EST the Emperor's New Clothes?

I may get strung up by my feet for suggesting this, but I am beginning to wonder whether electronic sellthrough, or Digital HD, is something akin to "The Emperor's New Clothes."

Every three months, DEG: The Digital Entertainment Group releases a new set of quarterly numbers, derived mostly from the studios, that show consumer spending on the various forms of home entertainment.

Each time, disc sales are down, EST sales are up and we hear lots of crowing about how consumers are finally grasping the concept of buying movies, TV shows and other filmed content as downloadable files instead of on physical discs, and what a great thing this.

Freed from the burdens of manufacturing and distributing physical discs, not to mention dealing with returns, the studios are crowing about how great the margins are, how lucrative this new business model is, and how consumers will no doubt soon be abandoning disc purchases altogether in favor of buying filmed content electronically.

But I question whether this brave new world will ever materialize, and whether all this happy talk about EST's remarkable gains is really just something we all want to believe so badly that we have somehow convinced ourselves that the more we talk about it, the more likely it is to become true.

The plain and simple fact is that while EST sales do keep inching up, they still account for a tiny fraction of overall home entertainment purchases — 18% to 82%, I believe the latest set of numbers indicate.

And while pushing EST through early release windows and digital lockers is certainly the smart thing to do, I believe a fair amount of caution is in order.

For starters, the disc business is still quite healthy. Sometimes I think those of us who live on the coast get too caught up in technological advances and trends — 3D, anyone? — to stop and think what mainstream America is doing. And the numbers suggest an overwhelming percentage of people still prefer to buy discs instead of downloads, in large part because of the old "if it ain't broke don't fix it" axiom but also because there's something about ownership that almost mandates a physical object. If we're going to buy something, we want something tangible, not ethereal.

Secondly, I think there's a misconception about the correlation between the rise of digital delivery and the decline in disc sales. Disc sales aren't going down because people are finally starting to realize they can buy movies as digital downloads without having to worry about cluttering up their homes with more "stuff"; they are going down because 1) younger people simply don't have the same desire for owning something that we older folks do (as seen in everything from music to cars and the rise of Uber and Lyft) and 2) the alternatives to ownership are so easy and cheap. Why spend hundreds of dollars on a boxed set of a hot TV show like "Breaking Bad" when I can access the same content at any time on Netflix?

If, as some pundits believe, eventually we will obtain all of our content electronically, then our home entertainment business will be in big, big trouble. If studio executives were stunned to discover people weren't rebuying their libraries in the transition from DVD to Blu-ray Disc, I believe they will be absolutely shocked to discover how few people are going to buy movies electronically that they already own on disc — particularly since so many of the films we have collected over the years are instantly accessible through Netflix.

That's why it behooves our industry to support, market, and promote discs as much as we can, as diligently as we can — lest this business wakes up one morning and finds itself stripped to its undershorts.

 
 

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Charting 35 Years of Change

I'm writing this from the outdoor patio at the Ritz Carlton in Marina Del Rey, Calif., where I have just finished speaking on a panel discussion on OTT, subscription streaming and how Netflix, in the words of one panelist, "is eating everyone's lunch."

Reflecting on the 35 years that Home Media Magazine, originally Video Store Magazine, has been covering home entertainment, the changes in our business truly have been monumental since the late Stuart Karl launched a trade magazine to cater to the growing flock of video rental stores that were popping up in the wake of that pivotal moment the year before when Andre Blay licensed 50 movies from 20th Century Fox and released them on videocassette.

The very concept of "streaming" would have seemed like something out of “Star Trek” to the early readers of Video Store Magazine back in 1979, those Neanderthal days before the Internet and the personal computer.

"Connected" meant ties to organized crime, "content" meant you were satisfied and "digit" anything made you think of fingers and thumbs.

And yet, at the same time, lots of things have not changed — fundamental, bigger-picture things that call to mind the saying, "The more things change, the more they stay the same."

The studios, as lords of filmed entertainment, still want ultimate control over that entertainment — and they prefer clean, neat sales transactions directly to the consumer, with no middle-man, no sharing of the spoils. In 1979 they battled mom-and-pop rental stores over the right to rent; today, they're pushing electronic sellthrough to consumers in love with Netflix and that infernal subscription streaming genie the studios wish they could somehow cram back into the bottle.

On the distribution side, there's still someone who's eating everyone else's lunch — Netflix today, Blockbuster a generation ago.

And among consumers, there continues to be a rabid appetite for entertainment that seems to be increasing now that our TVs are connected and our smartphones function as mini-home theaters.

That, and a burning desire to have that entertainment delivered on demand as cheaply and as simply as possible. VHS opened the door to consumers being able to watch what they want, when they want, where they want. DVD made things even easier, with its low sale price (no need for a return trip to the rental store) and random access. Netflix simplified the process even more with its by-mail subscriptions — heck, now you didn't even have to leave your home. And with subscription streaming the process of watching on-demand entertainment is even easier and cheaper than it's ever been.

What's going to be the next step in this steady progression of ease and simplicity? I have no clue — and yet I can't wait to find out.
 

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Extending Love to the Amodei Family

Kate and Joe Amodei

Our hearts go out to our good friend Joe Amodei, head of Virgil Films, whose beloved daughter, Kate, 29, died early in the morning Monday, Oct. 13, in Philadelphia. God bless you and your family, Joe, and may your precious little girl rest in peace until you see her again.

Kate's funeral will be held Friday, Oct. 17, 2014, at Woodside Presbyterian Church, 1667 Edgewood Road, Yardley, Penn. 19067.

Calling hours — 9 a.m. to 11 a.m.
Funeral service — 11 a.m.

There will be a luncheon following the burial service.

In lieu of flowers, the family is asking that donations be made in Kate's honor to Philabundance. Condolences may be expressed at the Hoffmann Funeral Home Bensalem website: .

In charge of special markets/operations at Virgil, Kate Amodei was a graduate of Temple University and a proud activist who loved to help those less fortunate. She was also an EMT.

Kate is survived by her grandfather, Joe Amodei; parents, Joe and Ginger Amodei; sister and brother-in-law, Kristina and Matt Ulmer; nieces, Aubrey and Elena Ulmer; best friend, Sarah Hughes; boyfriend, Matt Eby; cousin, Dana Amodei; and many other friends, coworkers and family members.

This is not how it's supposed to work. Our children are supposed to outlive us. The pain Joe and his wife, Ginger, must be experiencing is unimaginable. On behalf of the whole home video community where Joe has long been an integral player, we extend our sympathies — and our love.
 

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Redbox Instant Was Doomed from the Start

There’s only one thing that surprised me about Redbox pulling the plug on its streaming video joint venture with Verizon Communications, Redbox Instant by Verizon: Why did it take so long?

Back when I attended the big press conference at the Consumer Electronics Show in Las Vegas in January 2012, announcing the JV (it didn’t actually launch until March 2013), I had trouble understanding the business model.

Generally, if you take aim at a competitor — in this case, Netflix — you build a better mousetrap, as they say. Apple entered the cell phone market with the iPhone; Sony jumped into the video game business with the PlayStation.

But from the very start, Redbox Instant appeared to be a poorly conceived venture that consistently failed to take advantage of Netflix’s chief weakness: a limited selection of content, particularly on the movie side, which despite its grand success remains a depository for studio castoffs.

Of course, if Netflix couldn’t strike a deal with Hollywood for better product, what would make anyone think Redbox could do it? But even if the two services had similar (weak) content offerings, why has Netflix exploded while Redbox, well, appears to have imploded?

One factor was that Netflix already had an established base of customers accustomed to the subscription model, through its hugely successful disc-by-mail rental service. All Netflix had to do was migrate those customers over to streaming by making the viewing experience even easier and simpler, which it was able to do by eliminating the hassle of having to send back a disc.

The other advantage Netflix had was in brand awareness. When Netflix launched its streaming service, it was already known for sending movies and other content directly to consumer homes, albeit in physical form. Redbox, on the other hand, was known for its vending machines, a model in which consumers had to go somewhere to get their entertainment.

Netflix also marketed the hell out of its streaming service, to the point where Netflix became as iconic a name in home entertainment as Blockbuster had once been. Redbox hooked up with a cell phone company known for smartphones and data plans, not movies.

Redbox’s unique selling proposition was this: Subscribers didn’t just get unlimited streaming of movies and TV shows, they also got four DVD rentals a month from Redbox’s network of kiosks.

Big whoop. If you’re trying to sell someone a new car, you don’t throw in free horse-and-buggy rides.

In the official notice on its website announcing the demise of Redbox Instant by Verizon, the company said, “The service is shutting down because it was not as successful as we hoped it would be.”

That, my friends, is an understatement — and, in retrospect, Redbox has only itself to blame.

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Stopping the Steady Slide

How do we stop the steady slide?

When I heard that U2’s new album was being given away free to every iTunes account, I thought to myself how far the music industry has sunk – to the point where albums, once the cash cow of the business, are essentially worthless.

It was actually a slow and steady process, and one in which music industry leaders have only themselves to blame.

Back in the glory days of vinyl LPs, eight-tracks and cassettes, kids like me had a great sampling mechanism for new music. It was called the single, and it cost 89 cents at the Wherehouse. We’d buy singles of songs we liked on the radio; if the flip side was good, as well, we’d spring $3.66 for the album down at Tower.

The model changed with the introduction of the CD in 1982. Record industry moguls, smelling money, jacked up the price of the CD single to $3.99; when consumers, outraged at the steep price hike, stopped buying them, they killed off the single completely and focused on raising album CD prices to make up the difference. That’s when consumers revolted and, with the birth of the Internet, took to swapping music files online through Napster and other sharing sites.

The record industry took a hard line against this practice, suing their customers and raising the price of CDs even more, to over $20. Ultimately, their plan backfired; consumers kept finding new ways to share music for free and the music industry’s profits plummeted until finally they caved and began selling music downloads themselves, at a fraction of the price they had been getting for physical discs.

The leaders of our industry watched and learned. When the movie industry launched a new format, the DVD, the price of movies went down, not up, and consumers responded by buying boatloads of movies and building massive home libraries.

And yet our industry’s fatal flaw was believing that the DVD gravy train would last forever and migrate over to the next advance in physical media, the Blu-ray Disc. They overlooked the fact that quality, as the music experience had shown, wasn’t nearly as important as they had thought. Music downloads don’t sound nearly as good as CDs, but to the average consumer that doesn’t matter: They gladly give up quality in return for cheaper product and ease of access.

And that’s our next big stumbling block: How do studios maintain the profit margin when consumers are perfectly OK with spending less than $10 a month to stream movies over Netflix, even if the quality isn’t as good as disc and the selection is limited to catalog product?

Keeping new releases out of the subscription streaming cycle has worked so far, but there are only so many hours in the day, and the novelty of Netflix has yet to wear off. This has led to a precipitous decline in disc sales, with consumers no longer hell bent on immediately rushing out and buying the latest hot new movie release when there’s plenty of stuff they still haven’t seen on Netflix.

The sale of movie downloads — EST, Digital HD, whatever you want to call it — is supposed to save our business, but despite early windows the practice still hasn’t caught on as studio heads had hoped. It’s still a fringe business, and there are those who believe it will never really flourish until the price comes way down, to $5 or less, a move that would destroy margins and put a serious dent in Hollywood’s revenue stream.

That’s why the studios continue to support the disc business, while looking everywhere they can to cut costs.

Will we eventually suffer the same fate as the music business, where content is essentially being given away? I hope not, but the truth is, we’re almost there. To counter this, studios need to find some way to transform the subscription business into a transactional business, although there are those who say it’s already too late.

If it is true that every challenge presents an opportunity, I hope we find it. I’ll be thinking of possible solutions, as well — perhaps while listening to my free U2 album on my iPhone.

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The Five Forms of 'Defenders' Rallying Behind Disc

I’ll call them the disc defenders.

Lately, I’ve been running into people who are talking up the benefits of physical media — Blu-ray Disc as well as DVD — to anyone who will listen, often citing their own disappointing experiences with digital delivery.

And the more I listen, the easier it is to categorize these disc defenders into groups — groups that appear solidly committed to discs for some very valid and logical reasons.

The first group is made up of diehard Blu-ray Disc fans. They never cut back on buying discs, and they’re the ones most likely to ultimately replace the bulk of their DVD libraries with high-definition discs, even if half those old DVDs are still shrink-wrapped. They are driven chiefly by the quality of the picture and sound and more than likely have invested big bucks in elaborate home theater systems that really show off what high-definition discs are capable of. Despite advances in digital technology, they say, the fact remains that for the optimum high-definition viewing experience nothing can match Blu-ray Disc.

The second group is the gift-buying market. They love to give — and receive, for that matter — movies as gifts, which they later trade among family and friends. They’re the ones at Best Buy or Walmart or Target on Black Friday with a shopping cart full of discs; they use the cheap ones as stocking stuffers and the heavily discounted movie collections, new releases or TV series as gifts. Giving someone a digital download, often through an email notification, simply isn’t the same as giving someone a neatly gift-wrapped box with a movie or two inside, they say.

The third group is the collector. Yes, even though everything’s now on the Web or in the cloud, these people still like to collect physical things. They have their photos printed out and put into albums; they still have a rack of CDs in the family room, by the stereo; some of the rooms in their houses, by God, even have bookshelves filled with books with actual paper pages. And while I can’t swear to it, I’ve heard some members of this group also collect Franklin Mint plates.

The fourth group is the shell-shocked downloaders who due to a hard drive failure have lost their entire music or movie collection, generally back in the days before everything could be backed up into the cloud. They’ve never gotten over their loss, and they’re not about to be burned again.

The fifth and last group is what I’ll call the disenfranchised Netflixer. Like so many of us, they jumped at joining Netflix for subscription streaming. But after a while, the novelty wore off. Maybe it was the lack of current product — you can only watch so many ‘B’ movies from 2005 or long-canceled TV series. Maybe it was the incessant buffering problems. But whatever the case, the honeymoon’s over and the old Blu-ray player’s being fired up, once again.

The disc is dead. Long live the disc!

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Best Buy's Final Destination

Best Buy’s amazing slide to a 45% drop in income in the second quarter of this year, and ominous warnings of further drops to come in quarters three and four, can’t be attributed solely to the lack of new smartphones and the continued migration of shoppers online.

The electronics chain’s makeover, putting discs, CDs and other software in a corner in the back and reserving its prime floor space for tablets and smartphones, has destroyed its character and made it a lot less fun to shop there. You’d think management would have learned a lesson from Radio Shack, whose death march began when it brought in the iPhone. Sales initially surged, but margins plummeted — and before long everyone was carrying the iPhone and Radio Shack had painted itself into a corner.

Best Buy not only followed the same strategy, but also mangled a great idea last fall through its “showrooming” counterattack. Stung by consumers checking out products at Best Buy but then buying online, the company commissioned a series of 11 ads under the "Your Ultimate Holiday Showroom" theme, touting its low-price guarantee and the ability to order online and pick up in store.

The trouble was, the campaign focused more on outdoing Amazon than it did on highlighting the benefits of shopping in-store at Best Buy — although, in retrospect, maybe that’s because those benefits simply aren’t all that pronounced.

It all goes back to how fun it used to be to shop at Best Buy, before the chain transformed itself into a physical portal for tablets and smartphones. And there’s the essence of what Best Buy needs to do if it is to survive, much less thrive, in this increasingly challenging environment.

The stores need to become destinations again. I agree with Jehan Hamedi, global market development manager at Crimson Hexagon, a social-media analytics company that analyzed Twitter and Facebook dialog on Best Buy’s ad campaign. He told Ad Age Best Buy should make the stores more of a "playground" destination with fun in-store events, group discounts and refer-a-friend programs. "There's such a huge opportunity for them to link their product showroom appeal with a social experience," he told Ad Age. “We found that the largest, the prime [consumer] expectations, had nothing to do with what I might expect, like touching or sampling the product. It's more about social gratification — having fun. You go with your friends and they are your pre-purchasing sounding boards. It's a destination.”

My last visit to Best Buy was not a fun experience. The local store is situated in a large strip mall, right next to Walmart. I got there at a quarter to 10 on Sunday, wanting to pick up some discs as a gift for a birthday party my youngest son was going to, but Best Buy didn’t open until 10 and even though there were more than a dozen people outside waiting to get in those doors didn’t open until exactly 10, on the minute. I went to Walmart instead, and that was a lost sale Best Buy could have had if there was some flexibility and awareness of the store’s retail surroundings.
After my purchase at Walmart, I went to Best Buy to check into getting a protective screen around my middle son’s new school-issued iPad. It took me 10 minutes to find an available clerk, and I found the screen protector before he did. It was also I who suggested the Geek Squad put it on, not him.

As I was walking out, I saw a refrigerator I had purchased on sale on the Fourth of July holiday for $1,799 was back up to $3,265 — “10% off the regular price, just in time for Labor Day.” I understand price fluctuations, but come on! It’s episodes such as this that build consumer distrust — and at this point that’s the last thing Best Buy needs.

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Bullying the Studios

The pricing dispute between Amazon and Walt Disney Studios is merely the latest skirmish in a 35-year battle between studios, who own the content, and retailers, who distribute it.

It also serves as an indictment of Amazon’s business tactics and, as the Washington Post observes, “power over the retail and media economy.”

Simply put, Amazon is putting pressure on Disney — as it did earlier with Warner Bros. — to get a better deal on Blu-ray Discs and DVDs. In a story Home Media Magazine broke, the giant online retailer is blocking preorders of several Disney titles such as Captain America: The Winter Soldier and Maleficent as a negotiating tactic for better pricing.

Amazon certainly has a big muscle to flex: Preorders typically account for up to 30% of “first day” sales, and Amazon is the biggest pre-seller in the business.

Amazon also happens to be one of the biggest retailers of filmed content, period, and also is poised to be a leader in digital distribution.

But as a matter of principle, what Amazon is doing, quite frankly, stinks. It also exposes one of the online retailer’s weaknesses and rare disadvantages to traditional brick-and-mortar retailers such as Walmart, Costco, Target and Best Buy.

To move huge quantities of discs, Amazon has to sell new releases at the same price as Walmart and the other physical retailers. But Walmart and crew can afford to lowball the price, even selling below their own costs, because they use discs as loss-leaders to drive traffic into their stores.

Amazon hasn’t yet figured out how to get those impulse sales in the digital world — but they have to be competitive, so now they are using their clout to beat up the studios in an attempt to get better margins.

My take, to Amazon: Stop being a bully and, instead, focus all of that misspent energy on figuring out how to snag impulse buyers online. Amazon’s efforts in that regard have been half-hearted and only moderately successful — otherwise, there’d be no squawking over price.

If Amazon could come up with a way to really captivate consumers and, say, through each Blu-ray Disc or DVD purchase, get them to buy a ton of other things, they'd rule the world.

But they’d have to match the disc sales price of Walmart and other brick-and-mortar retailers on their own, without any studio subsidy, even if it meant taking a loss — which, in reality, would be an investment. And Amazon just doesn’t want to do that.

It’s much easier, I suppose, to block studio product and try to get the studios to blink first.
 

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Transaction vs.Subscription: The Next Battle Royale?

Remember that old line about how the more things change, the more they stay the same? From the very beginning of the home entertainment industry, the studios — who control the content, which of course is the single most important factor in the whole equation — have consistently done battle with various enemies, real or perceived.

In the early days of the business, they tried to crack down on the proliferating video retailers who were renting their videocassettes and pocketing the money. They ultimately lost in court and wound up toying with all sorts of strategies to share in the revenue.

When DVD came around and consumer habits shifted from renting to buying movies and other content, the studios found a new nemesis: deep discounting mass merchants who, in Hollywood’s view, devalued the product. Once again, the studios came up with various strategies to preserve their margins. On the catalog end, they worked with key retailers to agree on tiered pricing, so that the “race to the bottom” wasn’t a straight, head-first plunge. On the new release front, they began issuing two different versions of new releases, a bare-bones DVD the mass merchants could sell for peanuts and a more expensive version, packed with extras, that could fetch a significantly higher price.

A decade later, when the sellthrough business began to level off, studios went after Netflix and Redbox, which through their subscription and kiosk rental models, the studios felt, were cannibalizing sales. A bitter fight ensued, with studios refusing to sell Netflix and Redbox their product. The rental services figured out all sorts of work-arounds, including sending teams into Walmart to buy huge quantities of new releases. Several studios went to court, but ultimately, in 2010, everything was settled at the negotiating table, with three studios now holding back new releases from Netflix and Redbox for 28 days and, in return, extending the rental services better pricing.

Moving into the digital realm, the studios are now pushing Digital HD, or “electronic sellthrough,” which essentially consists of selling downloads to consumers. But despite early release windows the business remains on a slow roll, with consumers by far preferring to stream movies — the electronic equivalent of video rental.

This, in turn, now promises to evolve into the next big battle: transaction versus subscription. If you thought the studios hated video rental, that’s nothing compared to how they feel about subscription, which not only takes them out of the revenue loop but puts all content on a level playing field. So far the studios have been able to keep hot new releases from being included, but there’s already so much other stuff available for around 10 bucks a month that new-release sales are bound to suffer.

How do the studios keep the transactional part of the business alive? That’s a very, very good question — and one that ultimately will be decided not by Hollywood, but by the consumer.

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Netflix a Conquering Army

The impact of Netflix on how we watch movies and other filmed content is astounding. There are those who say the company’s subscription streaming service is decimating the disc sales business, while others scoff at this intimation and insist the real victim is broadcast TV.

Those who hold the latter point of view note that Netflix viewing options, at least at this point, are limited to old movies and recent duds, and that as long as the window between Netflix and Blu-ray Disc/DVD is maintained, we have nothing to worry about.

Oh, sure, there’s a definite impact from all the eyeballs watching White Chicks or “Supernatural” on Netflix instead of hot new releases on Blu-ray Disc or DVD, but the debate centers on whether those eyeballs belong to people who would, indeed, be buying new discs if Netflix wasn’t available, or if their owners are sluggish couch potatoes who’d otherwise be watching broadcast or cable television.

But there’s no question that the Netflix juggernaut keeps rolling and amassing power — with the ultimate goal, of course, of offering first-run movies and TV shows at the same exact moment they come out on disc — a move that will, of course, kill the disc business and probably a lot of other businesses alongside it, including pay-TV.

Never going to happen, you say? If the money’s right, of course it will — and if there’s one thing I’ve learned in more than 25 years of covering the home entertainment business, it’s to never, ever, say never.

As Home Media reported July 17, Netflix and The Walt Disney Co. have cut a deal in which Netflix gets exclusive pay-TV access to first-run movies in Canada beginning in 2015. A similar deal is in place here in the United States, although it’s not scheduled to start until 2016.

Netflix in Canada also gets first-run pay-TV films from Paramount, DreamWorks Animation and 20th Century Fox.

If things continue to be heading in this direction, pay-TV will crumble and fall to Netflix’s domination — and after that, there’s really only one more market left to conquer, the disc business.

Studios won’t give it up without a fight — but the more powerful Netflix becomes and the more the disc business falters, the harder it’s going to be to resist a reasonable offer. And if Netflix can somehow figure out how to make the numbers work, offering unlimited access to new-release movies and original TV shows for $9 a month, what began as a disc-by-mail rental service challenging Blockbuster and traditional rental will truly become the pre-breakup AT&T of home entertainment.

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