The Originals Game

Netflix appears to have an insatiable appetite for original content.

Speaking earlier this month at the MoffettNathanson Media & Communications Summit in New York, Netflix chief content officer Ted Sarandos attributed much of Netflix’s 20% year-over-year subscriber engagement hike to the success of original shows such as “House of Cards” and “Orange Is the New Black.”

The percentage of its total acquisition budget that Netflix spends on original programming keeps shooting upward; on an earnings call last month, chief financial officer David Wells said “it’s drifting up to 30% [and] could drift up to 40% … we are building out our … original content investment and that is cash intensive.” Accordingly, in his quarterly letter to shareholders last January, Netflix CEO Reed Hastings promised 320 hours of original programming this year, three times as much as in 2014.

Original content is not just the growth engine for Netflix here in the United States, but also abroad, where Netflix is aggressively expanding its reach. Sarandos noted that “House of Cards,” according to one report, is the most popular U.S. TV show in China.

And Netflix is more than happy to pay whatever it takes for exclusive rights — which is why some of the same studios that for years have griped about Netflix cannibalizing their sellthrough business are now creating original programming for the No. 1 streaming service.

Content, it appears, truly is king.

The more dependent Netflix gets on original content, the more it seeks global exclusivity of that content. Netflix no longer seeks blanket license agreements with studios for bulk programming. It picks and chooses specific programming.

To get control of that programming, Netflix is now dealing directly with creators and producers of TV shows and independent movies. When it licenses a show or movie, the rights are exclusive. That’s because binge-viewing, commercial-free, and on-demand access are key drivers of Netflix’s brand proposition.

“We’re either interested in the global rights or we’re not interested at all,” Sarandos said.

Netflix recently secured rights to African warlord drama “Beasts of No Nation,” starring Idris Elba. The streaming kingpin beat out independent distributors (such as Fox Searchlight) within the major studios — a win Sarandos attributed more to dealing directly with producers and granting immediate access than money.

It also secured exclusive rights to Fox TV’s “Gotham” and A&E Networks’ “The Returned” by dealing directly with the shows' producers, Warner Bros. Television (“Gotham”) and A&E Studios, respectively.

“For a dollar spent [on original programming] and an hour viewed, you get more hours of viewing per dollars spent on originals versus the licensed content,” Sarandos said.

At the same time, Netflix is still interested in bidding on sitcoms with major stars, such as “The Big Bang Theory,” “Mike and Molly,” and “2 Broke Girls,” provided the market for the shows isn’t overheated, according to Sarandos.

“We’re not seeking a lot of [random viewing],” he said.

But for the most part, original programming is the way to go for Netflix — regardless of what it costs, where it comes from, and who they have to beat out at the negotiating table.

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Home Entertainment Doing Fine Despite Misguided Media Criticisms

Ever since home entertainment, buoyed by DVD sales, overtook theatrical as Hollywood’s primary revenue stream in 2001, it has been a frequent target for those in the media who take great delight in hammering success. When the growth in disc sales began to slow during the high-definition disc transition and format war, countless reports surfaced that the sky was falling on the home entertainment business — a wrongful cry that grew louder when consumer spending on disc sales actually did begin to top off and then decline, even though those dollars were merely redirected toward  on-demand streaming and Digital HD.

The business is evolving, toward a digital distribution model, but if you look at the numbers you’ll find the total amount of money consumers are spending on bringing movies and TV shows into their homes and mobile devices has remained remarkably solid, despite competition from all corners of the Web, from Facebook to YouTube.

Indeed, the media’s cries that home entertainment’s days are numbered have become so frequent, and yet so hollow, that it is a wonder that anyone still takes them seriously.

Perhaps cognizant of this, some in the media have drafted a new game plan: If we can’t argue, with a straight face, that home entertainment spending is falling precipitously, then we can pick apart the business and brazenly declare the numbers are cooked.

It is this travesty that online gossip site Deadline has perpetrated with its assault yesterday on the latest quarterly home entertainment numbers report from DEG: The Digital Entertainment Group, which has first-quarter home entertainment spending nudging up a quarter of a percent, when all aspects of the business are factored in. The numbers show a continued slide away from traditional packaged-media sales and rentals into their digital equivalents, Digital HD sales and on-demand streaming.

Deadline quotes analyst Michael Nathanson, of MoffettNathanson Research, who according to the gossip sheet is “at the forefront of analysts who believe” — get this — that spending on “streaming services led by Netflix” should not be included in the home entertainment tally. He feels Netflix falls into the same category as “cable TV or premium channels HBO, Showtime and Starz,” according to Deadline, and thus should not be counted. “What’s more,” Deadline quotes the analyst as saying, the subscription streaming services "are mostly comprised of TV products, while the majority of DVD or VOD transactions are related to film.”

How’s that? Netflix, which began life as a DVD-by-mail rental service and then transitioned into streaming as the next chapter in the rental business, isn’t part of home entertainment? This reminds me of those occasional stories that popped up in the early days of DVD, when the business was booming, that implied home entertainment was dying because videocassette rentals were falling.

And as for the assertion that subscription streaming shouldn’t count because much of their fare consists of TV shows, that’s equally ridiculous. It’s the “on demand” element that sets home entertainment apart, and watching “Breaking Bad” on Netflix is no different from renting or buying the series on disc. Let’s not forget that in the early 2000s, the compact size and greater capacity of DVD led to a burgeoning TV-on-DVD market that at its peak topped $4 billion in annual sales.

As for the original content that inspires comparing SVOD services to TV networks, they are, if anything, more akin to the long-form equivalent of direct-to-video fare than they are the traditional television model, and thus still within the realm of what would be considered "home entertainment."

No, Deadline and Michael Nathanson, you are sadly mistaken. The home entertainment business is evolving, this is true — but you can’t just arbitrarily cut out a traditional segment of the business, rental, because it’s being consummated in electronic fashion rather than physical form.

You might not want to hear it, but home entertainment is alive and thriving — and those of us who have been around for 20 or more years are elated that at a time when more and more eyeballs are watching farting cat videos on YouTube or “liking” some status update on Facebook, filmed content is still being consumed, on demand, as heavily as it ever was.

If you feel like tearing apart some product or business, go after something that genuinely deserves it — like Smart Cars or newspapers.

Home entertainment is doing just fine.

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United We Stand

Going it alone in the home entertainment business has never been a good idea. Back in the early days of home video, VHS triumphed over the far-better Betamax primarily because JVC, which designed VHS technology, was willing to license it to other manufacturers. Sony refused to share; only in the late 1980s did the company finally agree to license Betamax to other manufacturers, but by then it was too late: VHS had an overwhelming market share.

The home video market grew and prospered regardless of this disharmonious start, but I fear that’s something of an exception. The home video market gave consumers unprecedented control over their viewing choices, something they had never had before, and it grew rapidly largely because the proposition was so enticing and there was no real competition. Pay-per-view was still in its infancy, and the on-demand factor that really propelled home video’s fortunes was still a pipe dream.

Today’s home entertainment landscape is much more fragmented than it ever was. Consumers have all sorts of options for viewing movies, TV shows, and other programs on demand — when they want to watch it, where they want to watch it, how they want to watch it. And the proliferation of screens — remember, for years, the home TV was the only conduit to watch something, regardless of whether it was delivered on a cassette (and then disc), cable, satellite, or broadcast — has only intensified the competition even more.

The only constant, really, is this: The content owners, chiefly the studios, would much prefer consumers buy a copy of the movie or TV show rather than stream it (or, back in the day, rent it). It’s a clean, finite transaction — and a lot more profitable.

The studios have done a great job, driving ownership, through a series of innovations that focused on the two key factors driving consumer demand in this business:  easy and cheap. First came DVD, priced low out of the gate to encourage sales and, with random access, so much easier to watch than a videocassette (no need to rewind). Then came Blu-ray Disc, a qualitative improvement, followed by Digital HD.

Getting people accustomed to buying movies electronically rather than in physical form was made all the more challenging by the emergence of low-cost streaming services like Netflix and Amazon Prime. And yet it can be argued that the ease of streaming has opened up consumer eyes to the wonderful world of digital distribution — and through incentives like early windowing and saving hot new releases for purchase it’s only a matter of time before the studios establish a viable sellthrough business.

UltraViolet only makes the value proposition all the more enticing. The concept of a digital “locker” where your purchased content lives on forever, and may be accessed at any time, on any device, is a sweet proposition. It eases the transition from disc to download, and at the same time acts as a safety net. Even if you lose or break the disc, or your hard drive crashes and takes down your movie library with it, the content you bought is yours forever.

If there’s one fly in the proverbial ointment, it is this: While all the major studios and many independents are part of the UltraViolet consortium, Walt Disney Studios is conspicuously absent, insisting on going it alone with Disney Movies Anywhere, a proprietary alternative to UltraViolet.

That needs to change. Now, more than ever before, is the time to be a team player — to stand united as the industry transitions from packaged media into the digital space, with a viable purchase proposition to counter the proliferation of streaming options.

Disney Movies Anywhere is certainly a great technology, but it’s only one studio. UltraViolet could be the home entertainment industry’s Balm of Gilead, but it needs universal support.

Why not figure out a way to merge the systems?

Have we forgotten that old statement, united we stand?

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Smartphone Viewing

A byproduct of the growing popularity of OTT is that consumers are judging their wireless carriers not by how cheap the service is, but by how smooth the streaming experience is.

I found that little pearl of information in a recent Ciena-sponsored study conducted by ACG Research, which predicts average bandwidth consumption per mobile user is expected to go up 52% over the next three years.

That sharp uptick in consumption is being fueled both by increasing smartphone penetration, which ACG believes will rise from 55% by 67% by 2018, as well as the growing trend among consumers to watch filmed content over their phones. ACG believes OTT use on smartphones will account for 59% of the predicted bandwidth consumption increase.

At first I questioned the validity of the study, picturing my almost nightly routine these past two months of watching a “Game of Thrones” episode, on Blu-ray, in my family room, on my trusty Panasonic plasma.

But then I caught myself watching a YouTube video during a particularly long red light, and even a half hour episode of a silly old 1960s sitcom while waiting at the doctor’s office for my annual physical.

And I figured if a home theater purist like me would stoop to watching stuff on a tiny smartphone screen simply because it is so cheap and so easy, then this truly must be the wave of the future. Just like home video flourished in the first place because we didn’t want to be tied down by the networks telling us what we can watch, and at what time, OTT and smartphones, together, have unleashed us from every conceivable restraint. And as more, and better, programming becomes available with the proliferation of OTT, so will our freedom increase.

The challenge for carriers, of course, will be to increase bandwidth accordingly. According to the ACG study, supporting backhaul capacity requirements will exceed 1 Gbps by 2018, “and this will be further intensified by the latest wireless standards such as LTE-Advanced and the introduction of more small cells, which are expected to deliver faster wireless services with broader coverage to users. Service providers need to take steps to deploy a mobile backhaul solution that supports 10 Gbps to meet this projected bandwidth and ensure quality of experience.”

As ACG research analyst Michael Kennedy noted in the Ciena press release, “Now more than ever, the quality of experience for the latest OTT applications is paramount and a key driver of customer loyalty. In three short years, these networks must offer broader coverage and handle more people using more applications on more devices at the same time. As a result, the backhaul infrastructure must transform to enable a more dynamic experience."

 

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$2 Billion Cure for 'Netflix Fatigue'?

It’s interesting to note that Netflix is now spending more money on content than HBO, BBC and Discovery. The subscription streaming behemoth, which began life as a DVD-by-mail rental service, spent more than $2 billion on content in 2014, about 20% of which went to original programming such as its hit series “House of Cards” and “Orange Is the New Black.”

That’s a huge expense for a company that charges its customers less than $10 a month for unlimited access to all this content, but with international expansion high on its agenda Netflix seems bent on making a splash in whichever new markets it enters, at the same time casting a wary eye over its shoulders at U.S. consumers and hoping and praying they don’t come down with “Netflix fatigue,” particularly now that Amazon Prime is nipping at its heels.

This huge spend has shaken up Hollywood to the point where studios and independent content producers are seeing Netflix as a lucrative new revenue source that at least for now far eclipses what they can make from this content from traditional channels, be they foreign TV rights or good old DVD and Blu-ray Disc.

Is it sustainable? That’s a good question. Nothing, in business, ever really lasts forever, but then lengths of successful runs vary wildly. MySpace was huge, but was rather swiftly banished to the social media graveyard by Facebook, which has remained on top largely because of its popularity not so much with fickle teens as with older demographics, particularly moms, with an ingrained sense of brand loyalty. The Apple iPhone and iPad remain the Cadillacs of mobility, status symbols both because of their sleek look and incredible craftsmanship.

Netflix has an amazing amount of product, but the lack of first-run movies and spotty record regarding TV shows — you can watch “Breaking Bad” but not “Game of Thrones” — is a definite weakness; hence, the drive toward original content.

But if there’s a word of caution I could throw out here, it’s that if you’re No. 1, everyone and his brother are going to want to unseat you. Amazon Prime is just one of a growing legion of competitors, big and small, broad and niche, hungry for a bite of the Netflix-dominated OTT pie. And while Netflix is smart to look overseas to further expand its reach — in January the company, currently in 50 countries, said it wants to be in 200 by the end of 2016 — the growth potential is not unlimited.

For Netflix, to paraphrase Charles Dickens, these truly are the best of times, and the worst of times. About all Netflix can do is continue to pay big bucks to feed the beast —realizing the beast is growing hungrier all the time and hoping it won’t one day turn on its master.

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Net Neutrality Is Vital

The Federal Communications Commission’s landmark ruling to declare Internet providers public utilities has met with a mixed response from those in the entertainment business.

The overriding sentiment appears to applaud the concept, but wonder — and maybe even worry — about the execution.

The concept is clear and, in my book, appropriate: Anything relied on as heavily by the public as electricity, or the Internet, needs to be protected in some fashion. And though as a small-government advocate it pains me to say this, the only viable method we have of protecting the public is through the regulatory arm of government.

California’s brief attempt to de-regulate utilities in the early 2000s was a disaster: energy bills tripled, and $10 billion left California in one month alone, bound for the corporate treasuries of unregulated power generators.

That’s because the private sector is not out to ensure what’s best for the public. The private sector answers to its shareholders, and its overarching goal is to maximize profits, not do what’s best for the public.

In the case of most businesses, that’s fine. Let the free market reign. But the big Internet Service Providers (ISPs) are different: They provide a delivery line, not a product or service, and keeping those lines open is critical for the public good. Unfortunately, we’ve seen them act the way any smart, for-profit business would act: in their own best interests. Verizon, AT&T and Comcast want the freedom to charge what they wish. They claim that they can’t afford all the investments they’ve been making and that companies like Netflix and YouTube are making gobs of money off their pipes and need to ante up more money to compensate the ISPs for all the extra bandwidth they are consuming.

The problem here is that the extra costs get passed down to consumers.

Under net neutrality — which the FCC finally accomplished through its finding that ISPs, like the big power companies, are public utilities and thus have to answer to a higher authority (the public) rather than their shareholders — all websites are equal. The commission has effectively eliminated the ability of ISPs to charge interconnect fees to ensure faster streaming speeds. This is as it should be, if you consider any attempt to restrict the public’s access to information — which is what higher costs invariably do — a breach of our constitutional rights.

The downside of government control, of course, is the prospect of over-regulation and, with it, a bigger bureaucracy — and more fees and more taxes to pay for it.

Netflix CFO David Wells really said it best when he intimated that in a perfect world, ISPs and companies like Netflix would be able to work things out on their own and reach some sort of compromise. “We were hoping there might be a non-regulated solution to it,” Wells said at the recent Morgan Stanley Technology, Media & Telecom confab in San Francisco.

But since that hasn’t happened — and clearly wasn’t going to happen — the FCC made the right call.

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A Procession of Visionaries

Honoring Louis Greth and Chris Nagelson of Walmart as this year’s Home Media Visionaries was pretty much a given, based on the big retail chain’s continued innovation in the field of electronic distribution and its simultaneous refusal to give up on the physical disc.

For more on these two fine gents, please read my column in the special section on Walmart.

But looking back through the years at our other honorees, I can’t help but notice that the one trait they all possess in common is an unbridled enthusiasm for the business and an unshaking belief that no matter how uncertain things might appear at the present, there’s always another day when things will become clearer and the business will return to growth mode.

Warren Lieberfarb’s selection as our very first Home Media Visionary in 2002 came as DVD celebrated its fifth birthday and sales were still growing by double digits every year. Few could remember DVD’s half-hearted launch and near death at the hands of Divx. Lieberfarb could have given up at any point in the early stages of DVD’s launch, when some studios simply refused to come aboard. Indeed, to many of us, the obstacles the fledgling format faced seemed insurmountable. But Lieberfarb never forgot that before DVD the rental business was slowly dying, and that DVD was not just a much better product but also the catalyst for a complete change in consumer habits, from going out to rent a movie for the night to buying one to keep or give away as a gift. So Lieberfarb persevered — and DVD became the biggest consumer electronics success story in history.

Our 2006 Visionary, Amy Jo Smith of DEG: The Digital Entertainment Group, is another industry veteran who refuses to give up — or bow down. Her claim to fame is rallying the troops and getting everyone talking again about next steps. Through conferences, workshops, white papers and webinars, Smith has become the glue that holds all of us together — and, it might be said, keeps things from falling apart when the outlook is not good. She’s not afraid to embrace and even encourage change. She and her team are always looking ahead, and in the process getting everyone excited about the business and its future prospects.

Louis Greth and Chris Nagelson are on the same track. Equal parts cheerleaders and visionaries, they know home entertainment will always play a key role in consumers’ lives, regardless of how it’s delivered. And like Lieberfarb and Smith, their overarching goal, quite simply, is to keep the customer satisfied.

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Building From Past Profits

Talk about the end of an era. I woke up this morning with a press release in my inbox telling me Rentrak has sold its Pay-Per-Transaction business to Vobile, a “worldwide leader in video and audio content protection, measurement and monetization services,” for $7 million.

Remember PPT, folks? That was the founding premise behind Rentrak back in the mid-1980s when a video retailer named Ron Berger founded the outfit, now a major media measurement and research company.

At the time, Berger ran a video chain called National Video, a major player facing stiff competition from Blockbuster and its policy of stocking up big on the hits. Berger devised Rentrak as a way for smaller retailers to even the score: they could lease titles rather than buy them outright and thus go a lot deeper on the major new releases than they otherwise could afford to.

Rentrak’s formula later was the model for studio “copy-depth” programs, which allowed retailers to buy more copies of hot new titles on the cheap in return for sharing a percentage of their rental revenues with the studios.

Revenue-sharing, as it’s now known, remained the studios’ preferred way of dealing with rental retailers through the DVD era right up to the rise of Redbox and Netflix.

Rentrak, meanwhile, used the profits from PPT to build its movie and TV measurement businesses, which have ensured the firm’s viability.

Using profits from the old to build the new is a smart business strategy, and one that’s kept industry – all industry – alive over the years. When IBM was faced with an onslaught of PC clones, the company’s fortunes suffered – remember that $8 billion loss in 1993? – until the firm wisely shifted course and began focusing on IT services and enterprise server solutions. Western Union survived email and texting by shifting from telegrams to money transfer services.

Here in Hollywood, we have a slightly different cycle. The core product – movies and TV shows – has long been the same. But the funding mechanism continues to change. First, it was theaters; then, syndication and TV rights. Home video became a potent funding force only after sellthrough triumphed over rental. And now the very same streaming services that threaten the viability of packaged media sellthrough are becoming a key movie and TV show funding source, thanks to the huge bucks Netflix and Amazon are willing to pay for original content as they aggressively expand beyond the United States.

Ah, the cycle of business. As one writer, for the website, recently wrote, “A successful company is like a great white shark. In its prime, it chews up the competition, but if it dares to sit still for too long, it dies.”

Rentrak is a great example of this. As for the studios, it’s still too early to tell.

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The Irony of SVOD

On the surface, it appears more than a little counter-intuitive: The same studios that a few years ago got into a tangle with Netflix and Redbox over renting new releases, a practice they said cannibalizes sellthrough, are now creating content specifically for Netflix and other subscription streaming services, which many see as the biggest threat yet to home entertainment sellthrough.

Not only that, but now Netflix will be getting The Interview, the controversial film about the assassination of North Korean leader Kim Jong-un, three-and-a-half weeks before Sony Pictures Home Entertainment releases the film on Blu-ray Disc and DVD.

Meanwhile, the subscription streaming juggernaut continues to snare consumer eyeballs. The latest numbers released by DEG: The Digital Entertainment Group show that consumer spending on Netflix and other subscription streaming services rose an estimated 25.8% to $4.01 billion, while discs sales fell nearly 11% to $6.93 billion.

Is our industry feeding the monster that threatens to devour it? Will producing content for a $9 monthly all-you-can-stream service ultimately undermine all existing distribution channels, including home entertainment — physical as well as digital sellthrough?

Studio executives say that’s a wrong assessment. Even though subscription streaming numbers are included in the DEG’s quarterly release of consumer spending on home entertainment spending, services like Netflix are much more like networks in that they buy TV content — a channel the studios have been feeding for years. Networks live off commercials; Netflix, off subscriber dollars. Both depend on viewership to keep the money flowing. TV production studios are in the business of creating, selling and marketing content, and Netflix, Amazon and the other streaming services are merely a new type of customer, now that they are scrambling for original content to keep their subscribers satisfied.

Are Netflix and Amazon luring viewers away from home video? No more so than a network with a hot new series everyone’s watching and talking about the next day at work. And as one studio executive pointed out, consumers are used to watching TV shows broadcast first and then being able to buy them, either on disc or as a digital download. The difference, of course, is the “on demand” angle — once, say, “The Sopranos” ran its course on HBO, that was it, whereas “Breaking Bad” can still be viewed in its entirety on Netflix, minimizing the need to rush out and buy the complete series on disc.

But from a truly big picture standpoint, these are all nuances. Any losses to the home entertainment divisions are more than offset by gains to the TV division — and in the end, it all goes into the same big studio pot.

If selling shows to Netflix and Amazon brings in huge wads of cash, studios would be foolish to not follow the money.

The bottom line, after all, is the bottom line — and a bottom that is then used to finance the next wave of content and keep the overall entertainment business healthy.

 

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4K Synergy Offers Refreshing Change

During a Digital Hollywood panel on which I participated, about the future prospects of OTT, the moderator asked each us how this year’s Consumer Electronics Show was different from past years’ events.

I was up first, but my prognosis easily rattled off my tongue: If you look at this year’s spotlight attraction, 4K Ultra-HD, there’s more cohesion and unity, and a greater focus on the whole consumer experience, than there’s been in years.

And that explains why studio executives are so optimistic about the future of home entertainment, despite DEG numbers that show disc sales fell 11% in 2014 and the continued dominance of subscription streaming in the electronic distribution sector of the business.

Everything seems to be coming together for 4K, and one reason is that consumer electronics companies are working not just on one aspect of the new technology but on the whole enchilada. It’s not just about a better picture, it’s about partnerships with content providers — a concerted outreach to make 4K available on all devices, from the most elaborate home-theater TVs to tablets and smartphones — and an all-out effort to make the 4K viewing experience quick and easy, despite the much-bigger size of the files and greater bandwidth requirements.

Everyone’s working together on home entertainment’s “Next Big Thing” — and I honestly feel we’ve learned a lot from past mistakes, from the bruising format war that dirtied the launch of high-definition discs to the disaster that was 3D. The year, not so long ago, when 3D was the show floor rage, all I remember is a plethora of incompatible formats — including those horrid Toshiba TVs with frames that reminded me of dog scratch collars — and mass confusion about eyewear. And then there was that nasty little problem about consumers maybe not wanting to watch everything in 3D, which no one seemed to have taken into account.

With 4K, it’s full speed ahead — and the alluring consumer promise to finally be able to replicate the movie-theater experience in their own home appears to be resonating. I was up in Arcata a week ago, renting an apartment for my oldest son, Justin, who attends Humboldt State University, and ran into a retired ranch hand who now works behind the counter at the Days Inn (yes, I’m living the life).

We got to talking, and when he found out I was in the entertainment business he just had to tell me how excited he was to get a 4K TV. “My friend has one, and it’s like a whole new world,” he said. “It’s a completely different viewing experience — much more so than Blu-ray over DVD.”
That’s not Mike Dunn or one of our other industry thought leaders talking. That’s Rich the ranch hand, your everyday, average Joe.

This year’s CES, much more so than past shows, was truly an invigorating, enriching experience. I left the show Thursday morning with the feeling that our business is back on track, and that we’ve not only developed a great new product that consumers genuinely will want, but we’re also bringing it to market in the right way.

It’s all about the consumer experience, you see. And if we keep that notion at the top of our minds and let everything we do be guided by it, I honestly believe we are destined to succeed.

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