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David Poland

By David Poland

Delivelution: April 2015 – Pt 1, Unscrambling Eggs

Pregnant again.

Before film, all moving entertainment content was live. Movies were the first born. It took until 1951 for television to be birthed for a consumer audience. The Delivelution had twins in 1976 with the first national cable networks and the launch of commercial videotape player/recorders. Baby 5 was commercial DVD in 1997.

And now, streaming.

We are still in the first trimester of What’s Next for the content delivery business. But we can expect the baby to arrive with most of its fingers and toes in a couple of years, with surprising symmetry, 20 years after the launch of sell-thru DVD, as DVD came about 20 years after VHS and VHS 25 years after broadcast TV.

Of course, I have left out a lot of the detail work in between these “children.” The Internet, for one. But this is not unintentional. The coverage of the Delivery Evolution of content tends to get caught up in those “trees” and to lose view of the “forest.”

The phase we have been in for a couple of years and will continue in for a couple more is an unscrambling of the content eggs.

For almost 40 years, cable has been at the foundation of post-theatrical content revenues. And the industry has built and torn down infrastructure over that entire period, seeking maximum revenues. Cycles have repeated endlessly. Empires have been built and burned. But it terms of the broad strokes, pretty stable. As a result, cable companies that were already wiring homes, were able to build a second arm of their businesses wiring the internet into those same homes. And some became content players. Vertical builds became all the rage. The world was being reduced down to a handful of mega-businesses.

But while there is an element of that still going on, something changed a few years back. These giant conglomerates realized that they were not maximizing revenues anymore with everything under one roof. The savings attached to being consolidated were less than the perceived potential earnings of smaller, more lithe units chasing maximized revenues.

Meanwhile, in The Delivelution, content library values were bottoming with the DVD ownership business. DVD went from being a massive added-revenue situation to being integrated into steeply rising costs of production and marketing and when it hit the wall, it was showing signs not just of maturation, but old age. Pricing had become so low and sales so high that people who were buying out of habit were looking at piles of unwatched, valueless DVDs. Moreover, Netflix came along with a cheap rental solution that made ownership seem silly for many consumers.

So where was The Money? Back to the cable companies. Around $100 billion in gross revenues annually on the cable/satellite side alone. Content costs were relatively low. And so, content providers started to squeeze. And so began the post-DVD second generation The A La Carte Era.

I am simplifying, but for the purposes of this column, forest, not trees.

And so… now we are in the period in which everyone is trying to unscramble their eggs and to sell them much more carefully than they had over these last 40 years of relative post-theatrical stability.

My date for the start of this era is June 9, 2009. That is the day the SAG contract with AMPTP was overwhelmingly voted in by SAG’s members. The agreement with SAG, under the claim that there was little-to-no money in the “emerging technology” of streaming had cleared a number of cost hurdles for the content owners and buyers.

Hulu, initially a partnership between NBCUinversal and Fox with Disney coming aboard in 2010, started streaming reruns in 2008. The 2009 SAG agreement gave those companies a 24-day free rerun window. Hulu announced its first profitable quarters in 2010.

Also in 2010 (July 6), the first streaming deal with a massive price tag was announced, as Netflix and Relativity Media did a $100 million a year deal to bypass traditional pay tv and to go direct to Netflix after theatrical.

This event triggered every content owner that was being paid at significantly lower rates (which at the time was everyone) to withdraw their content as quickly as possible. Both Disney and Sony found ways out of their full agreement with Starz, which was the top provider of streaming studio movies to Netflix at the time.

Also in 2010, HBO Go launched with some films from the four studios with which they have output deals, but with more of an emphasis on the original HBO content library. And Hulu launched Hulu-Plus, which allowed subscribers to push some of their reruns to TVs, instead of just computers and phones/tablets, and slowly added some exclusive content.

Streaming, even at the high prices that Netflix was paying, could not replace the lost DVD revenue. But it was a new revenue stream that made the pain a little less dramatic.

But as these new services rolled out, there was actually less and less major studio content available to stream. Studios didn’t rebel against HBO. But when it came to Netflix or Hulu-Plus or eventually Amazon, etc, they want(ed) to get paid.

And looking at the broad strokes, we’re still there.

The EPIX streaming deal with Netflix includes Paramount and Lionsgate product, is non-exclusive and limited to films that are actually playing on the EPIX cbale/satellite network.

Warner Bros has its HBO relationship and has also built out the Warner Archive product for streaming. They also bought Flixter a few years back, which may ultimately be something or nothing. But the vast majority of their library is not available for streaming.

Sony owns Crackle, which has about 150 Sony library movies available at any time.

Disney has a $350 million deal with Netflix that starts next year, but it is unclear if there is much exclusivity outside of TV and there is still talk about Disney launching their own channel.

Fox and Universal have deals at HBO, but are floating a bit, though you can count on Universal’s strategy being heavily influenced by its parental relationship (Comcast).

To give you some perspective, there were nine Best Picture nominees 2 years ago, which puts us outside of their pay-tv windows. As of this writing, of those 9 Best Picture nominees, only 2 are available to stream via a subscription service, Django Unchained and Silver Linings Playbook, both on Netflix thanks to their deal with The Weinstein Company.

Think I am being snobby? Of the Top 10 grossers of that same year, only 2 are available on a subscription streaming service. Skyfall is on Netflix and Amazon Prime and Madagascar 3: Europe’s Most Wanted is currently available on FX Now (which is free with cable/satellite).

Of course, you can buy or rent any of these titles for as little as $2.99, but now we’re back to Blockbuster.

Consumers have shown, thanks to Netflix, that they are willing to pay for a subscription service so they can watch what they like when they like. But at this moment, that option isn’t on the table for most of the studio libraries. But it will be… because it has to be.

Why didn’t Blu-ray, once it got past HD DVD aka “Red-ray,” raise the bar for the sell-thru Home Entertainment business? Because as that fight was happening, cable/satellite was converting to HD and the vast majority of consumers couldn’t really see the difference between a Blu-ray disc and the cable/satellite delivery of the same film in HD or a stream… certainly not enough so they would pay $15+ for a Blu-ray disc. Yes, there is the cinephile market. I have my shelves loaded with Blu-ray. But, I haven’t bought a new one in quite a while. I get the Criterion Collection on Hulu-Plus. I have more to watch than I can handle.

Those libraries, thousands of titles deep, can’t just sit there gathering dust. They cry out for exploitation. A few years into streaming, a lot of the eggs have been unscrambled. Studios are much closer to being prepared to exploit those libraries in the new streaming/DVR-driven universe.

I don’t know the specifics of the Disney/Netflix deal, but I can say this… whoever can boast of being the exclusive streaming home of the Star Wars library has a huge advantage. Whoever can boast about being the exclusive streaming home of Pixar and Disney films has a huge advantage. As we critical types are gushing about “House of Cards” or “Transparent,” in the real world, there are 20 million homes that will choose to pay monthly for a subscription that will include a densely-packed  subset of films that are beloved. And each studio has a library with that kind of muscle.

Will Disney give Netflix that advantage or will it build its own business? That is the mega-question of the next couple years.

In the cable era, it worked both ways. None of the other premium cable networks were ever able to match HBO’s subscriber base. But they sold movies to HBO and eventually, a few studios got together and built their own premium network, which was part of what drove HBO to shifting focus to more original programming.

But the key here is the library, not just the first wave of “pay-tv” revenue. None of it is getting more valuable sitting on the shelf. And for the first time in history, technology will allow content owners to make everything they own available to audiences at any time.

The questions are, what does the media experience look like for the consumer and how does the money pie get split up moving forward?

Those questions and more in Part 2: Meet The New Bundle. Same As The Old Bundle, Part 3: The Tyranny Of The Old, and Part 4: $200 Billion Is Never Enough.

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2 Responses to “Delivelution: April 2015 – Pt 1, Unscrambling Eggs”

  1. Chuck Lovelace says:

    I notice what you dont point out is the electronic sell thru market is starting to take hold. We can see some of the fruits of that with Star Wars being released tomorrow. Also no mention at all of downloads in your history of the current situation. Many people prefer to purchase their media via either physical or electronic sell thru. These businesses make billions for the studios even in 2015.

    As far a subscription services I notice that there is a bit of subscription fatigue going over the consumer of media right now and it “Subscription Fatigue” is being discussed more and more. While paying $8 dollars a month is great for many the consumer has little interest in paying much more than that. If netflix raises their fees I fear that a large chunk of their subs would cancel out and go elsewhere.
    With things like Sling TV coming online if you read the forums and comment sections people are complaining that they are going to be paying just as much as when they had cable for the a la carte experience (again back to Subscription fatigue).
    On the audio side of the subs universe, the disdane for subscriptions is already showing with music services like spotify where a big majority of their customer subscriptions are of the free variety with very little interest in the pay subscription option. Meanwhile a great number of people continue to purchase their music as single files or albums.

  2. David Poland says:

    Subscription fatigue is real… and will lead to re-bundling… which I will cover in Part 2…

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