Blockbuster and Sonic Want a Piece of a $4.6 Billion Pie

Today, movie rental giant Blockbuster announced a partnership with Sonic Solutions that will allow it to stream movies and shows not only on TVs and PCs, but also on mobile phones, portable media players, Blu-ray players, set-top boxes and digital video recorders. Between them, Blockbuster and Sonic already have deals with such CE manufacturers as LG Electronics, Samsung, and VIZIO. VIZIO had just taken the wraps off of its “Connected HDTV” Platform at CES last week. VIZIO’s other content partners include Accedo Broadband, Adobe, Amazon.com, Flickr, Netflix, Pandora, Rhapsody, and Yahoo! The Blockbuster and Sonic direct-to-CE service is expected to launch in the second quarter of 2009.

The bulk of the content available through the service will be newer titles, which will be available to consumers a la carte. Pricing has not been disclosed yet; however, Blockbuster will have to charge around $5 per movie to remain competitive with pay video-on-demand offerings from the cable operators. Blockbuster is also contemplating a subscription model.

The partnership comes as no surprise. One may say it’s in the partners’ blood (pardon the expression), since Blockbuster owns Movielink and Sonic Solutions recently acquired CinemaNow (both companies offer online video purchase and rentals). However, both Blockbuster and Sonic Solutions must beware of the pitfalls that have made Movielink and CinemaNow acquisition targets in the first place:

•Business model: consumers already pay for content by going to movies, renting videos and paying their monthly cable/satellite/IPTV bills. Getting them to buy/rent more content will be tricky.

•Consumer experience: The digital rights management (DRM) software has the potential of undermining the consumer digital media experience. Content partners require strict DRM to protect content from being pirated. The side-effect of strict DRM is that consumers may only play content on a limited number of devices (such as the original PC to which the content has been downloaded). Poor experience will limit consumer interest in the offering.

•Competition: Obviously, Blockbuster’s direct competition is Netflix, which has made its Watch Instantly feature available through numerous consumer electronics devices (LG HDTVs and Blu-ray players, Samsung Blu-ray players, the Roku Netflix Player, the Xbox 360, and TiVo). Additionally, this new partnership will compete with cable operators’ ever-growing VoD collections. It will also compete with numerous free offerings directly from content owners, including Hulu, CBS, and Disney, to name a few.

Parks Associates recent study TV 2.0: The Consumer Perspective, indicates that the potential exists to convert the more than 26 million monthly users of online video services to premium offerings, as Blockbuster and Sonic Solutions are offering. Bringing premium Web video content directly to the consumer electronics device – whether it is the TV, the set-top box, the Blu-ray player, or other devices should be a lucrative business in the next few years. From our report Internet Video: Direct-to-Consumer Services: Second Edition, we forecast that that transactional revenues for online video consumed directly at the TV (via a connected CE device) will grow from $1.2 billion in 2009 to $4.6 billion in 2013. Not only could Blockbuster drive new transactional revenues from both a PC- and CE-oriented online video strategy, but there is much to be said about simply offering the additional online video content as a value-add, and – longer term – there may be some opportunities to derive ad revenues. However, Blockbuster’s success depends on the specifics of how the offering is implemented in terms of business model and the user experience, predominantly. As always, the devil is in the detail.

Hot Topic for 2009: Widgets on the TV

Yahoo! and Intel plan to demonstrate their TV Widget Channel solution at the upcoming Consumer Electronics Show in Las Vegas. The channel will allow users to view photos and internet videos directly on their TVs as well as create customized tickers to show news, weather and sports on their TVs. Initially, the technology will be available on several models of Samsung and Toshiba TVs. However, both Yahoo! and Intel expect more consumer electronics (CE) partners in the near future.

Needless to say, bringing internet features to the TV is a gamble, as Microsoft, Apple, Sony and many others will attest. However, the idea has merit and can be successful with consumers if the provider offers the right features.

A recent Parks Associates’ survey, TV 2.0: The Consumer Perspective, finds that a fair number of consumers are indicating interest in the ability to have Internet-like experiences on their televisions. According to the survey results, 20% of U.S. adults in broadband households (consumers) express a strong interest in having widgets on their TVs that allowed them to customize on-screen tickers to display information such as news, sports, weather and traffic. Twenty three percent desire media sharing capability on their TVs (for example, the ability to view pictures from a photo sharing site).

Consumers also want to interact with one another via their TVs, to enhance their viewing experience. Data from the TV 2.0: The Consumer Perspective study indicates that 14% of consumers are interested in ability to chat with other consumers who are viewing the same program (25% of 18 to 24 year olds), and 13% are interested in ability to recommend (and receive recommendations) about programs (22% of 18 to 24 year olds).

It is thus safe to conclude that Yahoo! and Intel are moving in the right general direction and many similar products will be unveiled in the near future. Companies contemplating launching such products and services must keep several things in mind, however, if they hope to be successful:

1. New services must be very simple to set up and use
2. Every service/function must have a distinct purpose that makes consumers’ life easier
3. A solid business model must accompany every new service

Time for Starz and Netflix to shine

Digitization of media is rapidly changing the interaction between media companies and consumers. As recently as 2006, ABC was accused of being a heretic when it started to release full episodes of its primetime TV shows online for free. Today, the practice is ALMOST mainstream.

Media companies realize (some just a little bit faster than others) that digitization and prevalence of inexpensive broadband (at least in the US, and I do use term "inexpensive" loosely) has given consumers options. Media companies have also realized that consumers with options can’t be easily herded to a specific time (such as primetime) or medium (such as a TV channel or a destination site). Today, consumers no longer have to chase the media. It is the media that has to chase the consumers and present itself to them wherever, whenever and however CONSUMERS want it.

The latest testament to this trend is the deal that Starz announced with Netflix. Starz would make its Starz Play service available as part of the Netflix’ “Watch Instantly” feature. This deal makes the service available to Netflix’ 8.4 million users (as of Q2 2008). It is a bold move for Starz and jives well its overall goal: to make its content available to any consumer on any device. By comparison, the other major premium content player – HBO – has been dragging its feet. Its HBO on Demand service is only available to current HBO TV subscribers, only available in one market (in Wisconsin) and is only available on PC.

It is understandable that HBO is trying to protect its valuable user base, but in terms of next generation of distribution strategy, Starz is designing a new concept car while HBO is pimping its horse and buggy.

The move is also a shot-in-the-arm for Netflix. Securing rights to digital distribution of premium content is a single biggest roadblock to Netflix’ success. With the Starz deal in place, Netflix can now add 1,000 more titles to its 12,000-title “Watch Now” library with another 1,500 titles that would be added by the end of the year. Netflix also bundles Starz content into its all-inclusive, $8.99-per-month service tier**, creating potential to upsell existing customers and augmenting allure for new ones.

**STARZ-only service tier is also available through Netflix for $7.99/month

Sprinting ahead with WiMAX

Today, Sprint has launched its first official WiMAX network in Baltimore, MD. Initially, the service is rumored to offer 2-4 MBps speeds for about $30 per month plus the cost of USB modem (about $60). Sprint offers the service without contract and even offers flexible 1-day passes for $10, to try-before-you-buy experience.

If Sprint can successfully pull off the WiMAX launch in Baltimore, it would put the feather in its cap and help to silence the skeptics. What’s even more important, it will keep it from loosing the valuable 2.5GHz spectrum. Perhaps this is why the target city for the first major rollout is Baltimore, Washington DC’s (and FCC’s) back yard.

Baltimore has several other advantages as the launch city, positioning Sprint’s Xohm for success:
•Great scenario to build out a mobility play. A major argument against WiMAX is that it is a poor mobility solution. With WiMAX deployed in Baltimore, mere 40 miles away from Washington DC, deploying WiMAX in DC by the end of the year (as scheduled) would create a sandbox for Sprint to experiment with mobile WiMAX while lighting up another major metro market.

•Good balance of deployment cost and business mix. The cost of deployment in Baltimore would be lower than in many other major urban centers, such as Boston, New York or Philadelphia. Meanwhile, Baltimore has sufficient number of businesses and universities to provide Sprint with vital first customer wins.

•Baltimore is not a focus point for the 3G guys. Mobile broadband was born as a business service, so US major business center, such as New York, Boston and Philadelphia are well covered by 3G networks and have very high penetration of 3G services. They represent the bastions of entrenched 3G customers, vs. Baltimore, which poses a softer target, especially at the $30 price point.

Despite these advantages, Sprint’s team has a long, uphill battle ahead. The company has a cash reserve for about 12-18 months. The 3G carriers use their successful voice cash cows to fund buildouts of their 3G networks. Sprint doesn’t have that luxury. The company is cash-flow negative. It is rapidly burning through the cash it raised from its partners: Comcast, TWC, Brighthous, Intel and Google.

In addition to financial difficulties, at least for the moment, Sprint is at the technological disadvantage. The 3G carriers have older, 2/2.5G networks built out and most of their devices are backwards compatible. Thus when iPhone looses the 3G signal, it can continue using a slower, but reliable EDGE signal and stay connected. Sprint’s WiMAX doesn’t have that luxury. Unless a CE manufacturer embeds both a WiMAX chip and a cellular broadband chip into a device, once the customer is out of the WiMAX range, s/he is disconnected. Although in future CE devices, this flaw will likely be resolved by allowing consumer to fall back to 3G services when out of WiMAX range.

What is Paramount Thinking?

Last week, Paramount Digital Entertainment (PDE) recruited two Hollywood producers, Alexandra Milchan and David van Eyssen, to create feature-length films for distribution on the internet and presumably mobile platforms.

Upon reading the news, the first question in my mind was: “What is Paramount thinking?” As if reading my thoughts, I found a quote from Thomas Lesinski, PDE’s president, discussing large amount of experimentation with content length online and how people flock by the millions to watch long-form content on sites like Hulu and Joost.

Let’s consider some of the most prominent examples of aforementioned experimentation:
•Broadcast and cable networks airing linear TV shows on the web. Shows such as The Office and The Simpsons are readily available on sites like Fox.com and Hulu.com. These shows are not original, however. They have been repurposed from linear TV and linear advertising paid for them.
•Content owners creating original, short-form content exclusively for the web. SciFi channel, for example, has been releasing original 5-minute-long webisodes of Battlestar Galactica online to explore plot off-shoots and keep audiences engaged with the show between seasons.
•Producers releasing films online instead of directly to DVD. Movies like Incubus and Waterborne premiered online, instead of in the theater, to build awareness prior to movies’ release on DVD.

Really interested readers will notice that all of the above combine original, short-form content or repurposed online long-form content. None of these attempts to distribute original long-form content online. There is a reason for that and we will explore it in a minute.

Meanwhile, Paramount itself has experimented with online video, releasing Jackass 2.5 online in December of 2007, in partnership with Blockbuster. The movie has been dubbed the first feature-length movie released online.

The appeal of feature-length content online is easy to see:
•Won’t cannibalize linear audiences. A major issue with repurposing linear TV content online is the fear that viewers will opt to watch online, instead of on linear TV, fragmenting linear audience and draining advertising revenue from linear channel. Original web content is not available on linear TV and thus can’t cannibalize linear audiences.
•More premium inventory. A problem with the short-form content is the very small amount of space to insert advertising. Online video still relies predominantly on pre-rolls for monetization. Users are willing to tolerate a few pre-rolls for movies and TV shows, but not for the 5-minute clips. The most egregious offenders insert 1 30-second ad per clip. Average ad insertion rate is 1 ad per 2-3 clips. By comparison, a 2-hour-long feature film will have space for at least 16 ads (assuming 1 pod every 15 minutes and 2 ads per pod).

So, let’s take these benefits and add two Hollywood directors specializing in action flicks and internet shorts. Is this a match filmed in Hollywood Heaven? I don’t think so.

First issue: monetization. There still isn’t a business model for profitable online distribution, especially primary distribution. Almost all of the professional video served online is repurposed and has been paid for through linear windows, including theatrical release, pay-per-view, etc (side note: Kurt Scherf has an excellent report on the topic: Internet Video, Direct to Consumer Services).

Economics of Jackass 2.5 do not apply. The movie was comprised mainly of unreleased Jackass 2 content which has been paid for by linear release of Jackass 2.

To be profit-positive, a movie released exclusively online would have to be one 2-hour-long commercial, have to be released as a pay-per-view or would have to be the lowest-cost Hollywood production known to human kind. None of these options position the movie for success.

Second issue: PC is a secondary screen for the long-form content. Bulk of online viewing of long-form content occurs because viewers want to catch up with a missed episode of a linear show. Even in this instance, the market is TINY. Hulu, one of the most popular full-length programming distributors only clocked 6 million monthly visitors in September of 2008, according to Quantcast.

Bottom line: the internet is not ready for first-run, feature-length, professional content. Neither the audience preferences nor the business models are there for success. If I were Thomas Lesinski, I would focus on two things that internet is good for:
•Augmenting linear revenue with repurposed content (a-la Hulu, etc)
•Augmenting viewer experience with short-form content that markets a show prior to linear launch or keeps viewers engaged with the show while the linear component is on the hiatus (a-la SciFi’s Battlestar Galactica).