October, 2009

Coming full circle on video rentals

I have covered the home video industry for as long as it’s been an industry. And it never ceases to amaze me the lengths to which the Hollywood studios will go to try to deny the reality of consumer demand. The latest case in point: their scheme to stop the shift in consumer spending from DVD purchases to DVD rentals by carving out a sales-only window before movies would be widely available for rental.

Since the studios can’t legally bar retailers from renting the “sales-only” copies (the First Sale Doctrine, and all that) they would have buy the rental outfits off, presumably by offering them a lower wholesale price for DVDs if the retailers agree to delay the rental window. In his third-quarter earnings call last week, Netflix CEO Reed Hastings suggested the DVD-by-mail service might agree to go along.

“If we can agree on low-enough pricing, delayed rental could potentially increase profits for everyone,” Hastings said.

If Netflix were to go along, it wouldn’t be hard to imagine Blockbuster getting on board as well; it could use the earnings boost even more than Netflix could.  The trickiest case would be kiosk operator Redbox, which has been growing rapidly on the strength of dollar-a-night rentals, much to the chagrin of the studios. Relations are tense between Redbox and Hollywood, so a deal might be tough to negotiate. But it might be a way to resolved the litigation between the kiosk company and the studios.

Independent retailers would probably balk at the deal, seeing instead an opportunity to grab some market share back from the big boys by offering earlier rentals. But Netflix, Blockbuster and Redbox, along with perhaps a few other large chains (Movie Gallery/Hollywood) have enough market share among them at this point that the system might basically work.

Ironically, creating a protected sales window would completely invert standard industry practice back in the VHS days, when the studios maintained a protected rental window by pricing videocassettes at an un-sellable $99, before knocking the price down to twenty bucks or so three to six months later. But it would be no more consumer-friendly.

How about this, studios: Price all DVDs at $10, out of the gate, and make them available in 70,000 supermarket outlets nationwide. If consumers still wanted to rent, they could rent. But how many of those supermarkets would be putting in Redbox kiosks if they were simultaneously selling cassettes for $8.99, on sale? I’d guess about none.

You want to sell a gussied-up version with a bunch of extras and try to get $15 for it as a second SKU, go ahead. Knock yourselves out. Maybe you could get that for the Blu-ray, too. But a $10 base price would triple (or greater the size of the retail base for DVDs and make it easier for consumers to spend their money on packaged movies than on other entertainment options.

OMGZ! OUR MARGINS, I can hear the cries from Century City to Burbank. But what’s the point of protecting your margins if  you’re driving consumers out of the category? Why would you assume, at a time when aggregate consumer spending on DVDs is in free-fall, that you could convert any large number of Redbox renters into buyers at $15 – $25 a pop by actively frustrating their ability to rent?

The studios have been mis-pricing DVDs for a long time — from long before consumer spending started to decline — just as they’ve completely mismanaged the Blu-ray roll out (to say nothing of the high-def format battle that preceded it). They’re now paying the price for that mismanagement. Doubling-down on the same strategy isn’t going to fix the problem.

Paying for Hulu is not about Hulu

The Twitter- and blogosphere got a case of the vapors yesterday over a report that News Corp. plans to throw up a pay wall around Hulu. Speaking at an industry event, newly installed News. Corp. president Chase Carey said, “I think a free model is a very difficult way to capture the value of our content. I think what we need to do is deliver that content to consumers in a way where they will appreciate the value.” In case that wasn’t clear enough, he added, “Hulu concurseliza_dushku_hulu with that, it needs to evolve to have a meaningful subscription model as part of its business.”

OMGZ! came the response from Hulu tweeters. “Sell out,” cried the bloggers. Guardian blogger Roy Greenslade saw it as part of a Rupert Murdoch paid-content propaganda campaign.

Maybe. But I suspect it has more to do with cable retransmission consent for Fox than it does with pros and cons of free content. While much of the blogosphere focused on Carey’s Hulu comments, John Ourand of SportsBusiness Daily caught the real news in his report from the same industry event: 

Carey warned that retransmission consent battles may be brewing as his company tries to convince cable operators to start paying to carry the Fox broadcast channel. “It’s not about trying to pick a fight,” Carey said… “It’s about trying to get our business to a place where it can be a healthy, long-term business.” In the past, Fox has used retransmission consent rules to help launch its cable channels, like FX and Fuel. Now, broadcasters want to get paid for their broadcast networks so they can better compete with cable networks. Carey specifically singled out sports rights as “a real challenge,” adding that “it’s not rocket science” to figure out how broadcasters can compete with cable networks. “It starts with making dual revenue.

If you’re looking to start charging cable operators retransmission fees for your free broadcast content, you really can’t be giving the content away for free online.

As Deutsche Bank analyst Doug Mitchelson pointed out in a research note last week:

chase-careyFox is beginning to negotiate its retrans deals including, we believe, one with a top-5 cable operator right now. We expect Fox is asking for $1+/sub/mo given Chase Carey, Newscorp COO and former DirecTV CEO, knows how crucial broadcast carriage is to pay TV operators, especially sports programming (like the World Series), and also given Fox’s success getting about $0.65 for carriage of Fox News. Newscorp certainly has the balance sheet to tolerate ad losses if it has to pull its channel for some time.


In exchange for significant affiliate fees, we would expect broadcasters would dramatically expand VOD availability and place greater limitations on free internet availability of their shows. Ultimately, we expect the networks and TV stations to convert to hybrid local/national cable networks (think RSNs paired with programming from a national feed), and then sell or give back the local broadcast spectrum. With 100m pay TV households, $1/sub/mo would be $1.2b of revenue and EBITDA per network per year that could be shared among the networks and station groups (80/20?), making broadcast a viable business model.

 That would be a much bigger pay-off to News Corp. than anything it’s likely to see from Hulu, with or without a pay wall.


One of the more interesting subtexts to the battle between Disney and Sony Pictures over the work of the Digital Entertainment Content Ecosystem consortium (DECE) is the degree to which the studios have come to resemble each other. Sony Pictures has long been a captive of Sony Electronics. Decisions on what technologies or which formats to support are not made independently by Sony Pictures; they’re made by Sony Corp. in accordance with Sony Electronics’ technology or device strategy. That’s why Sony bought Columbia Pictures and CBS Records, after all: to be sure it had content to feed its devices.

steve_jobs_mouseketeerIn Disney’s rejection of DECE we see a similar dynamic at work with respect to its technology master, Apple. The parallel isn’t exact; Apple doesn’t literally own Disney. But Steve Jobs is Disney’s largest individual shareholder and sits on its board of directors. He obviously has a loud voice on what technologies and which formats Disney supports.

How do I know Apple is a factor in Disney’s DECE stance? I don’t have direct knowledge of it, of course. And I’m sure Disney executives would sputter and fume at the allegation. What makes it a reasonable conclusion, I think, is that there is no obvious or compelling reason for Disney not to support DECE, at least officially, if not enthusiastically.

I can see lots of reasons to be skeptical of DECE. It’s already taking too long to produce results and it’s likely to require so many compromises as to be only marginally useful at best. But I don’t see a big downside for a studio in keeping a hand in. It could, of course, turn out to be a waste of time, but the studios waste time on inter-industry groups all the time. Disney Home Entertainment president Bob Chapek has, himself, served as chairman of the Digital Entertainment Group, for instance, which is a complete waste of time, to say nothing of the $10,000 per company in dues. It’s possible the work of DECE could lead to something useful, which can’t be said of the work of DEG. I don’t see the downside to a studio from being involved, or the upside in trying to scuttle it.

Apple’s opposition to DECE, on the other hand, makes perfect sense. Apple has never believed in device interoperability, unless they’re all Apple devices. And it has done very well by following that strategy, as its Q3 earnings report this week makes clear. But a large part of Apple’s success in the device business has also come at the expense of content owners, as the music companies can explain (Disney, of course, was the first studio to sign a deal with iTunes). DECE’s success would be Apple’s failure. But it’s hard to see how it would harm Disney, were it not for Steve Jobs’ interest.

comcast-nbc-monopolyAs is happens, another major studio, NBC Universal, could soon come under the control of another technology company, Comcast. Comcast’s interest comes at a time of technological upheaval in the pay-TV business, and Comcast officials have made no secret of their desire to control the technological exploitation of NBC’s content assets, particularly its cable networks.

Should a Comcast/NBC deal come to pass, three of the six major studios will be controlled — if not literally owned — by technology companies with distinct agendas regarding the evolution of media business. Rather than playing kingmaker among technology providers as in the past, the studios are becoming the pawns.

Dear Sony, F@%K You, Love, Apple

Fascinating story in the Wall Street Journal this morning about a new digital delivery system for movies being pushed by Disney. Fascinating not just for the ostensible news it contained — Disney hopes to replace lost DVD revenue with a new system  for letting consumers access movies across multiple digital platforms called Keychest –as for the timing of its appearance and its sourcing. Clearly, this was a torpedo sent by Apple and aimed squarely at Sony.

The backstory: Sony is the driving force behind the Digital Entertainment Content Ecosystem (DECE), a consortium comprised of five major studios and several technology company, and chaired by Sony Pictures exec, Mitch Singer. DECE’s goal is to create a system to, well, let consumer access movies across multiple digital platforms. Though progress has been slow, work has continued. In fact, DECE principals are scheduled to meet Thursday in Seoul, Korea, for the next round of talks. When the WSJ story appeared here on Wednesday, of course, it was already Thursday in Seoul.

grenadeAmong the companies conspicuously missing from the DECE consortium are Apple and Disney. Apple, in particular, has shown no interest in cooperating with an industry-wide standard, perferring to go it alone when it comes to digital delivery. And Steve Jobs, of course, is Disney’s largest individual shareholder.

It’s pretty obvious that the story in the Journal  was planted by Apple and Disney and intended to blow up any progress DECE was thinking of making over in Seoul this week. How do we know Apple was involved? Because Apple went out of its way to make sure people knew where the story was coming from.

 According to the story, “people in the entertainment industry say it would be reasonable to infer that Apple would cooperate with” Disney’s initiative.  By “people in the entertainment industry” it would be reasonable to infer the reporter means “people at Disney” and possibly even people at Apple. As a reporter who has covered the entertainment and technology industries for many years, I can assure you that Apple almost never, ever cooperates on stories like this, even on background. For that sentence to be in there, someone at Apple had to either provide it directly or give the green light to someone at Disney to pass it on to the Journal.

Oddly, Disney Home Entertainment chief Bob Chapek more or less gives the game away by admitting the studio doesn’t expect Keychest, “to deliver tangible financial results for five years.” Apart from being a stupid thing to say in the Wall Street Journal, it also telegraphs the strong likelihood that Keychest isn’t quite as ready for primetime as the planted story tries to make it appear.

Nope, this was a hand grenade, rolled into the meeting room in Seoul, to inflict maximum damage.

The coming battle over used e-books (Updated)

On Thursday, Google announced during the Frankfurt Book Fair that its long-planned e-commerce platform for digital books will launch by June 2010. Christened Google Editions, represents a major departure from most current e-book offerings in that it won’t be confined to any particular reading device or desktop viewing application. Instead, Google will cache users’ purchases in a “cloud library,” which can be accessed from anywhere using any device with a Web browser

“It will be a browser-based access,” Google Books’  Tom Turvey said.  “The way the e-book market will evolve is by accessing the book from anywhere, from an access point of view and also from a geographical point of view.”

home-bookstoreUsers will be able to search for e-books on Google Editions (and presumably be served ads) and then buy them from Google, directly from the publisher or from one of dozens of partner retailers. Turvey said he expects the majority of Google Editions customers will go to retail partners, not to Google, to make purchases. “We are a wholesaler. A book distributor,” he said.

Given Google’s general bent toward moving content and applications off the desktop (or device) and into the cloud, turning e-books into Web apps is a logical strategy (GigaOm Pro subscribers can read my take on Google’s overall e-book strategy here). But it’s one that represents more than simply competition for Amazon’s Kindle. Google Editions is going to raise a host of new questions about the nature of an e-book.

For instance: How long before Google or one of its partner retailers sets up a used e-book exchange on the platform?

Up to now, used e-books have not really been an issue. Kindle books, for instance, remain locked to device they were acquired on. If you want to give a copy of a Kindle book to a friend, you have to hand over the whole Kindle. Other services let you transfer your e-books to a limited number of devices but unless you had the foresight to register your friend’s computer as an authorized device you’re out of luck. Selling the e-book to a stranger would be even more problematic.

The issue is not limited to e-books, of course. Any piece of DRM-protected content faces the same limitation. And it has long been a source of some controversy. Under the so-called first sale doctrine (Section 109 of the Copyright Act), the owner of a physical book is entitled to do whatever she wants with that particular copy — short of making another copy — including giving it as a gift, loaning it to a friend or re-selling it to a stranger. Ditto a CD, or a DVD. In principle, the same is true of any “lawfully made copy,” including digital copies. As a practical technical matter, however, sending a digital copy to a friend involves making another copy of the file, something the first sale doctrine does not permit.

For years now, we’ve simply lived with the inherent tension between the first sale doctrine and the practical realities of digital reproduction, in part because its main commercial implications were largely limited to business–online resellers like iTunes, Amazon or CinemaNow–which could be manage-ably licensed by content owners. Individual consumers bent on sharing their digital files had plenty of unauthorized file-sharing networks to turn to.

Google Editions works on a very different principle from Kindle or iTunes, however. Instead of transferring a copy of a file at the time of purchase, Google Editions will cache the  copy on a server, which is then accessed remotely. “Giving” a copy to friend, therefore, or even selling it to a stranger, does not need to involve a subsequent file transfer and its concomitant reproduction. All that would need to happen is for the seller’s access to the cached copy be disabled and the buyer’s accessed enabled at the time of the transaction.

I can see the issue arising first within a licensed context such as a “gift exchange.” Some Google Editions retailer will create a system allowing users to purchase e-books as a gift for someone else. The buyer (gift-giver) would be able to use her account to give a friend access to an e-book via the recipient’s account.

Publishers will love the idea at first because it will increase sales of e-books. But at some point, someone will hit on the idea of an independent re-sale exchange. Users who have purchased and finished with an e-book would be able to make it available to other buyers based on the same simultaneous disable/enable mechanism as the gift exchange.

used-bookstorePublishers will like that a lot less because prices on the exchange will be lower than the prices set by publishers for the same title (it wouldn’t work otherwise). Readers will be drawn to lower prices on the exchange because digital files don’t degrade from wear and tear the way physical copies do: “used” copies are just as good and fresh as “new” copies. Sellers will see it as a way to recapture a portion of the original purchase price, having first extracted value from the e-book by reading it.

Publishers, of course, will respond that your original e-book “purchase” was not in fact an actual purchase of a copy; it was the purchase of a license to use the e-book in certain ways and not others. The terms of service you agreed to by clicking “I agree” will preclude any sort of unauthorized re-sale.

We’ll then have a neatly framed question, suitable for litigation: If a transaction walks like a purchase and quacks like a purchase, is it a purchase even if the vendor insists otherwise? It won’t be the first time the issue has come up (see Vernor v. Autodesk, among others). But a case involving e-books is likely to capture the imagination of the public more than cases involving computer software (where most of the previous  litigation has occurred) because of our deep cultural history with trade in used, rare and antiquarian books.

I give it six to 12 after the launch of Google Editions.

Update: Looks like 6-12 months may be too long a timetable. According to the NYTimes, the new Barnes & Noble Nook, “will permit readers to lend their digital books to friends and download books wirelessly.”

Neutrality on net neutrality is not an option

Continuing its campaignagainst the FCC’s planned net neutrality regulation, the Washington Post launched its new Post Tech blog Thursday with an interviewwith Carnegie Mellon computer science professor and net-neutrality skeptic,  David Farber. According to Farber:

[I]t’s very hard to define [“neutrality” and “reasonable network management”]. The problem here is everyone talks about reasonable network management, but if you look at it from a technical perspective, someone trying to build new ways of operating networks is going to sit there saying, “I wonder if this new brilliant idea is reasonable or not. And if I go through all the energy of implementing it and testing it, will someone in Washington say that that violates some reasonable network management criteria?”


It is also attacking a problem which doesn’t seem to exist. The one or two cases where things that I would say fall into network neutrality have been taken care of easily. The FCC looked at this and said “You aren’t doing things right, so let’s look at it.” Having a whole set of regulations for something you don’t understand hasn’t happened is sort of tricky.

comcast_fccFair enough as far as it goes. But as a practical legal and political matter we’re way past the point of debating whether we should or shouldn’t have net neutrality regulation. The question on the table in Washington is who’s going to write the rules: Congress, the FCC or the courts?  The issue for the ISPs is to pick their poison, because the status quo is not an option.

For starters, you have Comcast’s litigation against the FCC over the agency’s reliance on its informal Broadband Policy Statementto order Comcast last year not to throttle BitTorrent traffic over its network. At this point, Comcast should probably consider dropping the case because there’s no plausible outcome that could benefit the ISP. Should the DC Circuit Court rule that the FCC’s “principles” have no legal force, or that the agency overstepped its jurisdiction — technically a “win” for Comcast in a narrow legal sense — the key committee chairs on the Hill would almost certainly move quickly to give the FCC to “correct” the jurisdictional problem. The FCC, meanwhile, would simply have more incentive to conduct a formal rulemaking so it wouldn’t have to rely on legally dubious policy principles. Read More »

Asking the wrong questions on e-books

The New York Times published a story the other day asking,Will Books be Napsterized? It’s conclusion? Probably, now that e-book readers are going mainstream and file-hosting sites like RapidShare are making it easier than ever for people to post pirated e-books online (speaking on a network filtering panel at the Future of Music Coaltion Policy Summit in Washington on Monday, Daniel Klein of London-based cyber-security firm Detica Group gave it 12 months before RapidShare becomes the new Public Enemy No. 1 among copyright owners).

napster-logoWhile the article, written by Randall Stross, professor of business at San Jose State University, is never explicit as to what it means to be “Napsterized,” it’s pretty clear it is referring to the loss of legitimate e-book sales–and perhaps even hardcover sales–due to people downloading for free illicit electronic editions of books rather than paying for the licensed product–much as the recorded music industry has suffered a sharp decline in CD sales since the advent of Napster and other peer-to-peer file-sharing networks.

“We are seeing lots of online piracy activities across all kinds of books — pretty much every category is turning up,” said Ed McCoyd, an executive director at the [Association of American Publishers]. “What happens when 20 to 30 percent of book readers use digital as the primary mode of reading books? Piracy’s a big concern.”


We do know that people have been helping themselves to digital music without paying. When the music industry was “Napsterized” by free file-sharing, it suffered a blow from which it hasn’t recovered. Since music sales peaked in 1999, the value of the industry’s inflation-adjusted sales in the United States, even including sales from Apple’s highly successful iTunes Music Store, has dropped by more than half, according to the Recording Industry Association of America.

Read More »

Net neutrality is Comcastic! Or not.

The Media Wonk co-produced and moderated the panel discussion at the first Digital Breakfast DC event on Thursday and if you missed it, boy did you miss some first-class jaw-boning over net neutrality, fair use and the mysteries of HADOPI. Not to mention chance to practice your skills at balancing a bagel and fruit plate atop a cup of coffee with one hand, while handshaking and schmoozing with the other. There was some genuine talent in the room in that category, let me tell you.

fcc-sealOne person who was scheduled to be there but wasn’t was Rick Cotton, general counsel of NBC Universal. Cotton’s office sent word on Monday that he would likely have to cancel his planned trip to DC this week because, “something had come up,” back in NY so he wouldn’t be able to make the panel. They didn’t say what the “something” was but when the first reports of talks between GE and Comcast over a deal involving NBC broke Wednesday night two and two seemed to come together neatly to equal four (for the record, his office cautioned against putting two and two together).

While it was unfortunate that Rick couldn’t make it (thanks again to Michael O’Leary of the MPAA for stepping in at the last minute), if his absence was in fact related to the reported Comcast talks it at least was on topic. Among the issues discussed by the panel was the FCC’s recently announced plans to conduct a formal rule-making on net neutrality, and in particular chairman Julius Genachowski’s proposal that in enshrine a “principle of non-discrimination”: Read More »