Category: The Front Line

HBO, Showtime…and Netflix?

More bad news for DVDs. Netflix and Epix are discussing a five-year, $1B deal that would give Netflix exclusive rights to stream movies from Paramount, MGM, and Lions Gate as part of its ‘Watch It Now!’ service.

Netflix already has an arrangement in place with Starz to stream movies from Disney and Sony Pictures, so this deal could be a real momentum-generator for streaming. According to the terms of the discussions, Netflix would have access to these movies several months after they are released on DVD.

According to the LA Times story,  the agreement would also allow Paramount, Lionsgate and MGM to sell and rent their movies via digital stores such as Apple Inc.’s iTunes, something HBO doesn’t allow.

Epix has been struggling to become profitable and also operates a streaming video subscription service. Its CEO recently predicted that Epix would reach between 3 and 4 million homes this summer. In contrast, Netflix has over 15 million subscribers.

So, how does this arrangement threaten the DVD market? Simple. Movies with short tails (in and out of theaters quickly) depend on DVD sales and rentals over several months to make back their budgets and even turn a profit.

But a lot of those movies are impulse rentals, as there isn’t much demand for them. These films are often found in discount bins at retail stores and Blockbuster, several months after their release. (Disney’s The Sorcerer’s Apprentice, which has grossed $111 million worldwide in four weeks but had a production budget of $150 million, will depend heavily on packaged media sales and rentals and pay TV just to break even.)

So a subscriber to Netflix would probably be content to just wait a few months and catch up with these less-than-compelling titles online, if they haven’t already rented them for $1 a night at a Redbox kiosk.

What’s next for Netflix? I predict the service will eventually turn into a full-blown broadband TV network, creating and streaming its own original programming. With 15+ million viewers, that’s more than enough critical mass to pull it off. Netflix is already planning to stream TV shows, so why not develop its own content?

Of course, that will put Netflix at odds with traditional pay TV service providers, such as Comcast and Time Warner. And it may lead to more cord-cutting, a trend that that pay TV companies dismiss now, but is likely to cause some real financial pain in the near future.

Another real possibility is that one of the major Hollywood studios and media conglomerates will buy Netflix in the next two years. Don’t bet against it! That would be a strong defensive move against losing pay TV subscribers and would instantly make the purchaser the 800-pound gorilla in streaming.

No Fizz In The DVD Biz

If you needed more proof that the DVD business is declining, look no farther than today’s Scranton Times-Tribune story about more layoffs at Cinram’s optical disc replication plant.

The plant, located in Olyphant, Pennsylvania (near Scranton) was originally owned by Time Warner and operated as Warner Atlantic Media Operations (WAMO). Toronto-based Cinram International bought the facility from Time Warner in July of 2003. Peak employment was reached in 2005. Since then, the company has laid off 683 employees.

Today’s announcement states that an additional 310 employees will be let go by December, bringing employment to about one-fourth of what it was seven years ago. Cinram also announced it would cut loose 482 employees from a DVD distribution facility near Nashville, Tennessee.

The company lost a contract to replicate Warner Home Video DVDs this past July. Instead, Technicolor will replicate Warner DVDs at a facility near Guadalajara, Mexico.

Ironically, Cinram’s income from home video sales increased in the first quarter of 2010 by 6.6 percent to $240.6 million, but compact disc revenue dropped 14.5 percent to $31.7 million.

It’s apparent that distributors of packaged media have to cut costs drastically to fend off the threat of direct downloads and streaming, along with video on demand. So Cinram’s announcement wasn’t entirely a surprise.

The question now is how much longer Cinram can afford to keep the Olyphant facility in operation. The Warner Home Media contract represented 28% of Cinram’s annual revenue stream, and that will be difficult to replace.

Redbox: A “Blu-race” to the bottom?

Don’t look now, but Blu-ray is coming to your local Acme. Or Walgreens.

Redbox, the “buck-a-night” DVD rental company, will soon be stocking Blu-ray movies at the end of the checkout counter. And you can rent ’em for $1.50 a night.

Redbox stated in a recent press release that it would initially offer Blu-ray discs in 13,300 of its kiosks, expanding across its entire network of 23,000 kiosks by the fall. Each Redbox kiosk holds 630 discs , or about 200 movie titles.

Redbox is on a roll financially, according to a story in Media and Entertainment Daily. The company’s revenue stream grew by almost 44% Y-Y for the second quarter. And they’re getting most of that revenue at the expense of traditional brick-and-mortar video rental stores (read: Blockbuster).

NCR, another player in the DVD kiosk business with the Blockbuster Express brand, hasn’t announced yet when they will be adding Blu-ray discs to their lineup.

At $1.50 per night, it really doesn’t make sense to buy a Blu-ray disc of any movie. The typical BD release is priced around $25 retail, or 16 times the Redbox rental cost. Not that there will be a huge demand for BD movies out of the gate – while the best estimates from The Digital Entertainment Group (DEG) have market penetration of Blu-ray players, Blu-ray drives in PCs, and Blu-ray equipped consoles (like PlayStation 3) at 19.4 million homes so far, there’s simply no reliable way to know how many of those PS3 consoles are being used to watch Blu-ray movies.

To put things in perspective, Netflix has over 14 million customers now. Comcast has slightly more, as does DirecTV. And any subscribers to those services can access video on demand (VOD) or streaming, if their TV and/or set-top box is so equipped. (PlayStation 3 is, and can even stream from Netflix!)

Given that some BD players are now available for less than $100, this could be an incentive for families to finally try out the BD format. Or maybe they will put that PS3 console to work to watch recent releases like The Bounty Hunter or The Book of Eli in full1080p HD…that is, if they have a HDTV screen large enough, and of the correct resolution.

Of course, if the BD movie title they want isn’t available, they’ll probably just rent the red laser version for a buck and be done with it. Redbox is a convenience service, based on a low-cost impulse purchase decision. If the movie is for a kid’s party or to keep the children otherwise entertained, it makes no difference whether it is a conventional DVD or a blue laser disc.

The question is how many videophiles will make use of the Redbox service. My theater at home is set up for HD, with a 92-inch Da-Lite projection screen and Mitsubishi HC6000 projector. So I’m definitely interested in $1.50 BD rentals!

The only problem is, I’ve been watching so many time-shifted TV shows on my 42-inch 1080p plasma in my family room (plus the occasional red laser DVD-by-mail) that the theater hasn’t been used much lately. Picture quality from an OPPO DV983 upscaling DVD player is so good that it isn’t worth bothering with Blu-ray playback on that plasma screen. I should know better, you might say…but I do, and you can’t see much of a difference between the two formats. At least, nothing to nit-pick about. That’s how good the OPPO scaler is.

In a nutshell, this move by Redbox promises to deliver additional revenue to studios, but probably not as much as they would have liked. No one in Hollywood is happy about the bottom falling out of the DVD rental market, but what other choice do they have?

The question is whether enough customers will prefer the improved quality of a BD movie over red laser DVDs and Netflix streaming to justify Redbox’ additional costs in stocking Blu-ray movies. If this doesn’t help the format take off, then nothing will.

FiOS is coming! (Yawn…)

They’re here!

The big orange spools of fiber optic jackets. The rows of white utility trucks. The polycarbonate junction boxes sitting every few feet along the curb. The spray-painted lines and alien glyphs all over my lawn, and my neighbor’s lawns.

Yes, FiOS has finally made it to our neighborhood. After nearly six years of waiting, Verizon has hired an army of subcontractors to run fiber optic cables under our lawns and breach the once-impenetrable Comcast wall.

This is FiOS! This is Big! (Well, the spools certainly are!)

Thing is, some of my neighbors are kinda blase about the whole thing. And I am, too.

Here’s why: Verizon first wired up nearby Doylestown Borough in 2003-2004, back when most people had separate telephone and cable TV hookups and broadband access was starting to pick up steam. Repeated calls to Verizon about the availability of FiOS in our township brought the same results – “We’re negotiating with your township over the franchise fees.” Seems that, unlike every other township around Doylestown, our supervisors insisted that Verizon pay the same franchise fees that Comcast had, back in the day.

This, even though Verizon had successfully negotiated discounted franchise deals with most other townships in central Bucks County.

Finally, after years of haggling, our supervisors reached an accommodation with Verizon, who had already announced they would not build out their national FiOS infrastructure any further, due to the high labor/materials costs and challenging ROI environment. Fortunately, we already had the required fiber optic ‘drops’ sitting in a Verizon service cabinet at the corner of our development from six years ago.

A few things have changed along the way since 2004. First off, Comcast’s broadband speeds have picked up considerably, and their service is quite reliable. Secondly, I, along with some of my neighbors, dropped Verizon landline telephone service and consolidated everything into the ‘triple play’ option (broadband, phone, and cable TV). And the quality of phone service is much, much better than what I had with Verizon. (Other neighbors opted to install DirecTV dishes and forego any kind of cable connection.)

I’ve also got a CableCARD-enabled TiVo HD that I use constantly to time-shift programs, and it works very well. Not only that, there are numerous ‘in the clear’ digital TV channels present on my system that can be accessed by conventional TV sets without extra set-top boxes.

I saved myself about $40 a month with the consolidation. And have gotten pretty used to the high level of service. So maybe it’s understandable that I’m not in any hurry to change over to a new provider, even if their Internet speeds are supposedly faster (something that was definitely true back in 2004, but maybe not now).

And it doesn’t help when a Verizon contractor shows up at my door, asking me if he can disconnect my cable TV wiring so he can trace the underground line back to the house. Hell, no! Not while I’m reviewing artwork for a client project!

The wires are definitely here…unless they’re somewhere else.

And that’s another thing to consider. When you call Comcast for a service problem (something I haven’t had to do in over a year), a Comcast-trained service person shows up in a Comcast truck.

When you call Verizon, you may get a Verizon tech. Or, you may get a subcontractor, particularly if you have wiring issues.  There are numerous ‘installation disaster’ stories of subcontractors puncturing gas lines and shorting out electrical lines while installing FiOS connections in the central Bucks County area. That alone gives me pause about the whole ‘switch to FiOS’ thing.

Now, don’t get me wrong. I’m not a particularly big fan of Comcast, who seems to raise their rates at the drop of a hat.  And I wonder what Comcast’s pending acquisition of NBC Universal will mean for future monthly rates and access to content.

The fact that I could switch to FiOS at any time may be useful to me to get a better rate from Comcast, or hold the line on future rate increases.

But to be honest, the service I get right right now is very good. And it’s reliable. And I can troubleshoot most of it myself with my own test equipment. And I know a lot of the service and engineering folks at Big C. So I guess I’ll stick with Comcast for a while longer, while those Verizon contractors continue to tear up everyone’s lawns and finish pulling fiber to all the houses in the ‘hood. Then we’ll see how it’s working out for any of my neighbors who decide to make the switch.

Maybe it’s simply a case of dealing with the devil you know, versus the one you don’t know?

Saturday mail delivery and DVDs: Six – no, make that two degrees of separation

Two announcements in recent weeks spell big trouble in the future for DVD rentals.

Sales of movies and TV shows on DVDs have been declining steadily for the past five years, which is not good news for Hollywood. However, DVD rentals have held fast, slipping only a tad a couple of years ago, and then recovering as Redbox “buck-a-night” rental kiosks have spread all over the country’s grocery and drug stores.

The dominant player in DVD rentals is, of course, Netflix, who is implementing a multi-year strategy to wean customers away from polycarbonate discs and get them to stream movies instead over broadband connections.  By Netflix’ own reckoning, DVD rentals will peak by 2013, and then start a slow decline towards extinction by the end of the decade.

They may want to move that timetable up a bit. The U.S. Postal Service just announced a hike of 2 cents in the cost of first-class postage, to take effect early next year. According to today’s M&E Daily, “…Janney Capital media and entertainment analyst Tony Wible …estimated that a (Postal Service) rate hike could add between $18 million and $30 million to Netflix’s physical distribution expenses in 2011.” That’s a real game-changer!

In a New York Times article from July 2, Netflix’ DVD operations head Andrew Redich was quoted as saying, “Big rate increases will absolutely squash business and will absolutely slow growth for a company like Netflix.” No kidding! No wonder the company is lobbying for a five-day mail delivery schedule instead, a move which would save the Postal Service about $2B per year.

Make no mistake about it – Netflix wants to move away from physical disc distribution to streaming, which would eliminate a ton of back-office expenses and staffing problems. The Postal Service announcement will likely hasten that move, which is not good news for DVD or Blu-ray manufacturers and distributors.

The other bad news is, of course, Blockbuster’s continuing financial troubles. Here are the vital statistics: In 2009, Blockbuster recorded a net loss of $569.3 million based on annual revenue of $4.06 billion. For Q1 of 2010, it had a net loss of $65.4 million. And BB is carrying $895 million in debt on its books. Last week, the company was informed by the New York Stock Exchange that it would be delisted as its average share price had been under $1 for a 30-day period (Blockbuster was hovering around 18 – 20 cents per share at the end of last week).

As for long-term trends, Adams Media Research stated earlier this year that 2009 in-store spending on DVD movies declined to $3.3 billion, down $1 billion from 2008 and $5.2 billion from the brick-and-mortar movie store’s high water mark in 2001.  Not a pretty picture!

So – are we seeing the last days of the DVD? Probably not for a few more years. But it’s clear that consumers like the idea of streaming content instead of buying and renting physical discs. It’s a convenience thing! (We’ve had a Blockbuster By Mail copy of Julie and Julia sitting here for almost two months, still waiting to get a ’round toit’ so we can watch it. Maybe it’s a laziness thing, too.)

The Postal Service is in almost as bad a jam as Hollywood and Blockbuster. Look at all the documents and forms that can be sent via email now, instead of through snail mail. Electronic payments, e-funds deposits, PDFs, JPEGs, virtual catalogs, you name it – if it can be digitized or scanned, it can be sent over the Internet, stamps be damned. How much longer before retail stores move entirely to electronic coupons? The ‘green’ movement is pushing more retailers to adopt online catalog and brochure formats, so more and more snail mail is just junk nowadays.

Maybe Hollywood can work with the Post Office on a movie about all this (to be streamed by Netflix, of course). They could call it, The Postman Never Rings At All. Or maybe, First Class 2: This Time, It’s 46 Cents.

And maybe we should just save that copy of Julie and Julia, instead of sending it back. It could be a collector’s item before long…