"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...

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.

Netflix - Pushing The Red Envelope

There is a very good recent article in the NY Times discussing how Netflix gained its power, who is threatened by it and why.  On the one hand, the article feels a bit trite in that it looks at the recent offering of a streaming-only package as Netflix' "move onto the web."  However, in the body of the article, it becomes clear that digital distribution has been a part of the Netflix business for over a decade.

For me, the intriguing discussion is about how Netflix threatens the cable television business.  Again, this is a somewhat obvious point, but still worth making.  As online content migrates to the living room TV, it is clearly an alternative to cable.  That's not just Netflix, but Hulu and Vudu and Amazon and CinemaNow and Apple and GoogleTV and.....The point is that online media delivery to the television is making cable systems potentially obsolete, or at least less relevant.  (I covered this point in more detail a few weeks back in another post.)

Two points:  First, cable needs to change.  It needs to be as flexible as Netflix and find a fresh strategy that capitalizes on its unique qualities.  I'll give that some thought and perhaps comment on some possibilities in a future post.

The other interesting question is what Netflix can do to continue its cutting edge success.  Believe it or not, I think Netflix should be developing original short-form programming.  Netflix really is the next HBO, and HBO made its best move when it went beyond simply showing movies and developed its own cutting edge programming.  Netflix has an installed user base of 15 million households many of who actively use the online aspect of the service.  Neflix has a very good user interface and first-rate streaming technology.  It can best capitalize on all of these assets by offering some exclusive programs.

Reed Hastings has always viewed Netflix as a content distributor.  Well, every big distributor uses its distribution system to move some of its own content.  Netflix is a $10 billion company.  It is big enough to tackle that strategy and it should be doing that right now.  I renew my call for Netflix to re-enter the content business.  It is time to revive Red Envelope Entertainment and start making great episodic programs.

By the way, if you want to read a great discussion (and less optimistic view) of Netflix and the NYT article, check out this blog post from David Poland of Movie City News.  This guy really does his homework and makes some excellent observations.

The Most Important Trend for Entertainment 2010

At this time of year, it's interesting and fun to think about where our industry is headed.  More specifically, what are the important trends in entertainment?  Which changes are most likely to impact those of us who don't work at NBC Universal?

We can talk about the various developments and what they might mean for the various sectors, but I think this coming year there is one single development that will be a game changer in almost every area of the business.  It is the convergence of the Internet with the home theater. 

Internet content has been moving closer to the living room for several years.  One major hurdle in that process has been the lack of enough bandwidth and speed to deliver large format HD content on a real time basis.  The combination of effective compression and faster networks has pretty much solved that problem.

Also, a truly effective and dominant solution for getting the digital content on to the TV screen had not yet emerged.  The TV manufacturers have taken matters into their own hands by integrating Internet inputs into the hardware architecture, and establishing alliances with content providers.  Problem solved.

So, for 2010 we will see the emergence of huge, sharp TV screens equipped with hardware and software that provides seamless access to everything on and off the 'Net.  We will be able to get endless amounts of full-sized HD content with surround sound at the push of a button.  Vevo, Netflix, Hulu and dozens of lesser known companies are poised to fill this newly minted content pipeline. 

And all of those TV sets boast at least a 120 Hz refresh rate, so they are 3D ready.  (In-Three and Reliance, Katzenberg, Cameron, and dozens of others are poised to feed dimensional content to consumers, both in theaters and at home.)

What's the business impact of this new technical capability?  It's quickly eliminating the DVD business.  It will be the final and fatal blow to the CD business.  It is putting pressure on theater owners to develop and deliver a superior experience.  It is already eliminating the "windows" strategy in the film distribution business.  It will give small film makers the ability to find their own audience (just like iTunes allowed independent music artists to find an audience).  It will create upheaval in the broadcast and cable businesses, forcing these companies to find better business models and deliver better programming. 

Virtually everything about our business will change when this final link is placed in the chain.  It is something that cannot be ignored; it must be embraced.  There is tremendous opportunity afoot for those who are poised to take advantage, and tremendous struggles for those who delay or resist.  My friends, the cheese is about to move in a big way.  If you have any doubt about whether I'm right, come to CES in Las Vegas next month and tell me what you see. 

The new horizon is now going to be solving the marketing problem.  It's hard enough to figure out what to watch with a couple hundred available channels.  How about when that number is infinity?  How do you decide what to watch when your choices are endless?  Whoever solves that problem stands to make a lot of money.  (Personally, I'm betting on Google.  They are really good at solving that type of problem.)

As always, I welcome your thoughts.

Mobile Media Marches On

Another good article this morning (this time from the BBC) which is indicative of the speed with which mobile media is advancing. The gist of the article is that the sales of smartphones will surpass the sale of laptops within the next 12 to 18 months.

Think about that -- 12 to 18 months. That is right around the corner. This means that everyone is quickly heading towards having robust media capability in their pocket, with a 24-7 connection. This supports what we've been saying about mobile media being the place where content providers need to be focussing -- not for sometime in the future, but right now.

This also means that the vision for mobile peer-to-peer distribution which gets charged to consumers through their carriers is a paradigm that should be set up now. If everyone has a media player in his or her pocket, and they can easily beam their favorite media to their friends, and the content providers can get paid on that transaction, that equals a win for everyone. That's where we need to be headed, and today's BBC coverage shows that the necessary shift in technology usage is fully underway.