As DVD's Die, How Will The Film Business Fare?

Here is a pretty good article that discusses the shifting trends in the in-home distribution of films.  Obviously, the trend is away from DVD's and moving towards direct delivery.  In fact, the shrinkage in the DVD numbers is pretty dramatic.  The DVD is going the way of the CD.

Blu-ray is making up some of those losses, but Blu-ray will eventually follow the same path.  Right now Blu-ray discs are popular because there is no real alternative for super-HD resolution.  But when a Blu-ray quality file can be easily and quickly downloaded right to your big screen TV, there will simply be no reason to mess around with a disc.

Discs are dead.  However, the download and video-on-demand markets are expanding pretty quickly.  None of this is news, but what does it really mean?

For disc manufacturers, it means they should already have shifted their focus to other businesses.

For distributors, the ability to warehouse and handle large amounts of physical product will not be useful much longer.  The distribution of content is still a very good business, but moving digital files is very different than moving discs. The good news for distributors is that the profit margins should increase dramatically as all of the costs of moving physical inventory evaporate.

Producers still need to produce great content.  Consumers will always want good stories that are told well.  However, production is both cheaper and trickier.  As more people use iPads, smartphones and similar devices to watch films, the productions will need to translate from very large screens with huge speakers (like IMAX) to the small screens of a smartphone with headphones.  That's challenging.

The real issue for those of us on the business side is whether the revenue from new sources such as download, streaming and mobile will replace the dwindling DVD market.  I believe the answer is "Yes" if you look at the profits.  The revenue might go down, but so will the costs of delivery.  That means that even if volume is lower,  the profits will be higher and hopefully make up the difference.

Direct delivery of content is a more efficient system than any physical media.  The benefit of those efficiencies should be apportioned in some manner among all of the stakeholders, from consumers up the chain to producers.  I think natural market forces will cause that to occur, and at the end of the day, the film business will be healthier than ever.  Higher profits means it's a better business model.

Movie Futures Market Approved, But It's An Empty Victory

The CFTC has approved Cantor Exchange to trade futures based on film box office performance.  Earlier in the month, the CFTC had approved a similar program to be operated by Media Derivatives.  All of this would appear to be a big "green light" for the trading of film futures. But...

Unfortunately for Cantor and MD, the House of Representatives included a ban on these trades as a part of the economic bill passed last Friday.  This ban is likely to remain a part of that law when it comes out of Congress, and the President has indicated he will sign it.  So, this is a hollow and temporary victory for Cantor and MD.

It may very well be that Wayne Friedman of MediaPost is right when he says it's about access to information. (I made a similar point in a post back in April.) The culture of Hollywood is all about spin, and that means tight controls on what information leaks into the public.  The culture of securities is supposed to be about access to information.  Investors are supposed to have as much information as insiders in order to make their trading decisions.

There's a big cultural clash between those two positions -- control vs. access.  It is actually a common theme in the media and entertainment business. (And technology too -- look how crazy Apple went when the iPhone 4 leaked.)  Hollywood seems to have won this round.  Congress trumps the CFTC, so there is unlikely to be any trading based on box office numbers.  Too bad.  I still think it would have been fun.

Cantor says that it is still committed to providing tools for the entertainment business to use in connection with financial transactions.  I will be interested to see what they come up with next (and what the studios do in response).

3D Glasses - An Emerging Business Opportunity

There is an opportunity quickly emerging for consumer electronics companies.  Most of the new 3D televisions  (other than the Vizio TV that was just announced) use glasses with active electronics.  The television manufacturers are supplying one or two pairs of these glasses with each TV, and then selling extra pairs for about $200 each.

In reality, these glasses can probably be sold for under $100 a pair and still yield a healthy profit.  I guarantee that there will be several companies offering a full line of active-electronics 3D glasses at discount prices by next year's CES.  This is a product category that currently doesn't even exist and it will become significant within a year or less.

Things are moving fast, and that means new opportunities for entrepreneurs to make money. If you want to get rich, watch new developments and figure out what new products and services will become useful as a result.

Anticipating Change - Another Lesson...This Time From Twitter

Today I was reading a very good article on Businessweek.com which addresses investment in startup businesses  built around Twitter.  The thrust of the article is that Twitter's acquisition of Tweetie, and its limitations on building ad-based businesses around the Twitter platform, is making it very hard for Twitter-based startups to attract investors.

Ok, I don't want to sound too sarcastic here, but....duh!  That's not a comment on the journalism in the article, but on the apparent surprise being experienced by these would-be entrepreneurs.  As we are seeing more and more, especially in the areas of media and technology, you can't build a business model that depends on someone else to keep doing what they are doing.  

Companies change; people change; the business environment changes -- this is happening every day.  Don't plan  your business expecting that anything will be the same by the time you implement the plan.  You need dynamic plans that can change faster than the surrounding circumstances.  You need plans that thrive in an unstable environment.  You need to be moving your cheese so fast that everyone is trying to keep up with you -- not the other way around.

Honestly, if you come up with a great way to make money from Twitter's platform, why would you expect that Twitter wouldn't do it themselves?  Why would they let you make money that they could be making?  They will only support your success if it ultimately brings them more success. It's a basic tenet of business.

Here's the lesson -- don't chase Twitter or Google or Relativity or Summit or anyone else.  Instead, be the next big thing.  If you don't have a truly innovative idea that doesn't depend on anyone else, then don't launch your company until you come up with one.

(As an aside, the author of the article, Om Malik of GigaOM  (@gigaom)- a super bright guy - definitely understands all of this.  But he also seems to reach the conclusion that it is in Twitter's self-interest to act more predictably.  I'm not sure if I agree, although it's a great issue to ponder.  Om implies that successful platforms have usually grown by supporting their developer base, and goes on to point out that the platform owners almost always reap the bulk of the benefits from those relationships. He draws  parallels between Twitter and Google, Intel, Apple, Microsoft, Sony and Facebook. All of this is what makes the article so good.  I recommend you spend five minutes and give it a read.)

Hot Topic: Digital Media's Impact on Film & TV

There are interesting developments this week in the intersection between digital media and the more traditional media of film and television. These events raise the question once again of whether digital media will have a positive, negative or neutral impact on traditional media.

On the negative side, Voltage Pictures filed its lawsuit this week against all persons who have infringed its copyright by selling pirated copies of The Hurt Locker.  The lawsuit is the first step needed for Voltage to attempt to find the identities of the alleged pirates.  This will lead to settlements and perhaps a few trials, but the philosophy is certainly designed as much to deter piracy as to collect damages.  Clearly, the underlying assumption is that digital media facilitates piracy and that this is a dangerous trend that must be stopped at any cost.

It is much the same strategy the RIAA has used for years in the recorded music industry, with varying success.  There would be some argument as to whether the cost actually justifies the benefits.  There still seems to be plenty of unlawful sharing of music files going on.  And iTunes has probably done more to curtail that problem than the RIAA's legal actions.

On the other end of the spectrum, Time Warner chairman and CEO, Jeff Bewkes, this week told investors that he views digital media as a positive factor in the media business.  He emphasized that film, television and magazines are not the same as the music business, and are not impacted by piracy in the same way.

Of course, Bewkes' message needs to be considered in proper context.  He was talking to investors.  He is likely attempting to allay their concerns so that they will keep investing in TW stock.  However, I don't think there is anything misleading in what he is saying.  I believe Bewkes and his team view TW as a broadbased media company, and digital media is a part of that business.  He is making a point of not getting mired in any particular business model or medium and I applaud that approach.  This is a guy who is moving his cheese before someone else moves it for him.  (If you don't recognize that reference, look here.)

So, who is right?  As data pipelines expand and it becomes easy to move entire full-screen films between computers, do producers and distributors need to call in armies of lawyers to fight the pirates?  Or does film and television content have inherent value for which consumers are happy to pay?

I think it comes down to value and user interface.  iTunes moves a lot of music because it works well and the price is right (kind of -- they would sell a lot more at 25 cents than 99 cents, but that wouldn't satisfy all of the stakeholders in the content).  I think the same economic theory applies to film and TV content.  If consumers can get it easily at a price that doesn't inflict too much pain, the vast majority will continue to pay.  Netflix and its competitors might be the iTunes for the film business.  Actually, iTunes might be the iTunes for the film business if its interface with the living room television works well and penetrates the market.

Bottom line - the entertainment business continues to change and those of us who make our living in it must use the new tools to give consumers an experience that they value at a price that makes sense.  Quality plus Value equals Profit.  That's the only formula for success that always works.

Film Distribution and Home Entertainment in 2015

There have been some very interesting articles recently predicting how consumers will be entertaining themselves five years from now.  The implications are significant.  Let me give you some highlights, and then make some quick comments.

- Displaybank, a consumer electronics research group predicts that sales of 3D televisions will grow by 91% this year, making up 3% of the world televisions by the end of the year.  The study projects there will be 83 million 3D displays in homes by the end of 2014.  That represents 31% of the world market.  Those are really huge numbers.

- GigaOM Pro is predicting that by 2015, 60% of the TV's sold will have a direct internet connection.  This year, 3.7 million applications designed to be run on televisions will be downloaded.  However, by 2015, that number will grow to almost 1 billion!  That is an enormous number!

- The Los Angeles Times reports that Google is about ready to launch its Smart TV software that will allow consumers to navigate between TV, streaming content, home videos and any other number of media formats and sources.

- Last week, Hollywood studios won a ruling from the FCC that clears the way for streaming first run movies directly to consumers on the same day that they are opening in theaters.  (Businessweek's coverage of the implications of that ruling is pretty good.)


You can see the trend here.  Conventional wisdom in 2010 says that within 5 years consumers will be fully connected and entertained without leaving their favorite chair.  The implications for our collective physical fitness are frightening.  But aside from that, what does it mean for the entertainment business?

Are theaters wasting money installing digital 3D systems and amazing sound?  Are consumers just going to buy a giant 3D TV and 7.1 surround system and watch everything at home?  Click the Domino's app in the corner of their screens and have their favorite pizza show up in 30 minutes or less -- for a fraction of the cost of popcorn and Coke at the cineplex?

Despite these projections, I don't believe that the theater business is dead -- but it is definitely facing some challenges.  On the one hand, I believe consumers experience a palpable excitement when watching a film in a dark room with a few hundred strangers, on a giant screen with seat-shaking sound.  And I think people will always want to get out of their house and "do something" other than watch TV.  Going to a movie is the primary way they fill that need.  But I also think that theaters have to work hard to continue to deliver a high-quality experience at the right price.


The problem is that the distributors who already take the bulk of the ticket price from the theaters may soon become direct competitors.  If the distributors make more money piping the film directly to consumers' living rooms, then they have no incentive to help theater owners fill their seats.  That makes it very hard for theater owners to deliver a superior product at a reasonable price.

For the next few years. there will be a real wrestling match between theater owners and distributors and consumer electronics companies.  I think  Sony wins either way as it will continue to sell TV's and distribute films.  But Regal and AMC are facing a much bigger challenge that might even result in another round of downsizing for those major chains.

I welcome some comments and other points of view.