Thursday, August 30, 2007
Monday, August 27, 2007
Will Warner Follow Paramount's HD DVD Strategy
Even though Warner denies a change in strategy, it signifies a dramatic comback by the HD DVD camp. For most of 2007, retail wins and dominance in movie sales have positioned Blu-ray as the front runner. While these HD DVD announcements do not overtake the Blu-ray format, it definitely puts them back in the game. More importantly, it will delay the format war indefinitely.
Monday, August 20, 2007
The HD DVD Format Fights Back
This announcement comes after two significant wins by the Blu-ray format. In July, Blockbuster announced it would only support the Blu-ray format in their stores going forward. Target announced this month that it would only support Blu-ray hardware. While, this is a positive sign for the HD DVD format, the Blu-ray format still seems to be inching ahead. The format, backed by Sony, holds the advantage in disk storage capacity, content support and retail support. Additionally, Sony's decision to include a Blu-ray player with its PS3 has been a major reason for Blu-ray's early adoption.
Thursday, August 16, 2007
Xohming (Zoaming) All the Way
Other things we learnt from the announcements include the following:
- The first $2.5 billion earmarked for the first 70 million pops will be spent before the end of 2008. The next $2.5 billion covering another 25 million pops is contingent upon the success of service.
- Since the first $2.5 billion is for densely-populated markets, the cost per pop is a lot lower at around $38 a pop, compared to $100 per pop for the next 25 million.
- Sprint expects $2-2.5 billion in revenue in 2010. Assuming an ARPU of $40 (most likely data ARPU since Sprint wants to keep its cellular network for voice) for a subscriber with a couple of devices connected to the network, Sprint needs to sign up 4.2-5.2 million subscribers before YE 2010.
- If Clearwire spends the same amount of money per pop for its 30 million pops, they need $1.6 billion between now and the end of 2008.
- Sprint probably spent some cold hard cash with highly-paid consultant to come up with Xohm, maybe more than they spent on Pivot or Legend spent on Lenovo.
Wednesday, August 15, 2007
Blockbuster, Google, and Lessons Learned about Broadband Video
Television networks have similarly struggled with the impact of digital distractions (the Internet, game consoles, DVRs, etc.) that have gradually eroded the primetime audience for many programs (American Idol notwithstanding). Their revenues have been impacted in the form of decreased ad "upfront" ad sales (typically referring to the early buying of advertising for the fall primetime season). In June, The Wall Street Journal reported that upfront sales had rebounded slightly compared to previous years, but television networks continue to reevaluate their ad strategies as major advertisers seek alternative outlets, particularly the Internet. When an online video service such as Joost can land 30 major brand-name companies as primary advertisers (among them Coca-Cola, Nike, and HP), you definitely sense that the rules for traditional media have officially changed.
We've been watching how both traditional and upstart media outlets have been addressing digital distribution, culminating in a report that was co-authored late in 2006 by Michael Cai and me (Internet Video: Direct-to-Consumer Services). In that report, we found that while big media of all types were actively engaged in digital distribution of some form, pure user-paid movies-on-demand services would consitute a much-smaller pie of total U.S. revenue than ad-supported models, including the work of the major TV networks to put delayed primetime programming on the Interenet - embodied by the efforts of ABC.com, CBS's Innertube, NBC's Rewind, and Fox Corp.'s MySpace. So far, this has held true, as the major broadcasters are still reporting good returns on their Web properties (as in an active viewership, no signs of cannibalization, and the ability to charge higher rates for ad inventory). Outside of the iTunes TV show and movie download service (which at last report had generated 53 million downloads), we indicated that the user-paid services - and particulary those specific to movies would face hurdles. In the report, we wrote:
"Internet Video for movie content faces stronger challenges in terms of technological challenges, resistance from major retailers, lack of easy connectivity between broadband services and the television, and the continued consumer reliance on tangible media."
Our own consumer data backs the notion that the early successes for broadband video are certainly those efforts more focused on shorter ("snackable") videos, versus a movie download. The good news is that the number of broadband users reporting paying at least monthly to download or stream video doubled between 2005 and 2006 (we compared data from a couple of our studies - Digital Entertainment: Changing Consumer Habits and Digital Media Habits). Five percent of broadband users in Q3 2006 reported paying for video streams and downloads. We're going to be really interested at the results from Digital Media Habits II, which should be available quite shortly. However, consumers active in watching video on the Internet were twice as likely to be downloading short clips (such as movie trailers, news clips, animated cartoons) than longer videos such as feature-length movies or TV shows).
The challenges of selling premium video content have been reflected in a couple of significant announcements from the user-paid broadband video space. First, it was announced on August 8 that Blockbuster was acquiring the online movie service Movielink. Now, rumblings about Blockbuster's potential acquisition of Movielink had been around since March, when the purchase price was rumored to be $50 million. In last week's news articles, the purchase price was rumored to be $20. It turns out that both of these price points were off by several multiples. In an August 14 SEC filing, Blockbuster reported that it had purchased Movielink for $6.6 million in cash. For a service that was created from a reported $100 million in investment from the major movie studios, this is one clear sign that a pure movies-on-demand business over the Internet just isn't ready for primetime.
The second broadband video announcement of significance came on August 13, when Google dropped its user-paid video services, the Google Video Store. Both of these news items certainly reflect the continued challenges facing the online services, but also opportunities for content developers and distributors. We wanted to share a few thoughts about both of these news items.
Blockbuster Seeks an Edge
As a company, Blockbuster’ experience in the video distribution business largely mirrors the opportunities and threats for the industry as a whole. As a movie rental company, Blockbuster’s reach in the U.S. is unparalleled. The company operates more than 5,000 stores in the United States and its territories. In 2006, Blockbuster reported gross profit of more than $3 billion on revenues exceeding $5.5 billion. However, the company’s financials have declined in the last two years. In 2006, Blockbuster experienced a 3.1% decline in DVD rental revenues and an 18% decline in DVD sales revenues. Blockbuster’s core rental business has been under pressure by Netflix, which held a nearly three-to-one margin of subscribers to its online DVD rental service than Blockbuster. Mass retailers, Blockbuster notes, also serve as a threat to its DVD rental and sales businesses because of a movie studio practice known as “sell-through pricing.” This means that the studios release nearly all DVDs to retailers at a price low enough to allow them to entice customers with a small mark-up of the price on their end. For large volume retailers such as Wal-Mart or Target, this is less of a challenge, as they can sell higher volumes of movies than a Blockbuster. For Blockbuster, however, this puts pressure on them.
Blockbuster is no stranger to experimentation with online content. In 2000, it announced a deal with Enron and other broadband providers to deploy a video-on-demand service over 1.5 Mbps DSL lines. Needless to say, given the collapse of Enron and the fact that broadband connections were not nearly as widespread nor as robust as they are today, that the effort was shelved. Now, Blockbuster has announced the purchase of Movielink, one of the first online movies-on-demand services that was established by the major motion picture studios in 2002.
The recent commentary and analysis from major news and financial media outlets has provided an interesting insight into both Blockbuster’s business and predictions about the overall broadband video-on-demand space. Our own takeaways from this sale include the following thoughts:
- Blockbuster is perceived as a follower of Netflix. Netflix initiated the online DVD rental business in 2001; Blockbuster began its online DVD rental business in 2004. Netflix announced its digital movie service in January 2007 (and it was commercially available in June 2007); Blockbuster announced its acquisition of Movielink in August 2007.
- Blockbuster’s brick-and-mortar retail stores are seen by the investment community as both a blessing and a curse. They are a curse, because they account for high overhead. However, recent comparisons of the growth of Blockbuster and Netflix’s online DVD rental businesses indicate that Blockbuster has been experiencing much higher growth in the last year, probably because the retail stores are available for more flexible rental options.
- Movielink et. al. hasn’t been popular because of restrictive digital rights management that doesn’t provide full flexibility. We'd also argue that the lack of freshness of the content is also a reason. Why use a movie download service if the content isn’t any newer than what one could get via a DVD rental?A more successful model for broadband video is wide distribution of content across multiple aggregators, as opposed to creating exclusive portals.
- A more successful model for broadband video is wide distribution of content across multiple aggregators, as opposed to creating exclusive portals. An early lesson learned by the TV broadcasters was that - certainly in this early stage - that exlusive portals providing only one source for accessing the content is a non-starter among an ever-fragmented audience. Certain pockets of the viewing audience, including teens and ethnic groups, are already dramatically changing their media consumption behavior. As the viewing audience becomes fragmented, the channels need to diversify. For media companies trying to establish their own online presence, it is essential to define a clear identity for each of their online channels.
Google Bails on User-paid Content
The Google Video Store was announced in January 2006. This service provided a variety of video, including sports, movies, and TV shows. Google offered these programs for download or rental at prices ranging from about $1 to $20. Although Google's ability to drive revenue from search-generated ads is unmatched, the company - according to critics - struggles in areas outside of this core competency. The Google Video Store was one of these areas. Critics such as David Pogue at The New York Times panned the site its poor design and for not allowing users to play copy-protected content on portable devices such as iPods and notebook computers. Second, Google faced an identity crisis of sorts in providing user-paid and relatively high-value content while at the same time pursuing (and ultimately acquiring) YouTube, which was made famous (or infamous, depending on one's stance) by providing lots of user-generated video and for (in some cases) serving as a clearinghouse for copyrighted content. One could argue that Google's efforts managed to alienate two key constituencies - users who critized a lack of flexibility in enjoying their paid video, and owners of high-value content, suspicious of Google's motives and upset that YouTube wasn't (in their minds) acting quickly enough to squelch the posting of copyrighted content.
On August 13, 2007, it was announced that Google shutting down the user-paid service, ending the 19-month experiment. Our takeaways from Google's pullback including the following thoughts:
- Google’s own YouTube posed a threat to a user-paid video service. Google is struggling to gain credibility with major content producers, because the YouTube site has come under fire for its use as an illegal distributor of copy-protected content.
- As in the case of Movielink, consumers struggled to find value with copy-protected broadband video when 1) much of it was free to view (illegally) on YouTube (or peer-to-peer sites); and 2) a DVD can be played pretty much anywhere.
Google’s core strength lies in ad-supported Web content, and it has struggled with challenging PayPal with Web payment schemes. This means that advertising will be Google’s “currency” of choice for generating revenues on the Internet.
- Google has sown the seeds of discontent with consumers, who feel burned about having paid for broadband video clips and who longer have access to that content. This can raise even more skepticism about the broadband video services – why would a consumer trust any of these sites versus buying a DVD that they can own “forever?”
Current Technologies and DirectTV Announce Broadband Agreement
With this announcement, I can't help but wonder why these two companies are choosing the Dallas-Ft Worth area? The biggest hurdle I see for Current and DirectTV is competition. They will have to compete with cable MSOs Charter and Time Warner. They will also be battling fiber and DSL services from Verizon and AT&T. Details on what Internet speeds will be available have not been announced. However, it will be very difficult for this BPL solution to compete on the basis of speed. It is assumed that Current and DirectTV will compete as a low price alternative.
It is interesting that this populous market was chosen. For years, one of the main selling points of BPL was the possibility to provide broadband services to areas that cable and telcos have not penetrated. With satellite being a popular chose for video service in rural areas, this seemed like a logical broadband strategy to pursue. We will see if this new partnership will begin to expand to rural areas in the future.
Thursday, August 09, 2007
Add comparison shopping to the list of Digital Home Services
These companies represent and area of “digital home services” that I hadn't previously considered – comparison shopping for services and products. However, it's clear why these type of services are important. Purchasing digital convergence products has become a complex task with many confusing options and emerging technologies. Gone are the days when a customer could research and buy a product based on basic parameters such as screen size, form factor, and color. Convergence (digital camera to home computer; audio receiver to high-definition set-top box, etc.) now requires the customer to feel comfortable about such topics as connections, digital interfaces, and interoperability. Therefore, it is not enough for consumers to simply know that a product exists; they also will be required to have a good degree of comfort in understanding how the product works. Reaching this level of understanding will require additional research on their part and speaks to the enormous impact that “influencers” will bring to the purchase process. Moving beyond the “friends-and-family” knowledge connections that we all have, consumers are likely to be drawn to reliable resources for product reviews, comparisons, and buyer’s guides that help walk them through the initial phases of the buying process.
There’s also a growing product presence through these sites. The companies are talking about posting peer reviews and advice and assistance with new products. The services are also talking about ways to link to professional services such as Geek Squad, firedog, and OnForce. So, it looks to be quote holistic in not only selling products and services, but also enhancing the experience with hand-holding and other support.
China's Cable Operators Eyeing Broadband Last Mile
According to officials at SARFT (State Administration of Radio, Film, and Television), they are exploring two-way interactive cable technologies, which definitely would include cable broadband. China's cable TV penetration is now at 35%, with 130 million subscribers. This large installed base can potentially become a gold mine if cable operators are allowed to offer broadband services. As telecom operators in China deploy their IPTV services (currently with more than 600,000 subscribers), cable operators will need to find a way to become more competitive.
China's two regulatory bodies, SARFT and MII (Ministry of Information Industry), have been fighting against each other for years. When telecom operators started their IPTV deployments, SARFT strongly opposed their entry. Since China does not have one agency in charge of communications and entertainment industries, like the FCC in the U.S., such conflicts will continue in the near future. In addition, the government has investment in both TV and telecom operators and officials need to constantly balance the need for competition and the possible repetititve infrastructure construction (considered wasted resources). Because of these factors, it may take years for cable broadband technology companies to benefit from a potentially large market.
Thursday, August 02, 2007
$500 a Penguin
Club Penguin did not invent virtual world or avatar-based social network but it was successful at targeting its audience and monetize its users. It combines premium subscription ($6 a month) and microtransaction. Kids can purchase both virutal and real-world merchandise within the game. For instance, they can buy furnitures to decorate their space or T-Shirts to wear to school. Such ideas are nothing new. Cyworld, the South Korean sensation pioneered the concept in 1999. 96% of Korean youth are on Cyworld and it is expected to generate $150-250 million for SK Communications, its parent company. People have doubts whether those cutesy avatars will work in North America. Cyworld did make its U.S. entrance in 2006 but it's unclear whether the company will meet its target of amassing 2 million users by the end of 2007. Apparently Disney believes in the model.
Virtual Worlds have been the media sensation for the past 12 months. There were tons of news articles on everything related to Second Life, including a recent one pronouncing the death of Second Life on Wired Magazine (It does not seem that the article had any impact on the valuation of Club Penguin). However, it's the less known worlds, such as Club Penguin, Habbo Hotel, Runescape, and Webkinz, that are making real money. Virtual World is here to stay, even if Second Life dies. At Connections 2006, I posed the question to the audience, will Virtual Worlds become the new model for social networking? Large corporations might be exiting Second Life, but they are setting up their own branded virtual worlds instead. MTV set up Virtual Laguna Beach and Webkinz, a site owned by Ganz, is making those fluffy toys fly off the shelf. Disney itself has also set up virtual worlds such as Virtual Magic Kingdom. We expect such Branded Virtual Worlds to become even more popular in the coming years and in our recently published report on game advertising, we actually forecasted the growth of advergames and adverworlds. It's funny that Disney said there won't be any advertisements in Club Penguin... It's a giant adverworld afterall.
This deal leaves me wondering, what's next? McDonalds buying Habbo Hotel? Sony buying Runescape?