Death of Blockbuster Was Only a Matter of Time

So this is it.

Just like that, it's over.

With Dish finally making the announcement all of us knew was coming, even though we might not have wanted to believe it, the Blockbuster era is officially over.

Another pop cultural icon, dead and soon to be buried — another nail, critics will say, in the coffin of the packaged home entertainment industry.

Granted, the fewer than 300 Blockbuster stores that remained of the once-mighty video rental chain amounted to a mere skeleton of the Blockbuster of the pre-DVD, pre-sellthrough era. During those heady days for the company, Blockbuster’s clout was such that we in the home video trade appropriated the “Big Blue” nickname that for years had been proudly worn by IBM and applied it to the unstoppable video power chain from Dallas, which within a decade of its 1986 launch had become the dominant player in the video retail trade.

No sooner had the first Blockbuster store been opened — by a fellow named David Cook — than its feeding frenzy began. Blockbuster began gobbling up mom-and-pops, then regional chains, then national rivals such as Erol’s (in 1990, for $40 million). By then, Blockbuster had been sold to Wayne Huizenga, the celebrated waste-management king, who had an even bigger vision for, well, “Big Blue.”

In 1993, Blockbuster acquired a controlling interest in Spelling Entertainment Group; a year later, Viacom acquired the company for a breathtaking $8.4 billion. By the time Blockbuster’s 10-year marriage to Viacom ended, in 2004, the company had 60,000 employees and upwards of 9,000 stores.

The relatively swift decline and fall of the Blockbuster empire has been well chronicled, by this publication and others. The upshot is that the home video business changed, but Blockbuster refused to change with it, clinging to its physical video rental model even after DVD sent the business spiraling toward sellthrough, even after consumer discontent with late fees and return trips paved the way for Netflix and Redbox.

Blockbuster filed for bankruptcy in September 2010; seven months later, the chain and its tattered fleet of about 1,700 remaining stores was bought at auction by Dish Network, ostensibly for the value of the brand name, for $233 million and the assumption of $87 in debt.

I can only imagine what Dish executives were thinking in the days and weeks after their purchase. Talk about buyer’s remorse — things went from bad to ugly to “My God, what have we done?” Stores fell like dominos: 200 in July 2011, 500 more in 2012, and another 300 earlier this year.

Now, as noted previously, it’s all over. All remaining Blockbuster stores, as well as the company’s once-promising by-mail DVD distribution operations, will be closed by January 2014.

In a press release, Dish chief Joseph Clayton said, “This is not an easy decision.”

Come on, Joe. At this point, I’m afraid it was the only decision.

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Digital Push Pays Off

It’s good to see the studios are becoming increasingly aggressive in pushing the digital sale, rather than streaming, of movies.

Several of the majors are giving big movies an early digital release in the hopes of spurring sales, which for years were stagnant and dominated by iTunes sales. That’s because there was no real incentive for people to buy a digital movie, and my hunch is they were put off by the relatively steep price, compared to streaming.

Consumers took to buying music over the Internet because they could easily purchase their favorite songs at 99 cents a pop. Studios came into the game with a decided disadvantage: While music is sold by the song rather than by the album, with movies you have to buy the whole thing, not a scene or two. And finding the right price for a download — which lacks a physical, touch-and-feel presence — has been quite difficult, with the electronic sellthrough, or EST, needle remaining stuck in the “anemic” range even when the price of a new movie dropped to about $10.

An early window for a digital release just might be the game changer everyone’s been hoping for. Studios, after all, cling to the physical disc simply because it’s tried-and-true and we haven’t seen a precipitous sales falloff as we did with the CD (a fact that, again, can be explained through consumer purchase habits: music by the song, movies by the whole movie).

But given their druthers, every studio executive worth his or her marketing degree would like to replace that disc-based revenue stream with a digital model, with nothing to manufacture, nothing to package, nothing to ship and nothing for retailers to return.

The problem is, getting people to fork over even $10 for a download has been incredibly challenging, because the concept of ownership, at least at this point, still mandates something physical. It’s more about the product than it is about the experience.

But making a hot new movie available only as a download two, three or four weeks before its release on disc is a whole other story. The consumer who doesn’t see value in buying a download for $15 when he can buy a beautifully packaged DVD or Blu-ray Disc for roughly the same amount now has a whole new reason to do so: He’s not paying for the ownership so much as he is paying for the privilege of having something before anyone else does. Call it pride, call it vanity — it’s human nature, and clearly it’s working.

As reported in our magazine, DreamWorks Animation’s Ann Daly on a conference call Oct. 29 said the early Digital HD (now the standard name for all digital versions of a movie) release last month of The Croods generated 15% more sellthrough revenue than any other DreamWorks film.

Daly applauds 20th Century Fox, which distributes DreamWorks Animation titles into the home entertainment channel, for being “aggressive in promoting and developing the electronic sellthrough portion of their business,” and maintains, “It is having a positive effect on our overall business.”

Keep it up, guys. Clearly, it’s working.
 

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Think Digital Content Creation, Not Just Distribution

Invariably, whenever we in the home entertainment industry talk about “digital” this or “digital” that, we are talking about distribution. “Windowing” is the buzzword of the year, and studio strategists are focused on maximizing the revenue potential of studio properties — movies or TV shows — at every stage of the distribution game, both physical and digital.

This may be smart in the short-term, but in the long term we need something more. We need to look beyond digital distribution, which is centered around consumers' viewing habits, and pay more attention to digital content creation — in other words, consumers’ viewing choices.

Now, we all know that in today’s home entertainment arena, the major studio movies and TV shows are still the big enchilada. Sure, consumer eyeballs are increasingly diverted — or distracted, depending on one’s perspective — by Facebook and YouTube, but the big buzz a few years back about user-generated content has largely dissipated as though it was a mere flash in the pan. You can only watch the YouTube clip of the fat cat burping and farting at the same time so many times, we tell ourselves, before you go back to Iron Man 3 or Wrong Turn 5.

Every studio has dabbled in Web-only content, but I believe in the future Hollywood needs to pay more attention to the digital world as not just another place to distribute existing filmed content, but as a fertile breeding ground for new content. Maybe consumers won’t tire of the burping-and-farting cat as quickly as we had expected — and when they do, maybe they’ll turn to other YouTube videos to fill up an evening instead of watching a movie or a TV show.

A new report from the Pew Research Center should be required reading for every studio executive. The report says that in just four years, the number of Americans who are uploading and posting videos has more than doubled. More than a quarter of Internet users are sharing videos online, particularly the younger ones — while the percentage of adults who watch or download video content is up to 78%.

There’s an opportunity here, folks — for quality, original studio programming, served up in bits and pieces, on YouTube and Facebook. Social networking sites should be chock full of studio series and shorts, webisodes and one-off sketches; instead, the bulk of the content is still user-generated, leading to the creation of genuine independent Internet superstars like Smosh, one of whose videos has an amazing 99 MILLION views on YouTube.

By the way, even the cat video has more than 3.5 million views – and counting.

Food for thought, my friends, food for thought.

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Follow the Consumer

The PricewaterhouseCoopers study we wrote about here is extremely interesting and provocative on many levels, but the underlying message is simple, clear and one we’ve heard myriad times before: Given their druthers, consumers prefer their entertainment cheap (ideally, free) and easy.

That’s why they are drawn to Netflix, which is the hands-down winner on both fronts.

Two findings stand out and should be of keen interest to anyone in the home entertainment business. One is that 57% of respondents, a clear majority, prefer on-demand viewing versus live broadcast. Our need for instant gratification, I believe, is what’s kept our business alive for so long — and while a good chunk of this “I want it now!” crowd will turn to streaming, there’s still a big segment of the population out there that 1) doesn’t have a web-connected TV and 2) wants to watch movies on the widescreen, not on their computer. This explains why cable and satellite delivery remain the primary sources of video consumption — and at the same time gives the physical media crowd something to exploit.

Cable and satellite remains popular largely because everyone’s familiar with it, and it’s a relatively simple process. But both advantages are shared by DVD and Blu-ray Disc. We’re all very, very familiar with discs, and while on-demand viewing gives us essentially the same control over what we watch, discs provide us with far better picture and sound — something I think we as an industry still need to more aggressively promote.

Another finding I found interesting is the fact that social-media platforms such as Facebook and Twitter, an integral part of so many lives these days, aren’t being deployed to finding online video anywhere near as much as one might think. From our story: “Just 4% of respondents said they use social media for suggestions of online video programming — only slightly better than Netflix and Hulu at 5%. This compares to 59% of respondents who rely on a family member or friend for programming ideas.”

To me, that underscores the No. 1 challenge of digital distribution: discovery. And to our friends at the studios who are involved in digital distribution, this should be a call to arms: We need to devote more resources, both brainpower and dollars, toward finding a better mechanism for consumers to find what they want to watch — with the underlying premise being that quite often consumers don’t quite know what they want to watch. We need to come up with a way that lets viewers search movies not by title, actor or category, but by, say, spectacular crash scenes, intense kisses, compelling soliloquies (anyone for Dennis Hopper in True Romance?), or epic battles.

Elsewhere in the study, the fact that just 10% of respondents like “binge viewing” of TV series is a bit surprising. I would have thought more people watch entire seasons, or even series, of TV shows from start to finish, but what’s not clear from the study is what exactly constitutes binge viewing. I can’t see myself spending an entire weekend watched nothing but “Dexter,” 16 hours a day — but watching the entire series over the space of three or four months, an episode a night, with periodic breaks to get in a movie or two, that’s more like it.

The strong yen for original programming is interesting as well, and coincides with the growth of YouTube, the accolades for Netflix shows, and other indicators that consumers — particularly the young’uns — are watching more and more programming that’s generated outside the Hollywood system.

If there’s a lesson here for studio executives, it’s this: When discussing the intersection of entertainment and technology, we’re focusing far too much on distribution and not enough on content creation. We need to look at technology as a lot more than simply new and better ways to get our traditional content into consumer homes (or smartphones, or tablets). We need to look at technology as a way to create new and different content that doesn’t begin at the movie theater or on the TV screen, content expressly created for these new distribution mechanisms.

Our YouTube channels should go beyond promoting our films and TV shows — they should be used to create an entirely new and, hopefully, additive entertainment experience.

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Q4 Off to a Strong Start

'World War Z'

It’s still September, and yet for home entertainment marketers the fourth-quarter selling season is already well under way.

Lionsgate scored remarkably well with Now You See Me, which was released Sept. 3. A week later came the first of the big tentpoles, Paramount’s Star Trek Into Darkness, which was seen as something of a harbinger for how the rest of the quarter would go.

All eyes were on that title, and by the time the week was over, I honestly couldn’t tell who was more excited: the folks at Paramount or everyone else. The consensus is that Star Trek Into Darkness has been a runaway hit — and like the groundhog who pops his head out of the ground in February and doesn’t see his shadow, studio executives are almost giddy at the prospect of an imminent warming trend in the disc business.

Taking a look at what happened this summer in theaters, it’s easy to see why. The summer was front-loaded with hits, and while the second half of the summer was a disappointment to our friends over in theatrical distribution, the first half was strong enough for Hollywood to chalk up yet another record year at the box office — and those early hits bring good tidings to the home entertainment crew because their theatrical runs are decidedly over and they’re all primed for home video release.

What the Hollywood Reporter aptly called “a schizophrenic summer at the U.S. box office” ended with ticket sales of $4.75 billion — a new record and tidy 7% more than the previous summer record of $4.4 billion, set in 2011. And, according to the Reporter, admissions reached about 560 million, “the best in four summers.”

This all bodes well for home video. The tentpoles came early: Iron Man 3, released in May, topped the domestic summer chart with $409 million (and $1.2 billion worldwide). Man of Steel (June) brought in a cool  $291 million ($657.3 million, worldwide) for Warner, while Paramount's clever zombie hit World War Z (another June release) fared much better than most anyone expected, grossing more than $200 million ($530 million worldwide). And then there’s Star Trek Into Darkness, a May theatrical release, which turned its $229 million domestic showing into what by all accounts was a bang-up start to the video-selling season.

Add to that what the Hollywood Reporter calls “a healthy crop of midrange and smaller films,” like Now You See Me, and you’ve got all the makings of a strong fourth quarter for our business.

Let’s just hope the momentum continues.
 

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The End of the Road

I wonder, sometimes, when we’re going to hit the end of the road in various product types. I thought we had hit the end of the road with high-definition TV, but then along comes 4K. Is this the end? Is this as good as it gets? Or will there be an even sharper image down the road — and down the road from that, until we get to ... a difference only a microscope can detect?

Seriously. Think about it. A generation ago, we reached a point where record players — oh, I’m sorry, hi-fi systems — got as good as they were ever going to get. It was in the early 1970s, I seem to recall, when the vinyl-playing machines reached their ultimate state of the art. Needles were as tiny as they could be; cartridges (those things that held the needle) were as sophisticated as they were ever going to get; tone arms were as light as a feather, minimizing damage to the fragile disc, which lost a little of its substance each time it was played.

Of course, when record players reached their zenith and consumer electronics manufacturers realized they could no longer build a better mousetrap they turned their attention toward building something different — and thus was born the compact disc, which relied on a laser beam, a “virtual” needle, if you will, with no weight and no damage to the disc.

Typewriters — same thing. The IBM Selectric, with its ability to instantly “erase” characters by striking over a letter with a magical substance that seemed to pull the ink right off the page, was the standard for years and years — until typewriters, no matter how good, were rendered obsolete by word processors and computers.

Musical instruments? We hit the end of the road there many years ago. Pianos and violins have remained fundamentally unchanged for hundreds of years, while electric guitars peaked in the 1950s and ’60s.

Back to TVs. As with so many products near the end of the road in terms of quality, we have seen lots of experimentation in recent years — as though manufacturers know we’ve about hit the wall in terms of picture quality and are desperately searching for some other reason to get people to buy new TVs.

The short-lived 3D hype reminded me of Quad Sound in the final days of vinyl — a grand concept, but horrible go-to-market execution and a small, niche audience.

And now we have Sony Electronics all excited about a “curved-screen” TV that has me scratching my head and wondering, wasn’t it just a decade or so ago that we got away from the old bulky curved-screen analog TVs and were all wowed by flat-screens?

Ah, the end of the road. Sometimes it seems more like a loop.

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Best Buy: Slowly Winding Down

Best Buy’s transition into a digital distributor of entertainment received a hefty vote of confidence when the chain reported better-than-expected financial results, with its stock price soaring more than 10% after the company announced a widening of its second-quarter profit to $266 million, up from $12 million last year.

Gross margins, too, expanded to 26.5%, topping estimates of 23.3%. CEO Hubert Joly, a veteran turnaround expert who ran hospitality and restaurant giant Carlson — which includes businesses such as Radisson and T.G.I. Friday's — before he took the Best Buy job late last summer, was immediately hailed for his cost-cutting and other efforts, including instituting a price-matching policy, establishing dedicated “store-within-a-stores” for Samsung, Apple and Microsoft, and investing more money on training programs for employees.

And yet the numbers are deceiving. By gutting its entertainment section, the company has saved on expenses but also cut loose a huge revenue source. As Erik Gruenwedel reports in our story in this week’s issue, Best Buy posted a nearly 30% drop in same-store entertainment sales for the second quarter, with packaged media now accounting for just 5% of its $7.8 billion domestic revenue for the three months that ended Aug. 3.

Lost in the media hoopla over the sharp uptick in profit was the fact that overall, same-store sales fell as well, albeit by just 0.6%, while overall revenue was down 0.4%.

Joly’s strategy appears to be something of a slow march to the bottom. He’s shrinking Best Buy’s business, but cutting costs even more. And as long as he can stay ahead of the game, profits should continue to increase, at least in theory.

But he needs to be careful. Margins may continue to inch up, but by turning his back on packaged media and focusing on digital he’s not just reducing revenue, but also limiting choice — which is never a good thing to do when you’re dealing with consumer goods. And eventually there may come a point where margins may be fine, but the actual dollar amount of profit begins to decline — slowly at first, then more rapidly, as more and more consumers steer clear of Best Buy entirely because there’s no longer anything unique about Best Buy stores.

We saw the same thing happen with Blockbuster, when it began relying more and more on the same hits you could find everywhere else.

There are those who say Joly simply wants to do what Amazon does so well: Follow the consumer. But Amazon, with its pure online presence, can be much more nimble and quick than Best Buy, still saddled with a network of huge stores — and expensive leases.

The cynic in me questions whether Joly even wants to grow Best Buy’s business. Maybe he realizes he’s up against overwhelming odds, so all he really wants to do is manage the chain’s decline as best he can and jump off before things really head south.

I don’t profess to know the long-term solution to Best Buy’s woes. Maybe there isn’t one. I’m also not sure whether the chain wants to remake itself as a multi-brand version of Apple Stores or a brick-and-mortar Amazon — two objectives destined to fail because both Apple Stores and Amazon already exist and are doing just fine.

But I just don’t see the current trend, of soaring profits and declining revenues, continuing for much longer.

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Blu-ray Saves the Day – Again, and Again, and Again

One of my favorite things about my job as publisher of Home Media Magazine is getting the chance to play reporter again. Writing the weekly chart story, blogging about industry issues and digging into a meaty news story is about as good as it gets for this old dog, and one of my personal goals is to free up more of my time to jump back into the trenches more frequently.

I’m a journalist first, and a businessman second — and I guess it’s always going to be that way.

A highlight of my editorial duties is writing the quarterly “state of the industry” story based on consumer spending numbers compiled for, and distributed by, DEG: The Digital Entertainment Group. I had the misfortune of being on vacation, out of the country, when the half-year numbers came in, so I grudgingly took a pass this time around, with senior reporter Chris Tribbey taking up the mantle — and doing a fine job, I should add.

That said, I’ve noticed a pattern in our quarterly numbers stories — a pattern that holds true regardless of whether total spending is up, down (as it’s been until recently) or flat.

The pattern is this: DVD sales continue to decline, but Blu-ray Disc and digital sales continue to post impressive increases, with the biggest lift, in terms of sheer dollars, always coming from Blu-ray Disc.

In our latest story, the headline — at least for the online version — reads, “DEG: Blu-ray, Digital Making Up for DVD Revenue Declines.”

I’d bet that same headline, with minor variations depending on whether overall spending is up or down, could have been used for virtually every quarterly numbers story we’ve run in the last five or so years.

Putting all this in perspective, it appears to me that had it not been for Blu-ray Disc, the home entertainment industry easily could have nosedived when our entertainment options proliferated like mushrooms with the emergence, mostly post-2005, of YouTube, MySpace, Facebook, online gaming, apps, the iPhone and the iPad.

And yet what do we keep reading in the mainstream press about Blu-ray Disc? I can’t even count the times Blu-ray has been lambasted as a failure and lampooned as a relic of the pre-digital era.

Clearly, the facts speak otherwise. Blu-ray Disc sales is a healthy, thriving and growing business. And instead of looking back on the gaga days of DVD, when the packaged media business was posting double-digit gains, year after year, we should marvel at Blu-ray Disc’s own success story: coming of age in the Great Recession and consistently posting significant gains quarter after quarter, year after year.
 

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Netflix’s House of Cards

I found it quite interesting that Netflix’s stock price plunged — by as much as much as 11% in after-hours trading July 22, even though the company appears healthier than ever.

Its subscriber count was up from last quarter, revenue continues to trend upward, and a week earlier Netflix snagged more than a dozen Emmy nominations for original series such as "Arrested Development" and "House of Cards," the first Internet series to be nominated in major categories.

Attribute this apparent dichotomy to the fact that Wall Street is a demanding beast, with high expectations. Netflix reported it added 630,000 streaming customers in the United States in the second quarter, a healthy number, by any measure — except, of course, to analysts, who had expected an average of 700,000.

And yet analysts aren’t exactly being “tiger parents” with unrealistic (and, perhaps, unattainable) expectations. Netflix’s own high-end forecast was 880,000.

While the Street and analysts fret about subscriber growth rates, they ignored the 800-pound gorilla buried in the financials: Netflix lost nearly 500,000 disc subscribers in the quarter. It was the first uptick in packaged-media attrition since Netflix began separating disc and streaming results in 2011.

So what, right? Wall Street, analysts, media, pundits and Netflix management have been preparing packaged media’s obituary for years. The only problem with their “perfect” streaming world is that packaged media is what keeps Netflix’s bottom line from turning the same color as its red logo.

Indeed, Netflix generated a $109 million contribution profit on $232 million in revenue from DVD, Blu-ray Disc and hybrid streamers in the quarter. That’s nearly a 47% contribution margin, and more than twice the 22.5% contribution margin heralded by Netflix on its domestic streaming business.

In fact, packaged media represented the bulk of Netflix’s overall operating profit when factoring in technology, marketing and rising content costs associated with streaming. And don’t forget, Netflix’s ambitious international expansion, which it claims is being supported by domestic operations, lost $66 million in the quarter.

Michael Pachter, research director with Wedbush Securities in Los Angeles, contends Netflix neglected to attribute $137 million in G&A and technology spending toward streaming expansion both domestic and abroad. If this spending would be properly allocated, Pachter writes, domestic streaming would generate an operating profit of only $65 million for the second quarter, while domestic DVD would generate an operating profit of $79 million.

And Netflix plans to bow service in Holland by the end of the year, furthering expansion costs that must be minimized elsewhere in the business such as packaged media.

Yet, when asked during Netflix’s inaugural live video webcast July 22 about management’s apparent indifference toward disc rentals, CEO Reed Hastings — as usual — shrugged off concern. He reiterated that 7.5 million subscribers opt for packaged media from Netflix, which he said carries any conceivable title worth renting — more so than SVOD.

In their letter to shareholders, Hastings and CFO David Wells wrote, “The world is moving from linear TV to Internet TV, and Netflix is leading that evolution.”

And that may be true. But until it gets there, Netflix would be wise not to ignore its by-mail disc roots.

“The company’s lack of concern about declining DVD subscribers is baffling, and management optimism about contribution profit from domestic streaming growth is misguided,” Pachter wrote in a July 23 note.
 

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4K Should Be the ‘New Normal’

Sony XBR 4K TV

There’s an old saying: Once bitten, twice shy.

I hope that doesn’t apply to the home entertainment business.

Yes, we got burned pretty badly on 3D for the home, which sputtered and ultimately failed — not so much because consumer demand wasn’t there but because consumer demand wasn’t great enough for people to put up with all the hassles of actually watching movies on 3D in their home.

The blame for that, as I’ve written about previously, rests squarely on the shoulders of the consumer electronics industry, which rushed out a parade of incompatible formats with constantly changing specs. They also tried to sell the public on the notion of high-priced glasses that run on batteries — an expensive, arduous proposition no one could quite grasp, given the simplicity of the cheap plastic glasses handed out in theaters.

But the 3D-for-the-home debacle is no excuse to sit on our hands and watch the 4K juggernaut take off with no one from our industry on board. As one reader, a veteran video retailer with whom I’ve corresponded off and on for the better part of 20 years, said in a recent email, “If you have not see the 4K sets … you should. They are the real deal. … I was blown away. If you don’t want one, it’s because you haven’t seen one.”

I’ll admit, when 4K first came on the market I was skeptical, since for all these years we’ve been led to believe that high-definition in its purest form — 1080p — was the clearest picture you could possibly imagine. Heck, that was the whole premise for Blu-ray Disc: DVD, as good as it looked on our old TVs, was no match for the new breed of thin high-definition widescreens that hit the market like a clap of thunder in the middle 2000s. Thanks to high-definition, you could see every pore, every freckle, on a human body; I remember when The Wizard of Oz was restored and issued on Blu-ray Disc the picture was so clear technicians had to remove the suddenly visible strings holding up the flying monkeys, while Dorothy’s unblemished face all of a sudden looked much more like that of a normal teenager.

But as my friend, Dan Crider, writes, 4K is the real deal. It’s the new normal in movie theaters, and as of last month consumers could finally buy 4K TVs for less than $1,000.

Amazon is already selling a 4K “Ultra HD Media Player” from Sony for $700. The device has 2 terrabytes of internal storage and comes preloaded with 10 4K movies, as well as the capability of using the soon-to-be-launched 4K Media Streaming Service, which will allow consumers to “rent” 4K movies for $7.99 or buy them for $29.99. The size of the movie files is surprisingly small, thanks to revved-up compression technology from a company called EyeIO.

As Crider notes in his email to me, “20 to 50GB is very doable. For starters, it fits on a standard two-layer Blu-ray Disc. Even at 100GB, three-layer BDXL discs can accommodate them, so there is no need for a new format.”

I know packaged media is passé and old school, but despite the bruising format war when high-definition first burst on the scene in 2006 it can be argued that Blu-ray Disc extended the lifespan of the physical disc by at least 10 years.

4K could be another life-extender — but we have to take action and soon.

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