Let’s Get Ready to Rumble!
Friday, January 6, 2006 | Dylan JovineRating:
LET'S KICK OFF 2006 THE BEST WAY WE KNOW HOW - WITH A GOOD FIGHT. Guest editor Todd Friedman and I have been involved in a raging debate for months that has finally reached an impasse.
The topic? The future of DVDs. The solution? A debate in this issue of the Tycoon Report.
The winner? You be the judge.
I'm not talking about the kind of fight people get into on the Jerry Springer show after they find out their husband is having an affair with their midget sister.
Nor am I talking about the kind of fight that happens in the little yellow square bus on the way to school.
Nope, today I happen to be talking about the kind of fight, er... contest that happens on the hit television show "AMERICAN IDOL."
But instead of singing we're going to debate the future of DVDs in America.
That's right.
Professor Friedman thinks that DVDs are here to stay.
In contrast, I think DVDs are going bye-bye.
But before we start our first episode of "TYCOON IDOL," I have one favor to ask of you:
We need you to be the judge today, folks.
Yup, all 50,000 of you reading this right now are going to have the power - unseen since the days of the Roman Empire - to channel your inner CALIGULA and decide which one of us gets fed to the lions.
To vote, simply hit the "REPLY" button on your email and write either "TODD" or "DYLAN" in the subject line. (If you want to add a comment or two, feel free to do so.)
So with no further ado...
In the GREEN CORNER, fighting out of Fresh Meadows, Queens, is guest contributor to the Tycoon Report and Professor of Financeat St. John’s University.....TODD FRIEDMAN.
In the BLUE CORNER, formerly fighting out of Queens but now hailing from the cultural vacuum that is Miami Beach, is Fallen Angel Stocks editor...DYLAN JOVINE!
LE-E-ET'S GET REEAADY TO RUMBLLLLLLLE!!!!!!!!!!!
As you will read in Todd's article below, he believes that people will never stop buying DVDs.
Todd’s main thesis is that people like you and I will be unable to part with those light rectangular cases that hold our favorite films.
For the sake of the debate, I probably shouldn't introduce into evidence the fact that Todd personally owns almost 1,000 DVDs.
I am quite hopeful that his views aren't blinded by the very expensive personal investment he's made into creating an impressive DVD collection.
Nor am I going to introduce into evidence the general disdain I hold for 95% of the product that Hollywood creates.
While I thoroughly enjoy going to the movies (it's one of my favorite activities), most of them are so predictable that I can't get past ACT I.
(In my circle of friends, I'm that annoying guy who actually walks out of the theatre as soon as he realizes he doesn't want to throw away "time" after throwing away money.)
But enough about us.
Let me talk about two things - us as consumersand the economics of making motion pictures.
THE CONSUMER SIDE
A general rule of business that you can bank on from here until the day you die is this:
"ANY PRODUCT THAT MAKES YOUR LIFE EASIER WILL BE A HUGE SUCCESS."
Since we're on the subject of home entertainment, the "Remote Control" is a perfect example of this theory.
Who do you know that doesn't own a remote control? (excluding your granola eating, nature loving,
hair-under-the-arm female hippie friends from college.)
Why does everybody own a remote control?
Because it makes our lives easier.
I don't know about you, but roughly once per month I love nothing more then to plop on the couch and flip channels without moving all day.
I know, I know...I should be getting up and changing the channels.
At least it would bring my waist back down from 38" to 35", but I can't do it.
I doubt I could ever get rid of my remote control.
Now back to the subject of DVDs.
Todd could cite all the facts he wants to, but the reality is that MOVIES ON DEMAND make our lives easier.
Let me give you an example:
As pathetic as it sounds, the older we get, the more our weekly pilgrimage to Blockbuster on Saturday night becomes an event.
Of course anybody with any taste in films knows that Blockbuster has the most shallow selection on the planet (Netflix rocks for that), but it's still something we do just to get out of the house and pick up some ice cream next door.
And while this is certainly a fun pastime, the two largest cable companies in America right now - Comcast and Time Warner - have the ability to snatch that blast of wild fun right out of your hands.
Let me use Time Warner Cable as an example, since I'm in New York right now and I'm addicted to it.
To watch an older movie, all I have to do is go to HBO ON DEMAND and select from a list of roughly 30 movies.
Even better, if I want to watch past episodes of the Sopranos or Curb Your Enthusiasm I do the same.
As soon as the movie starts, I am able to pause it, rewind it or fast forward it.
With newer movies, all I have to do is go to the PAY PER VIEW channel and rent any movie that I want.
Granted, there is limited selection right now, but that's changing.
My point is that the trend is going in the direction of all movies on demand all the time so you never have to leave your house.
I'm not a fortune teller, but I see three likely scenarios (or a combo of sorts):
#1. SUBSCRIPTION MODEL: You pay a monthly "subscription fee" to access as many older movies as you want.
Ultimately, this will include every movie ever made.
Whenever new movies come out, you will pay the $3.95 or so to rent them, because they will be on cable as soon as they hit Blockbuster (bye-bye Blockbuster).
In this scenario you would really never have to "own" movies because you'll always have access to any movies you want any time you want them.
#2. "IPOD" MODEL: You pay a fee each time you download a movie onto your cable box (which will have massive add-on storage space soon.)
Here you'll own the movies in digital form and be able to transport them when you travel or do whatever you want.
The movies will become just bits of data much like most of my music is now on my external hard drive and IPOD.
Whenever you want to watch any of your downloaded movies, you'll just press a button, and it will come on.
#3. 'STARZ" MODEL: When your television and the internet finally finish converging, you'll be able to watch movies straight from the web for some kind of fee.
Either way, these models will eliminate the need for you to even leave your home and rent a movie.
Just like the remote control eliminates the need for you to get up from the couch.
THE BUSINESS SIDE
To explain why cable companies will do this, I'm going to use my Time Warner Cable example from above.
Time Warner is a vertically integrated media company.
That means that it produces and distributes its product.
Now, if you're Time Warner, you have one of two options when you release a new movie for home use.
OPTION #1: You can continue to make physical DVDs and let people rent them from Blockbuster.
Of course, you have to split the money with Blockbuster, which is never fun.
OPTION #2: You can just let people download the movies you make directly from their cable and not split the money with any distributor.
Hmmm....100% of the revenue or split the revenue?
Tough decision - for a socialist.
Just as importantly for Time Warner is the competition they face from telecom companies such as VERIZON.
As most of you know, Verizon is trying to break into the business.
But if you're a Time Warner Cable customer and you love having access to that huge library of Warner Brothers films and Sopranos episodes, you'll probably hang up on the Verizon guy who cold calls you to get you to switch.
Thus, Cable companies putting as much content on their systems as they can creates a BARRIER TO ENTRY for Verizon.
Well, folks, that’s the majority of my argument.
Of course, I could go on about how non-vertically integrated distributors like Comcast will fare, but that's an easy subject for another day.
For now, I just want to remind you to vote for Todd or me (preferably me) when you respond to this
debate.
As for me, I'm going to Blockbuster.
AND NOW, TODD FRIEDMAN’S POV
After a terrible fiscal year, Hollywood is trying to figure out what went wrong.
A 15-year low and these guys are scratching their heads.
Ticket sale revenues dropped five percent in the first 11 months of 2005, according to box office trackers Exhibitor Relations Co Inc.
In addition, the number of American cinema-goers fell by 6.2 percent compared with the same period in 2004.
Why did this happen?
Are movies just made so badly that no one wants to see them?
It could be that DVD sales are exploding, and more and more people are staying home to watch the movies.
Then again, it is probably a combination of the two.
This is possibly due to poor content and because of the small window between the big screen release and the DVD release.
If that isn’t bad enough, they are now discussing having no lag time at all between DVD and on-demand releases (cable & satellite.)
“Hey, we cut off our noses.
Let’s shoot ourselves in the foot.”
Talk about a bunch of sadists!
Hollywood has to become creative and original again.
Most people are sick and tired of remakes and formulas.
Don’t they have any good screenwriters????
What happened to making people wait to see the movie at home well after its heatrical release?
The idea was simple enough, and it worked: Have the content only in the theaters and then wait six months or longer for (at the time) the VHS release.
If people wanted to see the film, it was either in the theater or they’d have to wait a long time to see it at home.
Hollywood figured they would capitalize and piggy-back on the momentum of the big screen release.
Well, they piggy-backed themselves into trouble.
We know that home viewing is important to Hollywood, so the questions then become: How long should they wait for release?
And In what format(s) should they release them?
The first one is pretty simple.
STOP releasing your movies immediately after their big screen release.
The movies used to be something special; it was like going to a live show or an experience for most people.
Over time, it has lost its special value.
One way to get that value back is to take away the assurance that people can see it at home soon after it’s in the theaters.
So now they need to choose a format, or do they?
They can currently choose DVD or Cable TV and Satellite TV (on demand, etc.)
These industries have seen major growth and penetration over the past several years.
These industries are also nowhere near the penetration that they could achieve.
DVDs are at around 75% penetration in the US, not yet close to the 90% that VHS achieved.
Cable has around 60 million subscribers of which only 26 million have digital cable service.
This means that less than half of cable subscribers can even get on-demand service.
In 2005, more than 1 billion DVDs were sold, and there were DVD players in approximately 73 million US homes.
On-demand is not used widely enough to threaten the current DVD market.
It will be at least another five years before on-demand has a solid penetration in US homes.
Did I ntion that DVD sales -- both players and media -- are booming worldwide as well?
Many consumers have started collections, way more than was ever done with VHS.
Hey, they’re smaller and this means more available shelf space.
The DVD market currently makes it possible for consumers to shop around and purchase movies they may not have known existed.
The same is true for on-demand, but there is no visual draw, making people less likely to purchase it.
With DVDs, they are right in front of you. With on-demand, you actually have to search through different lists.
You can also say good-bye to multiple purchases.
Hey, how many people buy multiple DVDs at a time?
No one is going to buy three on-demand movies at the same time.
I don’t own over 1500 DVDs for no reason.
The DVD market is a major outlet for Indy film makers; on-demand is a much harder sell for them.
Many consumers may never reach the Indy list.
So we know Indy filmmakers will continue the DVD trend.
TV shows have recently seen huge revenues from DVD sales.
Shows like Friends and Seinfeld did incredibly well in the DVD market.
They also did well and are doing well in syndication.
On-demand would not work for TV.
If syndication continues and ad revenues pour in from syndication, why would it be available (even for a small fee) on another channel?
And how would you charge, by the season or episode?
Who is going to pay for an episode that they will not even own??
The same goes for classic films.
Many aren’t looking for classics when they go to the
store, but they walk out with one anyway.
With on-demand, again, you have the problem of it’s not being in front of the consumer.
An argument for on-demand is that it is a cheaper distribution method for the studios to distribute their content.
Did you ever hear that cheaper isn’t always better?
Cheaper is distribution can be better and would be if it didn’t cut off a valuable source of revenue.
Yes, the studios could cut out the middle man and use cable to sell their movies.
But why do that when you could use both?
If they keep on-demand as a one-time or 24-hour usage and keep the DVD media for ownership, they get more
revenue streams.
The only one getting hurt then is the DVD rental industry, but this possibility has to wait for the proper infrastructure from the cable and satellite companies.
Turning to recent news, “Starz” has just released “Starz on demand” or “Vongo.”
They are charging $9.99 a month for movies that can be downloaded to any laptop or PC.
For an additional $3.99 a month, you can download pay-per-view movies as well.
Sounds like a great deal, and it is if you’re traveling.
If you’re at home, you would first be able to watch the downloadable movies on cable or satellite.
It is a first step in the on-demand direction, and “Starz” acquired these rights well in advance, securing them through 2010.
Now, we all know what they want to do: lock you in to the cheap service, do away with DVD media and then jack up the prices when it is mainstream.
Only one problem: by the time it could be mainstream, all the content syndicates will have secured the rights.
There will be fierce competition to have the rights, and the rights to these movies will not come cheap.
A “Starz” rep had stated that it would currently cost a new entrant about 750 million to 1 billion dollars to obtain the rights now.
And of course it will, since movie studios need to get a certain return so that they can justify any potential loss in revenue from their other outlets like big screen
and DVDs.
This is going to make it very cost prohibitive for new entrants, and this will, of course, slow growth for the on-demand market.
Let’s face it: people like to own their content.
Yes, in the future, it may be possible for people to download from on-demand onto some time of storage device and own the movie.
But first, you have to get past the other problems I listed, and, in addition, piracy becomes much easier.
It’s bad enough today, but does the movie industry want to face the same problems as the music industry?
I doubt it.
If the content producers are smart (all recent evidence to the contrary,) they will not replace DVDs with on-demand and will, instead, use both, hitting their collectors and occasional purchasers with the DVD market.
Then, they’ll hit the too-lazy-to-go-to-the-store, doesn’t-want-the-clutter, likes-to-sit-on-the-couch and see-what’s-on market.
Why kill such a profitable segment?
They will also make sure that these two have 3-6 month windows between their releases, with DVDs coming first, of course.
And if they have half a brain, they will stop releasing the movies for home exhibition so soon after their theatrical release.
Let people wait.
When people wait, they crave.
When they crave, they buy . . . and buy even if they didn’t really want it.
That’s why you never go to buy groceries when you’re hungry.
Prof. Todd Friedman
Dylan's note:
P.S. WELCOME TO 2006!!!!!! LET'S HAVE A ROCKIN’ YEAR
TOGETHER FOLKS!!
(Please let us know what you think about Dylan Jovine's article.)
Rate his article here »
Rate his article here »
Dylan Jovine
Contributing Editor
The Tycoon Report
