Wal-Mart ends online movie business

In yet another sign that the online video market remains in flux, Wal-Mart says that it's pulled the plug on its movie download service as of December 21, 2007. As we end 2007 and look forward to developments in 2008, it's worth reviewing some of the key events from the online video space - along with a couple of predictions for next year:

• The Movies-only Services Have Underperformed: Movielink was sold to Blockbuster for $6.6 million, Moviebeam was sold to Movie Gallery for about $10 (and subsequently shuttered), CinemaNow’s CEO told us that “In the worst nightmarish predictions, nobody would have predicted that digital distribution wouldn’t be a mainstream business. It still remains a very small piece of the overall home video entertainment pie.” Parks Associates’ estimate for electronic movie rentals and downloads is $99 million in 2007, growing to $372 million in 2008.
• Major Shift from User-paid to Ad-supported Models: Both Google and AOL introduce new ad-supported strategies and shutter their fee-based video download services.
• Movie Rental Services Complement Offerings with Broadband Video: Both Netflix and Blockbuster have online video offerings – look for both to unveil go-to-TV strategies in 2008.
• Consumers are Buying More Broadband Video: The iPod has helped spur sales of video downloads – we estimate that nearly 12 million U.S. households buy online videos at least monthly, spending – on average - $8 per month.
• Broadcast Networks Have Had Good Success with their Online Experiments: The airing of primetime TV shows online has not led to cannibalization (as of yet). Network executives report high advertising returns and solid viewer retention of advertisers.
• A New Push for Alternative VoD Services: VUDU rolls out $399 set-top box with higher-quality VoD service. Video is upscaled to be of higher quality as displayed on high-definition displays.
• Internet TV Goes High-end: Joost and Veoh Networks provide higher-quality content (including studio-created content and better quality), along with key advertisers.
• CE Manufacturers to Engage with Online Video Providers: Look for major deals to be announced in 2008, where broadband video portals are included on CE devices.
• Download-to-burn to Pick Up in 2008: Licensing agreement reached in late 2007 will allow download-to-burn services to grow. In-store kiosks and manufacturing-on-demand will see significant growth.

Nielsen and Large Ad Agencies Are Coming Back

For the last five years, Nielsen and big media agencies have been playing a catch-up game. That whatever they did in the digital advertising space always appeared too little or too late. But year-end 2007 may be the time when they can pop open Champagne bottle and celebrate their comeback. For Nielsen, it accomplished a lot in 2007. Earlier in the year, the company finally fulfilled its promise to advertisers made years ago to release TV commercial ratings and DVR household viewing data. It also acquired Telephia during the mid-year to get its foot in the mobile ad measurement business. And on December 19, it announced a partnership with INVIDI to test TV addressable advertising solutions, a new frontier that not very many success stories have been written yet. If the partnership works out well and results impress advertisers, Nielsen might eventually acquire the smaller player. While it’s too early to conclude that Nielsen’s comeback has staying power, these efforts revealed its growth strategy, and the company appears on a right path.

The INVIDI's story does not stop there. One of its latest investors, the WPP group, is the world's largest media buyer and ad agency conglomerate. The WPP’s interest in INVIDI is a clear sign that traditional ad agencies feel the urgency to develop their digital advertising expertise in order to meet the increasing demand from their advertiser customers and fend off potential competitors. Earlier in the summer time, WPP acquired 24/7 Real Media, another digital marketing service vendor. The deal was announced in the midst of a buying spree fostered by large media companies, such as Yahoo’s investment in Right Media, AOL’s Advertising.com acquisition, and Microsoft’s aQuantive snatch, all spurred by Google’s DoubleClick deal back in April. These deals on one hand demonstrate large technology/media companies’ confidence in new media platforms’ ad potential, on the other hand indicate that they do not have a complete package to compete in the digital advertising industry. These acquisitions fill their knowledge holes, and WPP’s moves are no exceptions. Investing in new ad technology companies like INVIDI is a strategic must for WPP and large ad agencies alike, and Parks Associates expects more such deals to follow soon.

Can Google's Wikipedia Extract Profit from a Non-Profit?

The New York Times (and others) are reporting that Google is working on it's own Wikipedia-like website called Knol (short for knowledge). The site is accessible by invitation only (for now) and differs from Wikipedia in that a) it allows advertising and b) article entries are created and controlled by a single individual. The presumed result is that there will be competing definitions for things like, "Rotary Wankel Engine", let the best one win.

It's an intriguing idea. Wikipedia obviously draws lots of traffic which presents tantalizing revenue opportunities. At the same time, the contributors would likely object to Wikipedia earning millions of dollars off of their volunteer labor. What Google is essentially trying to do is 'privatize' the Wikipedia idea and make it into a business. This raises the question of why hasn't Wikipedia 'privatize' itself. If they were sitting on an untapped gold-mine, don't you think they would? I suspect Wikipedia understands its user base quite well and, for reasons that Google might soon discover, 'privitising' the Wikipedia idea might not be as easy as it sounds.

My second observation is that while I'm all in favor of competition (generally speaking), I don't immediately see the value of dueling encyclopedia entries. Assume for a minute that you're wanting to know what exactly a 'Rotary Wankel Engine' is. You look it up and find 6 different definitions which to varying degrees contradict each other. Do you assume the highest rated definition is correct? Do you pick-and-choose the information you believe? Do you finally finally break down and start fact-checking? That sounds like a lot of work. I'd probably just go to Wikipedia and use whatever they have.

Changing the Gaming World Order

As we head to Germany for our Connections Europe conference, big news broke out in the gaming industry: Vivendi is taking the plunge to acquire a controlling stake of Activision, the No. 2 third-party game publisher in the world. The acquisition price puts Activision's valuation at $10.8 billion ($18.9 billion for the combined company and $8.1 billion for VUG). Based on its FY 2007 revenue, which was $1.5 billion, the acquisition is priced at a 7.5 P/S ratio. However, based on my forecasted FY 2008 sales of $2.3 billion, the forward P/S ratio is approximately 4.7. Compared to EA's 2007 PS ratio of 6, Vivendi is paying a premium for Activision's higher revenue growth potential. Based on the closing price for Activision on Friday, the company's market cap was around $6.5 billion. Vivendi is paying a 60%+ premium.

This is definitely a very interesting acquisition. Vivendi is currently the largest company in the online gaming market. World of Warcraft is pulling in more than $1 billion a year and the subscriber number is still growing, albeit at a slower rate. Its Sierra Online division is also investing in several new online games and business models, including a couple of South Korean imports. There have also been rumors about Vivendi's interest in introducing a mobile or even a console version of the WOW, which the company denies. Activision, on the other hand, is the second largest third-party game publisher and a dominant player in the console gaming market. Its quarterly revenue recently surpassed that of EA's, the first time in company history. The Guitar Hero franchise was extremely successful, the third endorsement selling 1.3 million copies in the first seven days. The Company also owns the popular Tony Hawk and Call of Duty franchises. 77% of its 3rd quarter revenue was from console games. Activision has not been very active in the online space, except for certain downloadable add-ons for games such as Guitar Hero. Activision admits its limited presence in the online space. In its recently quarterly report, it says, "overall, online play functionality is still an emerging area for us. As we move forward, we will monitor this developing functionality and its significance for our products." The combination is very complementary since the two companies are leaders in different spaces and there's very little overlap between their current assets and strengths. Vivendi can help Activision to bring some of its games and franchises online and Activision can help VGU on the console platform. Interested in playing at a Guitar Hero tournament in World of Warcraft, anyone?