Alarm bells come too late for Sony Pictures

The memo Sony Pictures co-chiefs Michael Lynton and Amy Pascal sent to employees Monday announcing massive layoffs, most of which will fall in the home entertainment and IT divisions, obviously wasn’t meant to be made public. But it’s fitting that it was leaked when it was, the same day that Bernstein Research analysts Michael Nathanson and Peter Choi published what amounted to an obituary for packaged media as a profit driver for Hollywood.

According to Bernstein:

  • For 2009-2012, we [previously] forecast overall U.S. home entertainment industry revenues to decline at a -2.1% CAGR. This underscores the mature nature of the industry, plus the importance of share gains for individual players. Over this time frame, aggregate operating profit declines of low single digits are also expected.
  • Now one year later, looking at the cold hard facts of 2009, retail spending on sell-through DVDs and Blu-Ray discs dropped by -18% while rental of these products actually increased by 4%. As a result, the sell-through of physical discs declined from 63% of the market to 57%.
  • This massive change in behavior continues to have negative implications for studio profitability as every home video executive would rather book the $16 of profit contribution per transaction from selling a disc vs. the $3.50 to $1.40 per disc profit contribution from rental.
  • [snip]
  • Our analysis also shows that the Blu-Ray format is having a more modest acceptance rate that traditional DVD. In 2009, three years after its introduction, Blu-Ray’s penetration of TV households stood at 4.4%, compared to 13.0% for DVDs in 2000. We also find that Blu-Ray [sic] has seen lower numbers of titles shipped per converted household relative to DVD. We don’t see Blu-Ray stemming the decline of physical sales. Read More »

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.

Blockbuster: Closed for renovation

It’s long been clear that there were too many video stores in America for anyone’s good. In the go-go years of the early 1990s, national chains like Blockbuster, Hollywood Video and Movie Gallery were adding stores at a clip of nearly one a day, each. Regional chains and independent operators expanded as well, until there were something like 10-15,000 video superstores in the country and probably twice that number of stores overall.

The numbers back then were compelling. Video stores were considered good tenants by strip-mall devlopers, stores ramped up quickly and threw off enough cash that much of the expansion could be financed internally. In addition to absolute growth in the market, the national chains could easily take share from incumbents when they entered a market, by virtue of their broader and deeper selection of titles, preferable locations and greater marketing clout. Read More »

Scared hens in the Fox house

Somewhere, Tom Freston is laughing.

murdochRemember when News Corp. was supposed to have figured out this New Media thing way better than the other media empires, and Sumner Redstone was firing Freston for letting Rupert Murdoch snare MySpace? These days, not so much. New Corp., in fact, appears to be getting a bit panicky over the whole New Media thing.

Yesterday, the company announced pretty ugly second-quarter earnings (fiscal Q4), low-lighted by a $403 million impairment charge against Fox Interactive Media, which consists primarily of MySpace, as well as a $228 million “restructuring” charge due mostly to layoffs as MySpace. That’s $631 million in charges for the same “prize” News Corp. snatched away from Viacom for $580 million in 2006.

In the earnings call, Murdoch declared that he intends to start charging people to read all News Corp. newspaper content online, from the Wall Street Journal  to the Page Three girls in the Sun, a sure sign that the company really doesn’t know what it’s doing online. Unless there’s some other strategy for leveraging the network economics of the Internet Murdoch hasn’t told us about yet, simply throwing up paywalls around everything isn’t a business plan. It’s taking your marbles and going home.page3girls

On the same call, newly appointed vice-chair and COO Chase Carey took a whack at Redbox, the $1 a night DVD rental kiosk outfit owned by Coinstar. “I think making our content available for $1 grossly undervalues it,” Carey said.

According to the Journal (sub. required, natch), Fox has told DVD wholesalers like Ingram Entertainment and VPD not to sell its movies to Redbox until 30 days after their initial release, the same anti-competitive-ish stunt Universal pulled earlier this year.

The fact that News Corp.’s No. 2 is spending his time worrying about dollar-a-night rentals tells you all you need to know about how far the studio is from figuring out to respond strategically to precipitously declining DVD sales.

If I were Carey (or Fox video head Mike Dunn) I’d be worrying about why Blu-ray, which Fox championed, hasn’t arrested the massive outflow of consumer dollars from the packaged media business. And I’d be focusing on how to structure my deal with Netflix before it finishes the job of remaking the online video-on-demand business into a non-transactional subscription business and Reed Hastings ends up with all the leverage, rather than risking litigation over my deal with Redbox. The DVD business is term-limited. Getting digital distribution right now will do a lot more for earnings in the long run than bashing a few kiosks to make yourself feel good.

Petulance is not a strategy.