Saturday, August 20, 2011

Hewlett-Packard - A Lesson In Why A Strategy Must Respect The Brand

First of all, it's nice to be back online.  I took several weeks off of blogging and tweeting to recharge my battery and simply observe for a while.  Time well spent.  I'll probably start getting back into things a little slowly.  Here's my first thought:

Hewlett-Packard's stock price suffered an historical drop this week.  I suppose they could point to general economic uncertainty, but no one is even trying to make that argument.  This is all about HP's strategy -- make that HP's lack of strategy.

This is not an "I told you so" moment, but back on March 15, I already had some serious concerns.  It was clear to me that Leo Apotheker did not have a good feel for the company.  Again, as I said back then, this is not an attack on Mr. Apotheker.  I'm sure he is a brilliant guy and talented businessman.  You don't get to that level without doing a lot of things right.

However, this is a lesson in why it is critical to understand your brand when you plan your strategy.  Every company is different, and that means that a good strategy for one firm might be a terrible strategy for another seemingly similar firm.  Mr. Apotheker is spending all of his time surveying the market for opportunities, and not enough time understanding HP and how it fits into that market.

I'm not going to pretend to have all of the answers for HP (or any answers, for that matter).  But I do know that the HP brand has decades of history as a symbol of innovation, quality and prestige.  It used to mean something when you spent extra money to purchase an HP calculator.  It added up numbers the same as the cheap brand, but it showed that you cared about quality.

I don't think that history is lost (although the brand has certainly been damaged -- first by some of Carly Fiorina's decisions, and now by Leo Apotheker's).  But a history of quality and prestige has no value in commodity offerings.  To capitalize on a history of quality, you need to do something special -- not jump into the same business models as your competitors.

Let me take a couple of painful positions which actually seem obvious to me.  HP should never have fired Mark Hurd.  I don't know what they were thinking.  He was clearly a talented leader who understood the company.  He made some mistakes, but they could have rehabilitated his reputation without looking like they were condoning his behavior.  Unfortunately, I don't think they can remedy that mistake now.  Hurd has a great new job and he probably doesn't want HP back in its current condition.

The other obvious point is that Leo Apotheker is the wrong guy to run this company.  I'm sure there is another good job for him out there, but he is a really bad fit for HP.  I'm sure this is not news to the HP Board, but the sooner they find a replacement, the better.  And who should that be?  Some talented executive who is focused on innovation and really understands the HP brand.  Or maybe they should just sell it to Google.

Saturday, June 25, 2011

New Media Isn't New Anymore, But It's Definitely Different

I can't believe it's been several weeks since I posted.  Some periods in our lives are like that.  We get really busy and time flies by.  Technology is definitely changing the pace of our lives, including how we use media.  It's an impact that all of us in the entertainment business need to understand.

I went to a great program this week at the Screen Actors Guild.  It was a discussion of the New Media business, how people are starting to make real money at it and where it's going.  The first point the panel made is that there is no longer a "New Media" business -- it is just the "Media" business.  Online and mobile content are important sources of entertainment and information for a huge portion of the population.  It's not the fringe anymore, it's the mainstream.

What do content creators need to know in order to successfully participate?  Cindi Rice of Epic Level Entertainment, a very sharp digital media producer, pointed out that the ideal length for an online program now seems to be between 2 and 6 minutes.  This is a very revealing and key piece of information.  In the online media environment, why is the length of a story so much shorter than the 90 minutes we spend in a theater, or the 30 to 60 minutes of a television program?

First, the Internet is a vast universe of content with no real limits, and it's expanding at a mind-boggling pace. Ready for this statistic?  There are now 48 hours of video uploaded to YouTube every minute.  Read that again and think about it.  That is only one website (albeit the largest), and that is every minute.  For all purposes, all of us now have an endless number of online media choices.  We could watch videos 24 hours per day, and we'd only see 1/2880 of what is placed on YouTube.  For all intents and purposes, the choices are infinite.

When you are at the world's biggest buffet, you take smaller portions of each dish because you want to try some of everything before you get filled up.  A bite of this, a taste of that.  That is what the online media environment is like -- people only have so much time, and there are an infinite number of choices.  Given that paradigm, it's an achievement to hold anyone's attention for even 2 to 6 minutes.

Another reason that online stories are shorter might be the way we use digital media.  For many of us, digital media is not really something we do so much as something to fill time between the things we do.  It's the halftime show.  It's the master of ceremonies making a couple jokes before he brings up the next act.  It's like the previews before the movie or the funny ads in between acts of a TV show.  Digital media gives us little bits of entertainment and information that keep us energized before we leave for work or head out to that next appointment.  When you look at it like that, a 2 to 6 minute story is just about the right length.  2 or 3 of those is a nice coffee break, and then it's back to work.

Admittedly, that is the perspective of someone who is older than the typical YouTube user.  I asked my 16-year old son about his online watching habits.  It is a little more of a real activity for him.  He likes to stay abreast of certain video series that he is following.  But he doesn't want to spend more than a few minutes on any one video because he wants to get on to the others.  If he really likes something, he'll go back and watch it again -- maybe several times.  Younger media consumers are perhaps simply becoming used to a faster pace.  They take their entertainment a bite at a time instead of by the plateful.

As content creators, what does this mean for us?  Everyone still likes a good story, but each medium is appropriate for its own type of story.  A complex story should be told in a novel or a film.  A nice three-act story works in a play or a TV show.  In the digital realm, it's all about one good, fast act.  Set it up, deliver the punchline and move on.

As Marshall McLuhan noted so many years ago. the medium is still the message.  And when the medium is digital, that message should be about 2 to 6 minutes long.

Monday, May 16, 2011

Mobile Convergence: The Single Device Solution

Earlier this month, Nielsen released the results of a study that shows consumers moving towards tablet devices, and away from laptops and eReaders.  I commented at the time that this isn't news, but it is an important trend that should not be ignored.

In a recent interview, Jeff Bezos wouldn't confirm that Amazon is going to release its own tablet, but he didn't deny it either.  He did indicate that it wouldn't replace the Kindle, but I don't think I believe that.  He might say that now, but ultimately it won't make sense to sell a device that is great for reading and watching videos and playing games and listening to music and writing documents and drawing pictures, etc etc., and then sell another device that is just for reading.  At least, that makes no sense to me.

The bottom line on this is that consumers want to minimize the number of devices they own and use.  They want things to be simple, but comprehensive.  An iPad or other tablet can do most everything that a laptop, an eReader and an MP3 player can do, and a lot more.  iPad's will eventually work as Bluetooth mobile phones, as well.  I think the only reason they don't do that now is because Verizon & AT&T wouldn't support that model, but eventually they'll have to.

That's what consumers want.  If I can carry one device that literally does everything I need in terms of media and communication, and it weighs a little over a pound with excellent battery life, my Nook will be on eBay in a heartbeat, and my laptop won't leave my house.  And I love my Blackberry, but I'd probably be willing to sideline that, as well.

And all of you will do the same thing.  We are heading for a single device mobile solution.  There will be some resistance along the way (as there always is), but the trend is already undeniably clear.

Saturday, May 14, 2011

How Do You Succeed In The Entertainment Business? Basic Economics

You learned everything you need to know about success in the entertainment industry the first two weeks of your junior year in high school.

About 7 months ago, I wrote a blog post about how to capitalize on emerging opportunities in the entertainment industry.  It turned out to be one of my more popular posts, and as I sit here 7 months later, I think I stand by everything I said.  Things are going about like we expected they would.

Based on that temporary success, I thought I would revisit the topic from another perspective.  I gave it a lot of thought (about 10 minutes or so) and I think success in today's media business is simply a function of  basic economics.

I am not an economist, but from what I can tell, there is one essential rule in economics from which everything else springs -- supply and demand.  The value of anything moves roughly in sync with demand for that item, and roughly inverse to the supply.

Here's one example: In the media business, the Internet provides an infinite number of channels to distribute information.  Therefore, owning a website has virtually no value by itself.  Everyone has a website.  But having a website that is one of very few channels to highly desired content is very valuable.  High demand + limited supply = high value.

In specific terms, look at the daily news.  You can't copyright the news.  Anyone who wants to report a story can report it.  There are essentially an infinite number of places to get news, and therefore it has little value.  Studies confirm that most consumers are not interested in paying for online news.

Mobile data provides an example of the other side of the coin.  As millions of iPads and smartphones are being sold, there is a massive increase in demand for mobile content.  A lot of us use free WiFi (like at Starbucks, where I'm sitting right now as I write this on my laptop) to get content.  But the mobility of the new devices has greatly increased the demand for anytime, anywhere access -- today, that means access to a cellular system.

In most markets, there are only one or two cellular networks.  That means the demand for access to those networks is rapidly increasing and the supply is limited.  Consequently, Verizon and AT&T have stopped offering programs with unlimited volume and they are charging for every kilobyte of data that runs through their systems.  And as people download or stream loads of HD content on to their iPads, there are a whole lot of kilobytes moving through the air.

So what's the right strategy?  None of us have the money or proper licenses to build a cellular network.  How do we get in a business that takes advantage of Economics 101?  The answer is to do something special and attractive.

All of us have the ability to create an endless amount of content -- but all content is not the same.  Strive to do something that's truly unique.   That handles the supply side of the equation -- the essence of true creativity is that it inherently limits the supply of what is created.  

On the other side, make sure you create something that will attract an audience.  Understand who you are creating for and what they really like.  If you can do that, then there will be a demand for what you create.  The higher the demand, the more valuable the product.

That's it -- it is truly that simple.  Perhaps so simple that you're questioning the value of the advice.  Is it worth stating the obvious?  I think it is.  Some of us get so caught up in trying to create intricate get-rich schemes, that we lose sight of the obvious.  Just find an audience and give them what they want in a unique way.  That's your best path to success.

Now, if you want to talk about financing films with a combination of two-tiered equity, mezzanine lenders and tax credits, that's a little more complicated.  Maybe we'll tackle that one next time....or not.

Wednesday, May 11, 2011

"May You Live In Interesting Times..."

The Challenges of Deal-Making During A Digital Revolution

Clearly we live in interesting times; that's not news to anyone.  But being a lawyer, agent, executive or other deal-maker in the entertainment business over the past few years has been especially challenging. In addition to the economic downturn, many challenges are arising from the blurring of lines between the various methods of content distribution.

For instance, there used to be a clear distinction between home video rights and broadcast rights.  Making those deals was fairly easy.  Everyone understood what was being sold, and we just had to argue about the price.  The studios got two checks, and both the DVD stores and the networks made money.  Everyone was happy.

Then, along came downloads, streaming and mobile and all of the old definitions went out the window.  It's like we're all speaking some new foreign language. As a result, deal-making is not so easy, and it's harder to keep everyone happy..

Let's look at an example.  I make a movie.  I sell the home video rights to Netflix, and they stream it down consumers' cable connections onto their TV's. I also sell premium cable rights to HBO, who puts the film on its HBO On Demand service and streams it down the same cable onto the same TV's.  From the consumer's standpoint, it's the same process.  Push the button and watch the movie on your big screen from your favorite chair.  They don't really care how it gets there; they just want high-quality video and sound, delivered at the best price.

But for HBO or Netflix, this new paradigm often represents unexpected competition - especially when both options are available within a relatively short time period (or even contemporaneously).  And it doesn't help that every large Internet player is suddenly in the digital distribution business.  Competition is indeed becoming fierce.

For the most part, these potential conflicts are still being managed pretty well.  Most deals are kept within distribution windows that limit head-to-head competition between similar methodologies.   However, as technology continues to advance, it is getting more difficult. The windows are getting shorter and sometimes rights are being expanded in unexpected ways.

For example, Time Warner and Cablevision both recently initiated services which allow consumers to use their iPad or other tablet as a mobile television.  The studios take the position that this is not allowed under the existing licenses.  They claim that any viewing of content on an iPad is a part of the mobile rights.  They need to maintain that stance in order to sell mobile rights as a separate window.  Who is right?  As is so often the case these days, it's unclear.  There are likely good arguments on both sides.

The bottom line is that a serious struggle of competing interests now exists.  The studios want to parse the rights into as many windows and revenue streams as possible, and exploit them all within a fairly tight time frame.  Exhibition companies want to have as much time as possible to reach as many consumers as possible without being hampered by obsolete definitions that cause their rights to lose value with each technological shift.  Consumers just want to watch the movie on whatever device suits them without paying extra.  And us lawyers are supposed to write contracts that make it all work smoothly -- even years down the road when everything has changed again.  (Have I mentioned that my work has become really challenging lately?)

The guys who might have the best idea run a new company called Big Air Studios. I heard the CEO, Michael Arrieta, speak at a lunch today.  Very sharp guy.  Big Air is a group of experienced executives and producers who are focused on distributing content by every possible means and through every possible device. Their philosophy seems to be to give consumers what they want and then figure out how to make money at it.  I like that.  I don't think anyone ever went broke making their customers happy.

These are indeed interesting times.  As challenging as it makes my work, I wouldn't have it any other way.  I love progress and change.  Honestly, I can't wait to see what happens next...

Saturday, April 23, 2011

The Clouds Are Gathering

As Distribution Moves To The "Clouds," How Will It Change Our Business?

In the wake of announcements and presentations at the NAB convention earlier this month, it has become clear that content management is moving to the clouds.  Microsoft, Cisco, IBM, Verizon, HP and others are all aggressively pursuing the development of cloud-based media management systems.  These companies are already pitching broadcasters and other content-owners on the merits of their respective cloud-based services.  So it's not too soon to ask the relevant question: "What are the implications of cloud-based content management for the entertainment industry?"

Let's start by agreeing on what we're talking about.  Cloud-based content services mean that the master copies of a large number of programs owned by various parties are all stored on massive servers operated by technology companies.  All of this content is accessed (whether for purposes of rental, purchase, streaming or download) directly through an interface operated by the third party technology provider.  Each content-owner's portal might be branded differently, but they will all probably operate in much the same way.

The reasoning for moving content to these types of services is pretty logical.   As more content is being delivered through digital streaming and downloads, individual content-owners and distributors will not have the internal resources to store, deliver and manage the greatly increased volume of traffic.  It would require huge amounts of storage and large "pipelines" to handle the fast movement of millions of large files.  Further, by outsourcing the process to technology specialists, the cost of programming and maintaining  a complex software interface could be amortized and shared among many companies.

Economically, it makes perfect sense.  Outsourcing incrementally increasing expenses which are outside of a company's core capability is generally an intelligent strategy.  So, is there a downside?  Perhaps.

I have never forgotten a discussion I had with Regis McKenna several years ago at CES.  He emphasized to me that the user experience is generally the single most important factor in the success or failure of any technology.  The reason that Apple products (and Netflix and Nintendo and Xbox and others) succeed is because they are fun and easy to use.  Successful technology products don't generally do more than their competitors; they just do it in a way that people like.

Applying this thought to cloud-based content distribution systems, I think that content-owners could lose much of their ability to customize the user experience.  If every owner and vendor of content looks and functions in essentially the same way, then the only differentiating factors are the actual programs and the prices.

Think of it this way. What if every store in a mall looked exactly the same, except it carried slightly different merchandise at slightly different prices?  No customized shopping experiences; just a different name on the door.  It would be very difficult to position your brand as a premium brand if you had no way to give customers a unique experience.  That could become a problem if all content distribution is controlled by a handful of companies.

When you commoditize anything, then price wars develop and margins go down.  The money content-owners save through outsourcing might not make it to the bottom line.  That means cloud-based systems could result in better prices for consumers and new profits for technology vendors, but perhaps little benefit for the content-owners.

That's one possible danger I see in content-owners outsourcing their customer interface functions.  Of course, if they can outsource pure technical functions (storage and delivery) and maintain control of the user experience -- and still save money -- that would be the best solution.

How do you see cloud-based systems changing our industry?  I'd love to hear some other thoughts.

Sunday, April 10, 2011

The Breath of Business and Success

Watching and understanding the cycles of "life" in business are keys to longterm success.

Ok, this might be a little esoteric, but if you go with me for about 5 minutes, I think you'll get some benefit from the discussion.

In thinking about what I wanted to write this week, I was looking at the current activity in our industry.  There are new companies coming online and old companies jumping into new businesses.  Everyone is investing  money and energy in an effort to grab pieces of emerging markets.  The two most obvious examples are streaming and tablets.

In the wake of Netflix' success, there are dozens of companies scrambling to bring content directly to consumers' TV's and other devices.  On the content side, Netflix is the clear market leader, Hulu appears to be the market challenger, and there are a number of market followers still hoping to move up and challenge the leaders.  On the hardware side, AppleTV, GoogleTV, Roku, TiVo and others all have their oars in the water.  The important point is that a growing number of companies are still vying for parts of these markets.

The same pattern is present in the tablet market.  Apple's iPad is the dominant market leader, Motorola's Xoom appears to be the current market challenger, and there are a large and expanding number of market followers (some of whom might become the market challenger, like Blackberry, for instance).  Again, the point is that more players are still coming into the space.

This current phase of the business cycle is the equivalent of these markets taking a deep breath.  It is a period of expansion when resources are poured into the marketplace and everyone scrambles to claim the new spaces that are created.  But as all living beings know, every deep breath is inevitably followed by an exhale.  If living beings only inhaled, they would never release any waste, and they would die.  This is true in business, as well.

When markets exhale, it doesn't mean that they are dying or becoming weaker.  Exhaling is healthy.  The market, and the companies in that market, actually become more efficient, gain strength, increase profits and improve operations during that period.  The "exhaling" period of a market is characterized by mergers and acquisitions, where the larger players absorb the healthy smaller players, and some closures where the weakest competitors simply give up.  But even the closures are healthy as it means that the remaining companies can expand further, making them stronger and more profitable.

Ok, so what's my point?  It's this: you can't plan for the present; you can only plan for the future.  If you are in a position to participate in this period of expansion, by all means take advantage of it.  But if you are planning for the future, watch the market breathe.  Recognize that it will inevitably exhale, and position yourself to take advantage of the circumstances that will exist at that time.

Every moment is a moment of opportunity for those who recognize it and are prepared for it.  Whatever business you're in, or want to be in, watch it as it breathes and be prepared when the next breath comes.

Saturday, April 2, 2011

The Essential Element For Success In The Entertainment Business

Anyone who reads my posts or tweets, knows that I love technology.  I'm always reading and writing about cutting edge technologies and how they are impacting the entertainment industry.  New tech is driving the launch of new companies, and the development of new strategies for old companies.  Technology is undoubtedly the most important factor for achieving success in today's entertainment business.  Or is it...?

As I often do on Saturdays, I spent the past couple hours looking at all of the recent entertainment and technology news.  There is plenty of it, as usual.  New methods for driving content from televisions to mobile devices, and the Internet to televisions and from clouds to everywhere.  Consumers can truly get whatever they want, however and wherever they want it.  

With all of these amazing new capabilities for viewing and listening on countless devices, what is the best strategy for success in our business?  With all of the new possibilities, the answer actually hasn't changed. Regardless of how you do it, you have to give consumers something that they really want to watch or hear.  And what do they want?  A great story.

The one essential truth of the entertainment business -- the one constant that does not change with technology -- is that people want to be touched emotionally.  That's what draws them to read, watch or listen.  They want to feel the emotional impact of the story being told.

All of the amazing new technology gives us better tools for touching people's hearts, but only if we tell great stories that trigger that emotional response.  Faster frame rates and 3D and better surround sound and IMAX all make a huge impact on our bodies, but it is the story being told that ultimately touches our hearts.  And that's what people want from their entertainment experience.  It is why they put their money down.  They want to feel the, anger, fear, passion, humor....They are buying an emotional experience, not just raw physical stimulation.

I am more enthusiastic than ever about the prospects for entertainment success through the use of great new tech.  I'll continue to look for innovative ways to deliver content to people everywhere.  But it will only matter if the content is truly special.  

Technology is the beautiful box, paper and bows in which we wrap our gifts, but wonderful stories are the gifts.  Let's never forget why we went into this business -- to touch peoples' hearts and souls.  

Monday, March 28, 2011

Current Entertainment Strategy: Grabbing Real Estate

Before going to bed this evening, I briefly scanned the entertainment news of the past couple days.  A few things caught my eye, but this article really got me thinking.  It's a short report on the Weinstein Company's new video game venture.  That's right, Bob and Harvey are going into video games.

My first thought was the realization that gaming must truly be the new driving force of the the entertainment business.  The Weinsteins are very smart guys.  They would not be chasing the gaming business unless they knew they could build asset value and make a lot of money doing it. (I am thinking this on the day I woke up at 6:30 a.m. to go wait in line with my son to pick up his new Ninetendo 3DS gaming console.  Very nice piece of hardware, by the way.)

Oklahoma Land Rush - 1889
Ok, that may be a little bit of an eye-opener, but it's not really news.  I think all of us already knew that gaming was a good business, and we can't be too surprised that smart entertainment guys like the Weinsteins recognize that.  But I think this move is also part of a broader trend that is much more interesting.

From a strategic standpoint, companies often make the most money by dominating their little corner of an industry.  Focus is traditionally the best strategy for most companies.  Do what you do well, and make your money in that area. However, consider these developments (in addition to the Weinstein gaming venture):

  • Netflix goes from online video store competing with Blockbuster, to streaming company competing with cable operators, to episodic producer competing with HBO, television networks and who knows what else.
  • AMC and Regal go from theatrical exhibitors, to presenters of live events and distributors.
  • Google goes from search engine, to dominant force in online marketing to distributor of a wide variety of content.
  • Apple goes from computer company to content distributor to cell phone maker to creator of an entirely new hardware sector that will be worth billions of dollars. 
  • Hasbro Toys is quickly becoming a major force in the entertainment business.
  • Comcast goes from cable company to the "everything"  business.
  • Sony is already in the "everything" business and may finally start effectively integrating its offerings.

The list goes on and on.  The lines between the various sectors are becoming increasingly blurry.  There are no longer many companies that are purely in hardware or software or distribution or production.  Everyone is in everything.  In fact, it's hard to tell where some of the lines are even drawn anymore.  Is YouTube in the television business?  Maybe.  It's hard to say.

Of course, many of these expansions into other industries are designed to simply leverage a company's existing assets and audiences.  However, that kind of strategy would traditionally involve license deals, where each participant remains within its area of expertise and they share money for the joint use of assets.

This is different.  Companies are no longer making strategic alliances with companies in other industries -- they are simply jumping into the new industry with both feet.

As technology drives constant change, companies are taking advantage of the highly dynamic environment to stake out new territories, and block competitors in the process.  They aren't just looking to make more money.  They see opportunities to expand into new, highly lucrative areas -- like gaming and mobile video, for instance.  They see opportunities to create vertical monopolies where they can control the factors which impact their business, and make additional profit at every step of the process.

This isn't just about making more money -- it is a total reshuffling of the deck and everyone is trying to improve their hands. It is fascinating to watch the game being played every day among these smart, aggressive executives.  It's business as a spectator sport.  I wake up every morning wondering who will make the next move and what it will be. It's great fun, and an exciting time to be an observer of the industry.

Tuesday, March 22, 2011

Now Is The Time To Create Quality Programming

An exciting trend is quickly developing in the entertainment business.  We are at the beginning of a new period of opportunity for creators of quality films and programming.

It seemed for the past several years, the quality of content was of marginal concern.  Certainly many good films and programs were getting made, but the business and technical aspects of the industry seemed to be more important.  As new companies used the Internet to create new doors into the business, the talk was about superior technology and innovative delivery and pricing strategies and convergence and brand integration and HD and 3D, and on and on.  Everyone still recognized the need for good content, but it wasn't viewed as a key differentiator between the various competitors.

While many of those "new media" conversations are still taking place, something else interesting has happened in the past couple of weeks.  Consider these developments:

As Amazon and Facebook joined Hulu, Vudu and others in attacking Netflix' growing dominance in home video, Netflix saw the writing on the wall.  Prices for existing films in the 3rd or 4th window will inevitably increase.  (That's certainly what the studios are planning.)  As a result, the quality of the Netflix streaming catalog would become more expensive to maintain, and consumers wouldn't care as much.  With more streaming options available, and the collective film library spread across so many companies, consumers would probably just start looking for the best deal.  That means Netflix would be spending more and making less while trying to hang on to its customers.  Not a pretty picture.

In response, Netflix recognized what HBO had seen years before.  The way to differentiate in a competitive market is to have something that no one else can offer.  That means original, exclusive, appealing programming.  So, last week Netflix made the House of Cards deal which will give it exclusive first window rights on the David Fincher/Kevin Spacey collaboration.  If anyone wants to see that program (and a lot of people will), they will have to subscribe to Netflix.  That's a competitive advantage that's based on quality, not price. A much better place to be.

Hulu figured out the same thing, and it has already started airing original programs of its own.

And Reelzchannel got the memo too.  When the controversial "The Kennedys" program was dropped by History Channel, Reelz recognized the opportunity.  By grabbing that show and advertising it, Reelz has already expanded into millions of more households and gained millions of viewers, and The Kennedys program doesn't even begin airing until April.

All of a sudden, as the playing field is leveling and the competition is fierce, quality original programming has become the key strategy of choice.

Of course, this is not a totally new concept.  As I mentioned, HBO has successfully pursued that strategy in the cable business for years.  And the prime time network TV business is still largely based on offering attractive original programming.  In fact, FX, TNT and other second-tier networks have been firmly rooted in the original programming business for several years. But now, with the key digital programming consolidators also adopting that approach, there is a vigorously growing market for quality productions.

In addition, sales at Sundance were the best in years, and even Berlin saw a lot of deals being made.  This resurgence in independent film is further supported by the recent formation of the Open Road distribution venture between AMC and Regal.  Apparently theaters also want to protect their businesses by gaining control over original programming.  Controlling the first window of a quality production appears to be the primary strategy across much of the entertainment business right now.

Obviously, this is good news for the creative community.  The bell has sounded, my friends.  Start creating.  There is a growing sellers' market, and that means that financing will not be far behind.  I am certain investors and lenders will be happy to back MG's from Netflix or Hulu or Open Road or even Reelzchannel.  And these are perhaps just the tip of the iceberg.  There will be more players entering the market for quality content.  In fact, I can't imagine that Walmart/Vudu is not already planning to control exclusive content which can drive sales through its streaming channel as well as its retail business, including related merchandise.  They are uniquely positioned to pursue such a strategy and they are too smart not to recognize the opportunity.

If you have a project to sell, now would be a good time to think about producing it.  This sellers' market for content will not last forever.  All of these companies need to spend money now in order to grab market share.  But when the dust clears, there will be consolidations, mergers and probably a closure or two.  Programming will remain important, but the number of buyers will once again shrink.  The market for programming will cool off a bit and the buyers will put their wallets back in their pockets.  So strike now while these companies need to spend money in order to compete.

The opportunity to create is right now.  I don't know how to say it more clearly than that.

Tuesday, March 15, 2011

HP CEO Lays Out New Strategy - I Hope He's Got Something Else Up His Sleeve

Hewlett-Packard's (Relatively) New CEO Has Some Ideas For The Company's Future -- Not Necessarily Great Ideas, But Ideas Nonetheless

In a 40-minute speech at an event in San Francisco yesterday, Hewlett-Packard CEO Leo Apotheker laid out his vision for the company's role in the new digital media universe.  This was Mr. Apotheker's first public address since taking over the HP reins from Mark Hurd last November.  It was his biggest opportunity to date to gain the confidence of the public and the investment community.  This is important for him as HP's performance has already slipped under his command.

Unfortunately, I don't think the plan Mr. Apotheker described is going to be a winning strategy for HP.  It seems the two major initiatives are:

  • To build a comprehensive cloud-computing platform; and 
  • To create a comprehensive application marketplace.  

Both of these are actually pretty good ideas -- but not for HP.

If HP is going to get into providing cloud storage and retrieval services, they are not going to be alone in that business.  In fact, it is likely to become a commodity business, with several players providing similar storage capacity and retrieval speed. Competition in commodity businesses, where the products or services of the various suppliers are essentially fungible, generally boils down to pricing.

Historically, HP has not done well where price is the primary differentiating factor.  HP has always been a high-end supplier of quality products (although in recent years, I'm less impressed by their computers).  The only way HP could dominate the cloud business is with really superior technology.

If "superior technology" in the cloud business means a better user interface, HP will likely struggle to stand out.  User interfaces aren't really their long suit either.  They don't generally supply the "must have" software for any market.  However, if they can use their superior technology to actually make cloud computing more seamless, secure and effective than any other company providing that service, and do it at a competitive price (not necessarily the lowest -- just competitive), they might do o.k.  But o.k. won't be good enough; they need to dominate the sector in order to call the strategy a "win," and I don't think they will be able to do that.

Leo Apotheker
The other strategic initiative of creating a comprehensive application marketplace is also a very good idea.  However, HP has no particular traction or expertise for that business plan.  That business will very much come down to the quality of the user experience, and as noted above, that's not necessarily a strong area for HP.  The HP technology won't really help, nor will branding it with the HP name.  I don't think consumers care who is selling them their apps.  I just don't see what HP will do to gain a competitive advantage in that line of business.

With that said, I hope both businesses go really well for HP.  I am very much a fan of the company, and I've always wanted to see it succeed -- even when Carly Fiorina was running it (although I was happy to see her go - she was simply  not a good fit).  I don't know that Leo Apotheker is of the same caliber as Mark Hurd, but I guess we'll find out.  I'm a little dubious after yesterday's speech.

Sunday, March 13, 2011

"Anytime, Anywhere" - Cross-Platform Is A Critical Strategy For Game Companies

Ubisoft's "Companion Gaming" Strategy Is A Hint At How The Gaming Industry Is Getting On-Board With The Cross-Platform Experience

Every current strategy analysis in the content industry inevitably turns to the idea of migrating the content across different devices.  In truth, this is one of  the factors that is most important to a majority of consumers.  If they buy or rent a film, they want to be able to watch it on their television, their iPad, their game console, their smartphone or any other device in their electronics arsenal.

With the introduction of the iPad 2 and the large marketing efforts for the tablets from Motorola, Samsung and others, the concept of cross-platform content delivery is becoming even more important.  The primary feature of the new generation of mobile devices is the ability to deliver a superior audiovisual experience, and consumers want to be able to take full advantage of that ability.

Ironically, there is a concurrent movement towards hardware integration.  Manufacturers are expanding the capabilities of their devices until a Nook, an iPad, a netbook, and the multitude of Android devices all provide essentially competitive functionality.  Consumers really don't want to carry around a smartphone, tablet, eBook reader and a laptop.  (They would need to get a good-sized dog just to help them carry all of their electronics!)  Ultimately, they would prefer to have one device that does everything.

But even as consumers try to reduce the number of devices they own and use, they still want all of their entertainment and electronic diversions available all the time, through whatever device is convenient at the moment.  It is critical to recognize and respect that desire. Companies that provide strong cross-platform solutions will be rewarded.  Those that fail to create a fully-integrated consumer experience are likely to alienate their audiences.

This article about Ubisoft's expansion in the social gaming space is actually what got me thinking about this.  Ubisoft clearly recognizes what consumers want and they are working to bring that to the gaming space.  The timing couldn't be better.

These and other factors show that the game business is still very much a growth industry.  There are more choices than ever for platforms on which to play the large and growing range of games. The industry  is generating billions and billions of dollars every year, and getting bigger.  It spawns films, television series, merchandise.  It is perhaps the most important segment of the entertainment industry in the digital age.

In order to fully capitalize on the current opportunities in gaming, it is critical that the game companies give their customers what they want -- the ability to seamlessly move between their various devices while not losing any continuity in their gaming experience.  Consumers ideally want to be able to start a game on a home console, continue it in their cars or on the train on a mobile device, and then continue on someone else's computer when they get to their destination -- all without starting over or missing a beat.

This cross-platform concept is already clearly a part of the strategy for companies in the film, TV and music segments.  With the advanced technology of mobile devices now capable of delivering an acceptable gaming experience, the adoption of this strategy is a critical step for game companies, as well.  The ability to implement an effective cross-platform gaming experience is likely to be a key difference between industry leaders and also-ran competitors in the coming years.

Saturday, March 5, 2011

iPad 2: Digital Media Becomes A Conversation

At first glance, the new iPad 2 appears to be a combination of already-existing technologies in a superior, user-friendly design - a fairly typical Apple product.  That may be an accurate description, but this particular package of features might also provide a new vision of what digital media can and will become.

If you want to get an orientation on Apple's new tablet, check out this video.  It's worth watching.  In the meantime, here's a quick summary of the new features:
  • Two cameras, front and back, to give simultaneously looks at the user and the user's environment. 
  • The ability to tether the tablet to a television to provide a 1080p view of whatever is on the iPad.
  • Faster processor to provide smoother, higher quality video.
  • Improved display.
  • Removable "smart" cover that protects the display, turns the device on and off and folds up to hold the device in two different orientations.
  • Great battery life.
  • Flatter, smoother design.
Ok, all of that is great, but each of those features has appeared on various other devices.  So why do I think this is a landmark moment in the evolution of digital media?  Until now, the iPad has been used primarily as a means of accessing robust media without being anchored to a stationary screen.  It allowed you to take your media with you in a size and quality that didn't feel like a compromise.

Now, with the cameras and tethering capability, it is suddenly more of a fully interactive 1080p experience.  High definition, user-generated, real-time video going back and forth between the iPad and the TV.  It's morphed from a primarily passive device to a much more active device in one generation.

From here, it is only a small leap before the wired connection between the iPad and television becomes a wireless connection.  Then it will become an IP addressable connection and the distance between the iPad and the TV becomes irrelevant.  When that happens, whatever I'm doing can be captured from two angles and placed on any television in the world.  Or any ten televisions, or any million televisions.  It's just a question of speed and bandwidth.  Suddenly, I am broadcasting real time high definition images to the world.

In that environment, tablet users are no longer just watching; they are creating and participating and infinitely connected and engaged with one another.  That is a completely different paradigm than watching YouTube videos while taking a walk.

Are you seeing this vision of  the kind of access we'll have?  Instead of watching pictures of a young student facing down a tank in Tiananmen Square, we will see what he sees, and watch the expression on his face as it is happening. It becomes a first-person experience, not a second-person story.  And in more mundane applications, we will be able to share any moment of our lives simultaneously with relatives in different countries.  We will walk a group of shareholders through our new facility in Hong Kong while they each sit in their own living room.  We'll be at our kids' shows, events, games -- anything at all, and share it immediately with anyone and everyone who is interested in seeing it.

In that new paradigm, technology serves to connect us in ways that we could never be connected before.  It bridges gaps and brings us together instead of isolating us.

Am I naive or ridiculously over-optimistic?  Perhaps, but I don't think so.  When I look at the iPad 2, this is the future I see.  A day is coming when we will all be in a 24-7 conversation that covers the entire globe.  It makes me smile to think about it.

Saturday, February 26, 2011

Why The Film Business Doesn't Face The Same Fate As The Music Business

For years, there has been a steady stream of of articles reporting the continuing decline of the recorded music industry. Everyone knows the saga by now.  As music became available on the Internet, people stopped buying CD's and younger listeners started freely copying song files from one another.  A whole generation of consumers now has the idea that music should be free, and sales of recorded music continue to decline.

All of those facts are pretty accurate, but there is one element of the story that is often left out, and it has a lot to do with why the music business can't get back to its prior levels of revenue.  Record companies were primarily in the business of selling albums -- groups of 10 or 12 songs.  Back in the "old" days, the normal price of an album was around $15.00, give or take a few bucks.  That meant that the price per song was a dollar or two -- much like it is now -- but the unit sale was much higher.

The magic in that model was that a record company could promote one good song off the album, and consumers would have to buy the rest of them too.  Think of it in another context.  You're hungry for a hamburger, but you have to buy 11 fish sandwiches at the same time in order to get your hamburger.  McDonalds would sell a lot of fish sandwiches that way, even if no one really liked fish sandwiches.

In reality, with the retail price of a recorded song about where it's always been, the gross profit margin is actually higher.  There are no manufacturing, shipping or co-op placement fees. Same revenue, lower costs -- that means more gross profit to go around.  But the problem is that this new model of distribution doesn't let the record company sell a bunch of fish sandwiches along with the burger.

With the demise of the DVD, there is a real fear that the film business will face the same sort of irretrievable decline in revenue from the home entertainment division.  While the problems of illegal copies and piracy are certainly a similar challenge, the film industry isn't faced with a prior business model that had them selling 10 or 12 movies per disc.  So as film distribution moves from discs to digital downloads and streaming, film distributors are still going to be selling in the same units as before -- one film at a time.  And all of the economic efficiencies of digital distribution should work in the same way to actually increase the profit margins.

I understand there are many other factors in play.  Films are expensive to make (although less expensive than they used to be), and there might still be a perceived value issue where consumers won't pay as much for a download or stream as they will for a disc.  However, with all of that said, at least the film guys aren't trying to reclaim a business model where most of their sales were from products that no one ever really wanted to buy.

Wednesday, February 23, 2011

A New Era In Home Entertainment Started Today

With Amazon's entrance into the streaming business, the horses are officially out of the gate in the new race for home entertainment dominance.

My buddy, Jack Wrigley, emailed me today to point out the importance of Amazon's acquisition of LoveFilm which has allowed the Internet retailer to magically turn its Prime subscription shipping service into a film-streaming service. With the flip of a switch, Amazon becomes a force to be reckoned with in digital entertainment. 

In light of that development, I think it is fair to say that this week marks the real beginning of a new era in home entertainment.  Up until now, Netflix has been in a massive proof of concept stage, showing the world that there is money in streaming movies into homes.  Prove the concept they did, becoming a $2+ billion business in the process, with massive growth still ahead.  And then within a 24 hour period, Blockbuster acknowledges that its business cannot be revived and agrees to sell the remnants for less than $300 million, and Amazon makes its bold move into Netflix' streaming space.  Oh yeah...and Redbox is shouting a distant "Me too!" from its post in front of the 7-11 stores.

In saying a quick and fond farewell to Blockbuster, I can only note that its market value less than 10 years ago was over $5 billion.  It lost about 95% of that value sitting on its hands while Netflix took advantage of predictable (inevitable, really) changes in the home video market.  It is perhaps the most blatant case of corporate arrogance I've seen in my adult life.  There are plenty of lessons to be learned from that tale.

Redbox jumped into the home video game for some short term profits, with a model for better price and convenience that was never as good as the Netflix solution.  It was good enough to beat Blockbuster's rusty model, but Redbox ignored the obvious pending impact of digital delivery.  Redbox uses the Internet for payment and inventory control on its machines while it continues to deliver its films in a dying format.  It's somewhat convenient because the discs are available 24 hours a day in places where consumers already go, and you can return the discs whenever you want to any Redbox machine.  If there was no such thing as digital delivery of content, it would be a great business.

Of course, Redbox is a division of Coinstar -- a vending machine company.  Redbox was designed as a strategy for placing more vending machines, not for giving consumers what they really wanted.  It's a perfect example of a supply-driven strategy as opposed to a market-driven strategy.  It only works well so long as you happen to be supplying something the market wants.

Reed Hastings
Netflix was born as a market-driven company.  Its mission was to ease consumers' pain over late fees at Blockbuster.  It also started as a disc-renting company.  Its subscription model and cool envelope design were the initial competitive advantages.  But Reed Hastings is a software guy; he understands the power of digital technology.  More important, when he sees changes coming, he embraces them -- in fact, he jumps ahead and lets the world catch up to him.  That's what successful people do.

So, he focused on creating a superior web interface that his customers could use to line up their disc orders.  Then, with the flip of a switch (and some new contracts), he let them start watching the films right on their computer.  When the inevitable convergence of Internet and television finally arrived, there was Netflix (and its 20 million users) already eating popcorn on the couch.

Jeff Bezos
Jeff Bezos at Amazon is another visionary guy who truly understands the power of technology.  His company also has one of the best user interfaces on the Internet, and a massive number of loyal customers.  Amazon jumped into the digital streaming business in a pretty timely manner, but its pricing model reflected its "unit sale" roots.  With today's move into a subscription model, Amazon is officially acknowledging that consumers don't prefer to rent their entertainment in single unit packages.  Amazon has 10 million Prime members already paying an annual subscription fee.  That's a pretty good start at chasing Netflix for movie streaming dominance.

And while Redbox publicly acknowledges that it needs to be in the subscription streaming business, it is lacking some key elements.  First, it has no cool website as an integral part of its existing model.  There is no installed user base already making online payments, and no superior user interface.  It's a vending machine company.  No one wants to stream videos in front of their local 7-11, and that's where Redbox lives.  Again, this was predictable; if they wanted to be in people's homes, they should have built their model with a home-based component.  They didn't do that.

So, the bell has sounded and the race has officially begun.  In addition to Netflix, Amazon and Redbox (at the back of the pack), there is Hulu and Google/Youtube and Vudu and Apple and others.  Plenty of horses to bet on.  The winners will be determined by their ability to navigate their way onto consumers' televisions, their ability to cut the right deals with studios and other content owners and creators, and good old-fashioned marketing.

And as always, the winners will be the companies that can see around the curve, getting ahead of the trends and letting the rest of the world catch up to them.  There is no way to win by chasing someone else's success in today's entertainment business.  True vision and innovation are the only paths to long-term success in the new digital environment.  Blockbuster learned that lesson the hard way, and there will be more casualties before it's over.

Saturday, February 19, 2011

Broadcast Network Trend: Being The Brand!

Broadcast and Cable Outlets Supplement Ad Revenue By Becoming Their Own Brands.

There is a fascinating trend going on in the world of broadcasting.  Networks are recognizing that their own names and logos have market value that goes beyond merely attracting viewers.  This isn't just a theory, as manufacturers of products are paying real dollars to carry the trademarks of outlets like E! Entertainment, Style and The Food Network.  If you analyze it for a minute, it actually makes sense.

Before cable came along, there were a limited number of broadcast outlets in each market.  This is because the signals all traveled through the air, and there were a limited number of frequencies to carry different broadcast channels.  With the advent and expansion of cable, viewers came to have many more choices.  And when digital cable came along, this expanded again.  And now with online media moving to the television set through AppleTV, GoogleTV, etc. etc., the number of choices is officially infinite.

In a universe of many choices, it is necessary for each outlet to focus on a niche in order to survive.  It happened in the magazine business first -- where the newsstand went from carrying a relative handful of broad interest publications to carrying hundreds of very specialized publications.  That is the same pattern that emerged as more and more cable stations came on line -- each station worked to be a leader with its own special audience.

In focusing on a particular niche and becoming the leading source of information and programming with a particular group of consumers, a media outlet develops independent credibility that goes beyond the programming or ads that it carries. People start to think of themselves as liking to watch The Food Network, as opposed to just being a fan of Guy Fieri or Ace of Cakes.  The network itself begins to stand for something -- it becomes a brand.  

So, in a logical and intelligent response to competition, broadcast and cable outlets have positioned themselves as having a particular meaning with a specific audience.  Once that is successfully accomplished, it only makes sense to capitalize by "lending" that credibility to other products -- for a price, of course.

I actually think I like this trend.  It allows broadcast outlets to supplement their income without selling more ads or putting cans of Coke and other products in the middle of every show.  It is an indicator of successful marketing and perhaps even helpful to consumers in identifying products which are consistent with their own tastes and interests.  Bravo!  

(That last line was funny, you see...because Bravo is the name of a network... and the post was about names of networks... funny, right?   Ok, sorry.  You're right.  That was a bad pun.)

Saturday, February 12, 2011

Pandora: A Good Bet for Wall Street?

With an IPO currently scheduled for later this year, is Pandora sexy enough to attract investors?

This week, Internet radio company, Pandora, filed its application to sell stock to the public.  If you read between the lines, the application may be more of a publicity move than a financial milestone.

There is no doubt that Pandora could use the $100 million it hopes to raise.  The company is still struggling to become profitable.  And therein lies the conundrum.  Investing in a losing venture only makes sense when the capital infusion will turn the company around.  But I don't think Pandora is struggling because it lacks money.  The problem seems to be its business model.

Pandora's competitive advantage -- the strength which it sells to consumers -- is its psycho-tech music measurement software.  It is something out of a science fiction movie -- software that allegedly understands exactly why you like particular songs.  The theory is that Pandora can turn every listener on to more music that is exactly what he or she wants to hear.

I'm not even going to argue whether the software works.  I'm willing to assume that it does -- at least to some degree.  If they work that hard to analyze the music I like, they can probably find some more songs that will appeal to me.  The issue is whether anyone will ever pay for that service.  Unfortunately, I don't think so.

I think all of us like to discover new music in a more organic way.  We ask our friends or simply stumble across it.  In fact, I think we enjoy the process of listening to something and deciding whether we like it or not.  We don't need the pressure of software telling us that this is music that is scientifically matched to our tastes.  I personally don't like to think of myself as being that predictable -- even to a computer.

And even if I like the idea of getting a bunch of new music chosen (if computers actually "choose") just for me, I can't see paying for it.  I'll subscribe to Netflix for 8 bucks a month, but not to Internet radio -- no matter how smart it is.  And that's why Pandora is free, and why it will probably continue to be free.

That means that its only likely real revenue source is some version of an ad-based model.  It might find its way to profitability by selling ads, but I don't think it will enjoy explosive growth.  And with music royalties and other costs likely to increase, the road to profit will only get steeper.  (In fact, Pandora is apparently no longer available in Canada because the music license fees were too high.)

Pandora is certainly getting a lot of buzz.  It now has over 80 million users and is constantly mentioned as one of the hottest companies on the Internet. By filing for an IPO, it is trying to tell the world that its momentum will eventually lead to riches.  Personally, I just don't see it.

Without a huge upside, there is probably not a lot of incentive for investors to jump on board.  The idea of investing in an Internet stock is to bet on the home run, and Pandora doesn't seem to have enough power to hit it out of the park.  

I'm open to other points of view.  Let me know if you think I'm missing something on this one.

Sunday, February 6, 2011

This Is The Year The Indie Film Business Starts To Come Back

I was going to title this post with a question - asking if this is the year the indy film business starts to climb out of its doldrums.  But in truth, I am writing about it because I think there is no question.  This is indeed the turn around year.  Here's why I feel so optimistic:

Obviously, the volume of sales at Sundance was a big positive.  Since 2008, Sundance sales had been in the dumps, falling to only 10 sales in 2010.  This year the number was almost 4 times that amount.  Both of the 2011 Sundance films that I worked on sold to great distributors in very favorable transactions.  I found that personally encouraging, but that's not what sparks my optimism.  It is the overall willingness of a number of different distributors to risk their dollars on a variety of films.  This is a broad showing of confidence from smart people with their hand on the pulse of the industry.  That means a lot.

Another positive factor is the tipping point in the evolutionary metamorphosis of the home video market.  The grieving over the death of DVD's seems to be subsiding, with the rise of Netflix, Hulu, CinemaNow, Amazon, iTunes, Vudu and other streaming services helping to dull the pain.  While the revenue from these services has not filled the hole left by the collapse of the DVD market, there is now a clear path to profit.  In fact, once the market penetration of streaming rises a bit further, it will be a much more profitable model for delivering films to consumers' living rooms. 

The other part of the home market that is perhaps even more exciting is mobile distribution.  There were 80 different tablet media devices exhibited at the Consumer Electronics Show this past month.  There will be millions and millions of these devices in consumers' hands this year, and the numbers will continue to rise dramatically for years to come.  This is a new market for films that has never really existed.  Certainly some consumers were using portable DVD players, but that was all part of the DVD market.  Tablets facilitate distribution in a way that should greatly expand the amount of mobile viewing.  And it facilitates support from sponsors and advertisers in a way that DVD players could not provide.  This has to result in an economic boost.

And none of this is at the expense of the theatrical business.  Theaters are doing well; consumers continue to enjoy the theatrical experience and average ticket prices are inching up.  (A lot of that is the result of 3D and bigger studio films, but the indie business still benefits as audiences show up at the multiplex and a certain number of them will choose to see smaller, critically acclaimed films.)

Clearly, the revenue picture for the film business is stabilizing and actually looking pretty favorable in terms of future growth.  That is the factor that will bring investors back into the game, raise the minimum guarantees, bring lenders back to the table and generally free up some financing to start making more movies.

There are two possible negatives.  One is a potential decline in state incentives.  States are very tight on money and it is possible that a significant number will pull back or even eliminate their production incentive programs.   If that happens, the money will be difficult to replace.

The other challenge is that budgets have been squeezed pretty hard.  The films I'm working on have much lower budgets than five years ago.  While better technology has created production efficiencies that take up part of the slack, there are still limits on how ambitious most independent productions can be.  This means that certain films will still be difficult to make.

With all of that said, I remain confident that we will begin to see an improving environment for independent film production.  It won't be a meteoric rise in activity, but it should definitely start heading the right direction.  So dust off some of those scripts that you abandoned a couple years ago.  It might be time to take another shot at getting them made.

Saturday, January 29, 2011

TiVo's Best Strategy? Cord Cutters

Unfortunately, Tom Rogers and his team don't seem to think so.  This recent article on TiVo's struggles gives a clear picture of the challenges TiVo is facing.  Major cable providers have no reason to partner with TiVo.  They all have their own DVR's and TiVo would probably only confuse customers and cannibalize the cable provider revenue.

Tom Rogers
If you read the quotes from Rogers, he really sounds a little desperate.  (Sorry to say it, Tom, but that's the impression I got.)  He is quick to criticize Apple TV and Google TV, while he is still working hard to forge relationships with cable providers.  The problem is they don't want what he is selling, and TiVo Tom isn't getting the message.

At the same time, there are a growing number of people who are dumping their cable service -- the cord cutters.  They would love to have better technology to manage and record their broadband programming.  TiVo is in a great position to deliver that with their TiVo Premiere service.  It might take a little repricing and positioning, but it could easily become the hardware of choice for cord cutters.

But Rogers apparently thinks that market is too small and isn't really chasing it.  It's a real mistake.  By the time that market is large, all of those people will have implemented other solutions.  He can criticize Apple and Google all he wants, but they will both probably be doing a lot of business that could have belonged to TiVo.

As I mentioned a few posts back, TiVo seems too focused on exploiting technology rather than building a business.  There seems to be no real forward thinking strategy there at all.  The company seems content to just pick up the scraps instead of fighting for a place at the table.

TiVo was a visionary company a few years back, and now I think they've squandered it and the entire industry is passing them by.  I honestly hate to be so critical of any company or executive, but I just don't see any passion or vision there.  Maybe I'm just not getting it....

Friday, January 28, 2011

Feedback on Netflix' Place in The Media Landscape

If you read my posts and tweets, you know that I am an avid observer of Netflix and its ongoing impact on the entertainment business.  I also spend some time chatting about it offline with other folks in our industry.  One of my favorite bantering partners is my friend Jack Wrigley of XStreamHD.  (By the way, XStreamHD is a very cool delivery and management system for HD content.  Check it out here.)

Jack sent me a couple of interesting items in response to my last post, and I wanted to share them with you.  First, one of Jack's friends is an industry insider who would prefer to remain anonymous.  He has a good perspective on how Netflix could evolve.  

He astutely points out that studios are highly unlikely to give Netflix rights which devalue their other distribution windows.  Therefore, he believes that the bulk of Netflix' streaming catalog will probably continue to be films that are past the pay TV window.  They will get some fresher titles from smaller distributors and perhaps Paramount and Lions Gate.  Those titles will be the marketing hooks, but the older titles will be the bulk of their business.

Reed Hastings
This would allow Netflix to survive as a non-competitive addition to offerings from cable companies, and that means that cable companies would actually be able to offer Netflix streaming as an additional pay service that does not threaten their existing relationships.  That's a potential win-win model for Netflix and cable.  Consumers could get Netflix streaming for $9.99 on a stable SVOD channel, or for $7.99 through their broadband connection (with its inherent fluctuations in delivery speed).  That actually makes a lot of sense -- probably more sense than Netflix trying to muster the money and power to fight HBO, Showtime, etc. for rights in the pay TV window.

Glenn Britt
With that said, recent comments from Reed Hastings and Glenn Britt don't seem to indicate that they see a natural partnership between Netflix and the broadcast side of the cable business.  They both see Netflix as a driver for broadband services, but if they think it could evolve into a SVOD service on the broadcast side, they aren't saying so.  It's possible that Netflix sees a cable SVOD model as potentially cannibalizing its existing service at a much lower margin, rather than creating incremental additional distribution.  As always, time will tell.

Ok, that's it on Netflix for a while.  I'll find some other interesting stuff to explore in the next post.

Sunday, January 16, 2011

The Love-Hate Relationship of Netflix and The Studios

This recent article in the Hollywood Reporter gives a comprehensive view of both the public and private statements of studio execs when talking about Netflix.  There are a couple of great points that shed light on the future for the current star of the home distribution marketplace.

First, it is clear that Netflix is an important buyer of films and television programming.  Studios are happy to have Netflix in the mix, taking up some of the financial slack from the collapsing DVD market.  It is also true that the prices being demanded of Netflix for premium programming are going up quickly. It appears likely that Netflix' acquisition costs for some programming may go up by a factor of as much as 10 from one contract period to the next.

So, Netflix is currently in a strong position, but facing a looming dilemma.  It has a distribution base that is quickly approaching 20 million subscribers.  That translates to revenue of somewhere around $2 billion dollars a year.  However, with acquisition costs going up, it is predicted that Netflix will soon be paying somewhere north of $1 billion in annual content acquisition costs, and the prices will continue to rise.

The studios are pressuring for the much higher license fees and Netflix is acting cool, but there is an even larger complication.  There are many aggressive streaming competitors currently entering the market.  If Netflix wants to maintain its market share and subscriber base, it needs to retain the position of being the premium supplier of streaming content.  That means maintaining access to all the best programming.  That won't be easy with more bidders in the mix.

If Netflix really wants to maintain a reasonable cost structure, it needs to bargain harder with the studios, and that means saying "No" to deals that are too high.  But each of those lost deals will go to a Netflix competitor who will get bragging rights along with the premium programming.  If that happens a few times, it won't be hard to start turning some consumers away from Netflix and towards the competitors.  And this will be happening at a time when Netflix might need to raise its prices in order to maintain margins (in the face of the rising acquisition costs).  Not a good combination - raising prices as competitors are publicizing victories in acquiring some desirable pieces of programming.

Bottom line -- Netflix is still one of my favorite companies, but it is going to be facing some real challenges in the not too distant future.  It's not going to fail; I don't even think it will lose money.  However, it is going to have to fight harder to remain successful.  Netflix made the switch to digital streaming look easy, and I suppose it was when competition was scarce.  With the heat being turned up by both studios and competitors, Netflix should start reexamining its strategy now and staking out a more defensible position.

I still believe original programming may be the key to maintaining the Netflix subscriber base when times get tough.