of 2012, giving it access to top releases. News Corp. president Chase Carey characterized that agreement as “beyond cheap.”

Let’s hope the studios aren’t making deals that may be considered “beyond cheap” in the years to come. If so, these deals may be more to blame for Diaz’s lower salary than is DVD.

---

Why Is Blu-ray Quality Overlooked?

Last week I wrote a column about the loss of quality in the digital delivery realm, and since then I’ve received some assenting feedback.

“I agree with you 100%,” said one respondent. “I’m in the custom integration business and I have to spend time with each customer explaining to them the quality difference between streaming and Blu-ray. Sometimes I get the glossed over look when people think disc is dead and streaming is high-definition. It’s a war and the Blu-ray disc Association, Hollywood, etc., had better treat it that way. My kids have no problem with physical media so I know that isn’t a stumbling block.”

Others chimed in as well, pointing out the compression of digital files.

My question is: Why isn’t the industry doing more to drive home the quality of Blu-ray as opposed to the current state of digitally delivered files?

Last month we published a comprehensive white paper on Blu-ray Disc at 5, extolling the format’s quality and continued growth despite the headwinds of a terrible economy and a worthy predecessor in DVD. We, as an industry, should be doing more of that.

The digital delivery market naturally will have a cheering squad on Wall Street that is willing to repeat over and over again, “Disc is dead! Disc is dead!” After all, investors are always looking for the newest thing and tend to shun established and mature businesses. They just aren’t as exciting and won’t produce the kind of outsized stock growth that Wall Street craves.

But their (somewhat self-interested) enthusiasm for digital delivery doesn’t mean Blu-ray isn’t the best way to see a movie in the home.

Recently, I discussed this question with an industry observer who noted that many catalog titles actually are doing quite well on Blu-ray. He, too, wondered why the industry isn’t putting more effort into pushing and growing the market for the format.

Certainly, these aren’t flush times at many studios, which have instituted layoffs in recent weeks. But not promoting a quality, growing product won’t make things any better. There’s only so much cost-cutting studios can do to boost the bottom line. I agree that selling catalog at a hefty price to streaming services that go to consumers’ iPads and cell phones will help plug the profit hole, but so will selling consumers on the big-screen quality of Blu-ray.
 

---

Quality Getting Lost in Digital Future

Every day as I do my walk with my iPod in tow, I lament the quality of digital music.

Sure, it’s convenient to have a small device that holds thousands of songs, but I miss the resonance of the old records I grew up listening to, or even the quality of the digital CD.

Something seems to be missing; the sound is tinny, kind of lifeless.

The same is true with digitally delivered video, which is Wall Street’s darling. If I want to watch a blooper on YouTube, I’m not too concerned with the quality of the picture and sound. (Often, based on the content, I’m kinda glad the picture is grainy.) But a truly great film with superior cinematography or a sci-fi or actioner with lots of special effects deserves the best quality video and audio. The same is true for such TV shows as “Lost” with its beautiful locations.

Recently, I received a letter from a reader who lamented the quality of both audio and video content in the digital delivery realm:

“I will NEVER depend on streaming for watching a movie. Why? I want the best picture and sound experience there is. I believe if more people had a Blu-ray player, they would not even consider streaming as their only option in watching movies and TV shows. Streaming will never be able to equal the performance of Blu-ray in either picture quality or sound.”

He rightly makes the point that while many digital services will tout HD quality, the fact is the picture — and especially the sound — often don’t really measure up to Blu-ray Disc.

I understand many consumers like the convenience of digital files. Heck, I love my iPod and wouldn’t want to do without it on my walk. But as you get over the initial convenience factor, that quality loss starts to become more apparent. I recently got fed up with bad audio quality and decided to take out my old CDs and play them in the car instead of listening to my iPod. What a difference! How I missed the fuller sound of a quality product.

Certainly, there is room for both convenient services and high-quality viewing in the entertainment business. I applaud Netflix’s decision to again focus on its physical media business. Consumers would lose out if the whole video world turned to streaming at this point.

While convenience is great, so is quality, and the best video quality around right now is Blu-ray Disc.

---

Digital Could Shift in Studios’ Favor

Non-exclusive deals.

That seems to be the studios’ trump card in dealing with digital players such as Netflix and Hulu.

“Sure, we’ll sell you our back catalog for a hefty price, but we reserve the right to sell the same deal to other players (read: your competitors), too,” is the studio line.
In this game, Netflix and Hulu are victims of their own success. No longer will these services be able to buy content at rock-bottom prices and offer a buffet of low-cost content to consumers at a relative bargain.

The New York Post reports Netflix’s much-discussed content license talks with Starz Entertainment could cost it about $350 million annually. That content deal — originally inked for only $30 million annually according to analysts’ estimates and scheduled to expire in 2012 — gives Netflix streaming access to movies from Disney and Sony Pictures, among other content. It has been one of the best offerings for the subscription service. The New York Post, citing comments from an executive involved in the negotiations, reported the $350 million fee would top Netflix’s recently signed $200 million annual tab for access to content from pay-TV channel Epix.

Heck, digital content is starting to cost Netflix some real money.
The company will get no sympathy from the studios, which see Netflix, in particular, as having a cheap ride so far in delivering digital content.

Determined not to get burned again, content owners have decided to squeeze as much profit out of the digital delivery services as they can. Replicating the old physical rental business, the studios plan to go to each middle man and exact the best deal possible — especially for back catalog that has exhausted its sellthrough worth in the DVD and Blu-ray  Disc business.

The studios seemingly have little to lose. The DVD windfall is over on catalog releases. New-release Blu-ray Discs still sell well, but the Blu-ray catalog business will never replicate DVD.

While it was taking on the debt-laden Blockbuster Inc., Netflix was a more nimble competitor with no legacy costs to impair its rise. Now it is quickly growing into an established business that the studios plan to drain for a bigger share of the pie. Netflix — as the most important player in digital delivery of content — has a target on it, and the studios plan to take as big a share as they can.

---