It always makes me a little queasy to read pieces like Nat Worden’s WSJ story, Studios Seek Out Backup to DVDs , which manage to be both old news and to project insanely into a future that history teaches us does not exist.
Of course, there is the media-glutton, Richard Greenfield of BTIG, stirring the pot, even when he is missing the point. His last media grab is still resonating as media still throws out rising ticket prices as a serious issue when they are 3D driven and a tiny blip on the radar of a much bigger series of issues facing the movie business.
But the most breathtaking quote of all was: from Viacom Inc. Chief Operating Officer Tom Dooley in regard to the Netflix deal. “The deal clearly demonstrated that these new players are going to represent significant revenue streams to studios,” said Mr. Dooley. “There is a new market developing that’s beginning to replace the physical DVD business. This may not be as elegant a transition as some of the industry’s previous transitions because consumer technologies move so quickly these days, but it will happen.”
I hardly know where to start when there are this many dangerously false notions offered by an important executive in one quote.
He starts with something that is clearly true – “The deal clearly demonstrated that these new players are going to represent significant revenue streams to studios.”
New players… yes. New players often overpay to break into a business area.
But, “There is a new market developing that’s beginning to replace the physical DVD business.”
Uh… kinda… but in the context of the quote, it sounds a lot like Mr. Dooley, like others, has convinced himself against all logic that the “new market” will replace the revenues of the DVD sell-thru bubble of the last decade.
Thing is, it’s not actually a new market… it’s the same market with a wider variety of delivery systems with a lower price point per unit.
“This may not be as elegant a transition as some of the industry’s previous transitions because consumer technologies move so quickly these days, but it will happen.”
Actually, this is very similar to the transition as the industry had from VHS to DVD, in that the VHS market was coming down from its peak and with a clearly superior new technology, the industry scrambled to figure out how to handle the transition. It has nothing to do with the speed of consumer technology, as the issues being faced are still much the same as they were 3 years ago… the main difference is that the studios are opening their vaults, not that the technology has stormed the gates.
What is also significantly different in that last transition is that The Industry decided to make DVD a sell-thru business and not a rental business. The reason for this was to create a price point that was higher than rental, that they had to share less of with brick & mortar, and that was still seen as a bargain for consumers. HUGE win… until the business matured. That’s when the industry pathetically started giving up on price point, chasing the ghost of DVD sell-thru. That is when pay-TV really got out of the movie premiere business. And the bottom fell out of all pricing, making the possibility of a $10 (or in their dreams, a $40) home digital delivery price point attractive.
What we are seeing now is a change – digital delivery – with only one point of increased value, but a number of ongoing issues with decreased value. That is to say, the new value proposition is all-access… the downside is still delivery. Cable/Satellite HD is inferior to Blu-ray as well. But as good as streaming is, it still has glitches and vulnerability to the whims of wireless.
The Big Question… the difference between this being a “new market” and just an extension of the current market… is price point. Can studios get the price point back up with digital delivery?
The answer seems to be “no.” And as a result, we are seeing serious reconsiderations of The Model.
In the meanwhile, you have Netflix trying not to become the next Blockbuster, throwing 30% – 40% more than pay-tv for content. As I have pointed out repeatedly, this is not a business model, this is a gamble on a significant business expansion based on this new kind of content availability. The goal is to solidify Netflix’s position so that, in five years, they can start negotiating lower fees that will allow the business to be profitable. (In the meanwhile, don’t be shocked when Netflix eliminates DVD rentals or charges a premium for DVD rentals in 2012. It will not signal the end of DVD, but the model being a drain on the new Netflix model when they need to cut costs to the bone as they evolve through this transition.)
My point is… Netflix’s current spending spree is a blip, not a new model. The strategy may work for Netflix, but if The Industry sees that as The Next Thing, it will be creating another bubble, not a reliable future for revenues. At the same time, as so often happens, a certain carelessness about opportunity costs being expended is involved.
If, let’s say, the Netflix buy is $200m per studio per year… and let’s say that IS the model. It seems like a LOT to studios that have been squeezed down by pay-tv in recent years. But it doesn’t start to match the revenues of the DVD boom. What AREN’T studios doing to build the future numbers because they are being paid to stream on Netflix? Hmmm…
Disney, for instance, seems to be moving forward with testing of anything/anywhere On Demand for their family library at a price slightly lower than Netflix’s monthly price. What happens when/if the two services compete using the same library? How much value does Netflix deliver if they only have a window for limited Disney product, which starts later and ends sooner and costs more, if your family TV is dominated by your kids? And is this a viable $200m annual investment for Netflix?
Anyway…
Dooley is right, the transition will happen. But I get very nervous when I read someone powerful being quoted with this kind of, “We have it under control” kind of quote. They don’t.
Right now, you cannot add up all of the pieces, including Netflix buys, and match the revenue stream of just 3 years ago. The genius of the DVD play was that it replaced VHS by being a sell-thru system.
What it appears we are moving into is a no sell-thru future. The two models are subscription and rental. Rental will be dominant for a while… and then fall to subscription, in my view. And that fall will come when subscription becomes ubiquitous. Not 20 million or 30 million units, but 100 million… cable/satellite level penetration.
Even then, if the cost of delivering to all formats is, say, 10% and the price for a monthly subscription is $10, the return to the studio on 100 million subscribers is still “just” $1.08 billion a year… which still doesn’t match post-theatrical revenues of an entire studio slate from the height of the DVD boom. (Note: I don’t think that, say, Lionsgate, will be able to charge monthly the same way that, say, Sony can. As they are now, on a number of projects, they will probably team up for subscription models… so while a billion would be a lot for them, as it would not for the majors, they probably won’t be able to see that whole figure.)
And this is why Hollywood is darkening its shorts right now. No one can see what The Solution is… because there is no solution other than spending less on making movies so these reduced revenues will still make for profitable businesses.
There is a What’s Next… but it’s not WHAT’S NEXT… it’s a place where consumers get more for less… and The Industry has no one to blame but itself and its infantile attraction to bubbles.

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