Turn any Thunderbolt-equipped Mac into a Mac Pro

High-end media producers have become concerned about the future of Apple's Mac Pro, for two reasons:

1. The Mac Pro hasn't received a major update in years, and
2. Apple withdrew the Mac Pro from Europe on March 1st because it doesn't meet European safety regulations.

It's entirely possible that Apple plans to update or replace the Mac Pro later this year--but it's also possible that this is it for the Mac Pro. That makes ways to expand Apple's other models even more important. For the past couple of years, Apple has touted its 10Gbps Thunderbolt interface as the expansion interface for media producers, but Thunderbolt docks have been very slow in coming to the market.

Engadget reports that Sonnet, which already offers a line of Thunderbolt expansion chassis, adapters and disk arrays, has introduced the Echo 15 dock, with the widest array of interfaces I've seen. It includes:

• Four USB 3.0 ports
• Two eSATA ports
• One Thunderbolt port (in addition to the Thunderbolt connection to the host computer)
• One Gigabit Ethernet port
• One FireWire 800 port
• A DVD or Blu-Ray drive
• Room to mount a 2.5" or 3.5" SATA drive internally

The Echo 15's prices will range $399.95 for the DVD-equipped model with no hard drive to $549.95 for the model with a Blu-Ray drive and 2TB hard drive. Sonnet is taking pre-orders at its website and expects to begin shipments this summer. The Echo 15 is priced very competitively compared to docks from Belkin and Matrox that have fewer ports and no optical or hard drives.

 

The radically reshaped media landscape

Today's media landscape is very different than it was even a few years ago. You might casually, or even professionally, follow one media business or another, but it's only when you look at all major media segments together that you understand just how radical the changes have been:

• DVRs have fundamentally changed the way that people watch television. Viewers are saving up entire seasons of shows and watching them all at one time, finding something better to watch on the DVR at 10 p.m. instead of watching network television, and skipping enough commercials that it's having a serious impact on the bottom lines of networks.
• Movie studios' home video revenues are in serious decline. Consumers are renting from Redbox and Netflix instead of buying DVDs, Blu-Ray is growing much too slowly to make much of a difference, and streaming video revenues haven't replaced, and probably will never fully replace, DVD revenues.
• As of July 3rd, Netflix became more popular than any U.S. cable network, according to BTIG analyst Richard Greenfield. Greenfield estimates that Netflix now has around 24 million subscribers, and the company itself said that its users watched more than one billion hours of video in June. That works out to around 80 minutes of viewing per day. In Netflix households, the service even beats ABC and CBS. Every minute spent watching Netflix is a minute that a broadcast or cable network isn't showing that person a commercial.
• Internet videos are finally making serious inroads into broadcast and cable viewership. It used to be that television networks simply used the Internet as a "farm system" to identify rising talent, but there are now too many people producing interesting Internet shows and not enough network slots to put them into. The Internet, unlike broadcast and cable, has an unlimited number of time slots and no requirement to get carriage from cable or satellite companies.
• Newspapers have cut all the editorial and production staff they can while still staying in business. They're now cutting back on deliveries and days that they print their papers. The only remaining step for many of them is to drop their print versions altogether and try to survive in digital form.
• Self-publishing has moved from the last resort for desperate authors to the fastest-growing segment of the U.S. book industry. Authors who could have gotten publishing contracts are choosing instead to self-publish, and are making more money as a result. Authors who were widely rejected by agents and publishers are turning to self-publishing and, in some cases, finding big audiences. (As with Internet video, major publishers see self-publishing as a "farm system," but it's only a matter of time before the farm teams overwhelm the big leagues.)
• Internet music services such as Spotify and Pandora are having a major impact on both the recording and radio businesses. Record companies are becoming more dependent on subscription music services for revenues; radio stations are losing part of their audiences to paid, commercial-free services. Car companies are adding Internet music services to their infotainment systems, making them as easy to access and convenient as broadcast and satellite radio.

There isn't one major media business--television, cable, movies, newspapers, books, music or radio--that isn't undergoing a dramatic upheaval. All of the changes favor new entrants. Rather than fighting back with innovation, most major media companies have resorted to litigation, lobbying, restraint of trade and refusal to deal in order to try to hold back competitors, or to support their customers that are trying to hold back competitors. In the short run, these tactics often succeed, but in the long run, they'll undoubtedly fail. You can't hold back the ocean forever.

Consumption of online movies passes physical movies for the first time

If physical DVDs and Blu-Ray discs aren't dead, they're certainly in the process of shuffling off this mortal coil. According to Broadband TV News, IHS Screen Digest forecasts that legal, paid consumption of movies online  in the U.S. will reach 3.4 billion views in 2012 from 1.4 billion last year, while views from physical media (Blu-Ray and DVD) will decline to 2.4 billion from 2.6 billion last year. Online views will grow 135% year-over-year.

IHS forecasts that 2012 will be the crossover point, when online viewing of movies (including video-on-demand) will first exceed rental and purchase of physical media for watching movies. 2.4 billion views on physical media is nothing to sneeze at, of course, and it'll be years before DVDs and Blu-Ray discs become insignificant. Nevertheless, the handwriting is clearly on the wall: Consumers are getting comfortable with renting and watching movies online.

There are three reasons why online viewing won't grow even faster:

• Redbox's $1.20/day rental fee and huge installed base of kiosks makes its service both cheap and convenient for consumers, 
• Renting and buying physical media enables consumers to use the millions of DVD and Blu-Ray players they already own, and
• Movie studios are still holding back most of their recent releases from Netflix and other services.

New devices, such as Roku's "streaming stick", will make adding streaming Internet video to millions of HDTVs even easier than it is today. It's entirely likely that physical media will be obsolete before the end of this decade, especially if movie studios make more of their releases available for early streaming.

Desperation time: Warner Bros. doubles the waiting time for DVDs

All Things Digital reports that Warner Brothers is set to double the delay between the time that DVDs and Blu-Ray discs go on sale and when they're available for rental through Netflix, Redbox and Blockbuster from 28 to 56 days--almost two full months. (In a separate decision, Warner Brothers' sister division HBO has decided to stop selling DVDs to Netflix altogether, requiring the company to purchase the movies at retail price.)

Warner Brothers' plan is very likely to anger consumers but have no substantial effect on DVD sales. The reason is that consumers who are already unwilling to pay for a DVD in order to see it a month sooner aren't likely to be willing to pay for it in order to avoid a two-month delay. Under Warner Brothers' new plan, movies will hit the rental and pay-TV/video-on-demand markets at about the same time. The plan could actually backfire and lead to lower wholesale sales of DVDs and Blu-Ray discs, since Netflix, Redbox and Blockbuster may purchase fewer copies due to the increased competition from video-on-demand and streaming services.

Warner Brothers and other studios can't turn back the clock and can't change the economy. They might be able to make their plan work, if they make UltraViolet versions of their movies available without having to first purchase the movies on DVDs or Blu-Ray, at a reasonable price and with a much simpler process than they have today. That would make services like Warner Brothers' Flixster a real alternative to Netflix, rather than an ill-conceived tool for decreasing piracy.

Here's why the movie industry needs new revenues

AllThingsD reports that Rich Greenfield of BTIG has quantified the straits that the movie industry has found itself in. For more than a decade, DVD sales made up an ever-increasing majority of the industry's revenues. 2008's Great Recession flipped the DVD market from growth into decline, and the increasing popularity of Netflix and Redbox moved the home video market, which had transitioned from rental to purchase, back toward majority rental.

BTIG's numbers show how far the pendulum has swung. In the first half of 2010, U.S. sales of DVDs were just over $4 billion. Including Blu-Ray and electronic media, total home video sales were $4.998 billion. In the first half of this year, U.S. DVD sales were just over $3 billion--down almost 24% in one year. Blu-Ray sales, which were once seen as the great hope of the movie industry, were $810 million, up from $773 million a year earlier. The total for all physical media was less than the total for DVD alone last year. Electronic media sales increased year-over-year, but only from $260 million in 2010 to $270 million in 2011. Rental and Video-on-Demand revenues, on the other hand, increased from $3.782 billion in 2010 to $4.195 billion in 2011. The total rental market is now bigger than home video sales, and most of the rental revenues go to companies like Redbox and Netflix, not the movie studios.

This is why the movie studios are desperately trying every tactic they can think of to increase revenues, from $60 Video-on-Demand movies to UltraViolet digital copies of movies for online streaming. It's why Sony no longer wants to pay for 3D glasses, and why both movie studios and theaters are pushing 3D movies so hard. DVD sales were the lifeblood of the industry, financing ever more expensive movies and bigger promotional campaigns. With DVD revenues shrinking, studios are having to make difficult decisions, such as Paramount's recent decisions to consolidate its home video division with two other groups and to close its New York distribution office. At some point, studios are going to have to cut back movie budgets and possibly even cut the number of films they release each year.

The DVD "cash cow" is running out of milk, and there's nothing new on the horizon to replace it.

3D: Not dead, but headed for a niche

The New York Times has an article about the back-to-back poor boxoffice performance of 3D versions of "Pirates of the Caribbean: On Stranger Tides" and "Kung Fu Panda 2". "Pirates of the Caribbean" only sold 47% of its tickets in 3D, and "Kung Fu Panda 2" only sold 45%, even though both movies were heavily promoted as 3D titles. In fact, 3D's share of boxoffice revenues has been declining almost since "Avatar" left the theaters. Audiences are getting tired of movies that were originally shot in 2D and then poorly converted to 3D (like "Clash of the Titans" and "Thor"), along with the low brightness, glasses and headache-inducing qualities of 3D as shown in most theaters, and, perhaps most importantly, the steep ticket prices.

As the New York Times points out, the movie studios have a bumper crop of 3D titles coming out this year, and the industry has become dependent on 3D's higher ticket prices to try to compensate for declines in DVD sales and the failure of Blu-Ray to pick up the slack. It now appears that 3D isn't the "Hail Mary" pass that the movie industry was looking for.

That doesn't mean that 3D is dead, but it does mean that the studios will have to become a lot more selective about the movies they release in the format. 3D needs to be reserved for "event" movies that can truly take advantage of the effect--the novelty of 3D for its own sake has worn off. Studios also have to drop 2D to 3D conversions; the audience has caught on, and we're rapidly approaching the point where it will cost more to do the conversions than the incremental revenues that movies will earn with 3D.

The studios also have to, once and for all, get over their spending addictions. DVD sales underwrote a wild period of production and marketing cost escalation, but since the Great Recession, the studios have been looking for replacements for DVD revenues like crack addicts looking for a fix. It's time for the studios to go into rehab. Average production costs of $150 million or more have got to drop to more reasonable amounts. The studios can easily afford 3D becoming a niche format for special events, but only if they bring their spending in line with market realities.

Theater owners' true concern about Premium VOD

Fox, Warner Bros., Universal and Sony found themselves at the center of a firestorm last week when word got out that they had agreed to make some motion pictures available to DirectTV, Comcast and VUDU (an over-the-top Internet video service owned by Walmart) for premium VOD play 60 days after they premiere in theaters. Subscribers to those services would pay $30 per movie and would have 48 hours to watch them from when they purchase.

The National Association of Theater Owners protested the studios' decisions, saying that making movies available at home so soon after they open in theaters will "...fundamentally alter the economic relationship between exhibitors, filmmakers and producers, and the studios." On Sunday, the Chairman of Fox Filmed Entertainment replied, saying that only a small number of titles, primarily those that "don't realize their full potential in theaters", will be made available for early VOD.

Here's the underlying issue that theater owners are really concerned about: Their share of ticket sales from films increases the longer that a movie stays in theaters. The first week that a movie opens in a theater, the studio gets 80% to 90% of the boxoffice. In six weeks or so, the theater and studio are splitting the boxoffice receipts 50/50. If a movie stays in a theater for several months, the theater can take 80% of the boxoffice for itself.

Neither movie studios nor theater owners are concerned about true "bombs" going to premium VOD. What theater owners are truly concerned about is that movie studios will make titles that could last for months in theaters available through premium VOD, thus decreasing theater owners' opportunity for profit. If premium VOD becomes very popular, theater owners are concerned that they'll lose their exclusives on all profitable films after 60 days.

My personal opinion is that the premium VOD option may be a mirage. The premium VOD offering appeals to people who really don't want to go to a theater but are willing to pay a fairly huge premium in order to see a movie at home, perhaps two months before they can buy it on DVD or Blu-Ray for the same or less money, and 90 days before they can get it for $1.00 at Redbox or from Netflix. So, the theater owners and studios may end up fighting over nothing, but don't be surprised to hear and see a lot about this over the next few months.

Could 3D be the Blu-Ray of HDTVs?

Dealerscope has written about a CEA (Consumer Electronics Association) report that U.S. HDTV sales declined on both a units and dollars basis for the first time in 2011. The decline wasn't completely unexpected, because there was a huge increase in sales when digital television broadcasting replaced analog service, which made tens of millions of television receivers obsolete.

In 2006, consumer electronics companies and motion pictures studios hoped to make DVDs obsolete with Blu-Ray discs. At the time, DVDs were still breaking sales records, but motion picture studios were concerned about DVD piracy, and consumer electronics companies saw their profit margins on DVD players being eroded by Chinese manufacturers. Blu-Ray was supposed to be the solution to both groups' problems: It had enhanced anti-piracy systems for the studios (and could encourage consumers to replace their standard definition DVDs with high-definition Blu-Ray discs). In addition, Blu-Ray players required new licenses and were significantly more difficult to manufacture than DVD players, which kept the Chinese manufacturers on the sidelines (at least initially).

What both groups failed to foresee was the Great Recession, which forced consumers to go back to renting movies rather than buying them. That gave a huge boost to Netflix and Redbox, but it caused the overall market for DVDs to decline. Most consumers were also unwilling to pay the premium demanded for Blu-Ray players, so player and disc sales failed to compensate for DVD's decline. In response, consumer electronics manufacturers have had to drop the price of entry-level Blu-Ray players under $100. Now, digital streaming and downloads are depressing sales of physical media even further. Since most Blu-Ray players are compatible with one or more Internet movie services, they're encouraging expansion of streaming video without a commensurate increase in demand for Blu-Ray discs.

The CEA's sales results suggest that a similar scenario is playing out for 3D. Both consumer electronics companies and movie studios hope that 3D will spur a new round of TV purchases, and will stimulate sales of 3D-capable Blu-Ray players. However, the first generation of 3D HDTVs was expensive and required active glasses, which typically cost around $100 each. Glasses from one HDTV manufacturer generally don't work with televisions from other manufacturers. The increased cost, multiple formats and discomfort of wearing active glasses discouraged consumers from adopting 3D.

This year, at the Consumer Electronics Show, several manufacturers showed 3D systems that use less-expensive passive glasses or no glasses at all. However, early reviews state that the loss in resolution that some of these systems require in 3D mode (they can only display 25% of 1080P resolution) is noticeable and distracting. Some systems also use filters that distort conventional 2D video. The glasses-free systems require viewers to sit in specific places in order to see the 3D effect. The proliferation of 3D formats (active, passive, glasses-free, and variations of each approach) is likely to confuse consumers even more than last year. What's worse is that the problems with various 3D formats may not be clear in retail showrooms, but will become obvious once consumers get the TVs into their homes. That will lead to product returns and negative word of mouth, which will taint all the 3D products, even the best ones.

At the same time, millions of consumers are using HDTVs as the primary screen in their living rooms and tablets as a second screen that can augment the first screen in some cases and replace it in others. Consumers are buying tablets, which don't do 3D well but are portable, rather than 3D HDTVs. It's much too early to say that 3D in the home is dead, but the probability is increasing that 3D will be a niche format, in much the way that Blu-Ray is a niche.

U.S. video rentals from kiosks now exceed rentals from retail stores

According to the NPD Group, in Q3 2010, rentals of DVDs and Blu-Ray discs from kiosks (primarily Redbox) exceeded those from retail stores (including Blockbuster) for the first time. Netflix and other subscription services accounted for 41% of all video rentals, while kiosks accounted for 31%, and in-store rentals accounted for 27%. Year-to-year, kiosk rentals increased 10%, subscription services increased 2%, and in-store rentals declined 13%.

Keep in mind that the numbers reported by NPD Group only cover rental of physical media; if streaming video and digital downloads were included in the figures, retail's share of video rentals would be even lower.

This news comes at the same time that Blockbuster received a two-week extension from the U.S. Bankruptcy Court to file a reorganization plan and hire a new CEO. The Dallas Morning News reports that Blockbuster is looking for as much as $250 million in additional financing in order to exit from bankruptcy. Bloomberg Television is reporting that some Blockbuster creditors are balking at putting more money into the company and are suggesting that the company liquidate.

In any event, Blockbuster's retail locations are an endangered species. For the company to survive, it has to increase its presence in the kiosk segment and build a viable online business.

Attention Jeff Bewkes: It's coming, whether you like it or not

Jeff Bewkes, the CEO of Time Warner, has been getting some cheap shots off recently at Netflix's expense. Last week, at an entertainment conference run by UBS, Bewkes was asked about Netflix's offer to acquire rights to in-season television shows for $70,000 to $100,000 an episode, and he said that it "... is a measly little offer...that is not attractive or incremental". So, what's Mr. Bewkes' attractive and incremental opportunity? According to him, it's syndication revenues and DVD sales.

Let's examine that argument. In the U.S., television broadcasters are struggling to recover from the recession. That's a big reason why there's been so much emphasis on payment for retransmission rights by cable, satellite and IPTV service providers; broadcasters are trying to tap into whatever revenue sources they can find. There's not a lot of money in broadcasters' pockets to pay more for syndication rights. But what about DVD sales? According to research firm In-Stat, they're forecasting physical video media sales to decline by $4.6 billion from 2009 to 2014. That's not just a decline in DVD sales--that's a total decline in both DVD and Blu-Ray sales. In other words, Blu-Ray, the technology that was going to save the movie studios, won't. On the other hand, In-Stat is forecasting that video downloads and streaming are going to increase $4 billion, from $2.3 to $6.3 billion, over the same period. Essentially, Bewkes' company has no choice but to sell to Netflix and its competitors, simply to compensate for the decline in DVD and Blu-Ray sales.

In a separate interview with the New York Times last week, Bewkes referred to Netflix this way: "“It’s a little bit like, is the Albanian army going to take over the world? I don’t think so.” The problem is that in many ways, Netflix's army is bigger and has more weapons than Bewkes' own. As The Wrap pointed out, Netflix now has the rights to stream movies comprising 49% of the 2010 U.S. theatrical box office. By comparison, Bewkes' HBO only has access to 43% of the 2010 box office, and HBO is bleeding subscribers, while Netflix continues to grow.

Perhaps by bad-mouthing Netflix, Bewkes believes that he's improving his negotiating position or demonstrating what a tough manager he is. The overall impression, however, is that he's out of touch with reality. Given Time Warner's history of mismanagement over the years, that's not reassuring, either to Time Warner's shareholders or employees. It might be a good time for him to decline additional interview requests and get a better handle on what's really going on in his businesses.

Lowest summer attendance in U.S. movie theaters since 2005

In addition to the problems caused by the decline in DVD sales, you can now add bad news in movie theaters. According to Hollywood.com, U.S. theatrical attendance hit its lowest point since 2005, even though theatrical revenues hit a new record ($4.35 billion.) Why did revenues increase even though attendance dropped? The reason is that average ticket prices have been rising for years, and the introduction of 3D has pushed prices even higher.

If revenues are up even though the number of customers declined, that can't be bad news, can it? Actually, it can. Ticket prices can't continue to escalate at the rate they have indefinitely, especially given the slow and tenuous financial recovery. To spike revenues, movie studios are converting movies originally shot in 2D to 3D, with generally poor results. Revenues for these converted titles have been dropping throughout the year, and if the studios aren't careful, they may kill off the willingness of moviegoers to pay more for 3D before the new format even has a chance to take hold.

If theaters can't raise prices and attendance continues to decline, the inevitable outcome will be decreased theatrical revenues. DVD sales and revenues are also declining, even though the "loss leader" discounting of new DVD titles by the big-box retailers (Wal-Mart, Target and Best Buy) is largely a thing of the past. Blu-Ray hasn't taken up the slack in DVD sales and is unlikely to do so in the future. The market is shifting to DVD rentals, video on demand and digital downloads, but these channels bring in much less revenue than DVD sales.

It's the combination of all these trends, not any one trend in particular, that is (or should be) grounds for extreme concern in the movie industry. Some say that the industry has always had down years and has always rebounded--first radio, then television threatened to kill off movies but failed--but studios have become addicted to the "crack" of DVD sales and increased ticket prices. Movies like "Avatar" and the "Transformers" series couldn't have been produced without these revenues. Studios will have no choice but to either maintain budgets and release fewer films (increasing their exposure to risk of failure) or decrease budgets and produce the same number of films. This will decrease the potential for breakout blockbuster hits, which could result in even lower revenues. Neither outcome is appealing, and there's no solution on the horizon.

Are we at the end of the blockbuster film era?

NewTeeVee is reporting on a research report written by BTIG analyst Richard Greenfield, which states that the delays between the DVD release of feature films and their availability on cable VOD have collapsed from an average of 30 days in 2006 to five days in the first half of 2010. Now, most movies are being made available on VOD on the same day and date as DVD.

According to the article, Greenfield's belief is that movie studios have largely given up on protecting DVD revenues against VOD in favor of protecting the entire home video revenue stream against Netflix and Redbox. The typical price for a day-and-date VOD movie is $4.99 in SD and $5.99 in HD, and 70% of that revenue goes to the studio (versus 60% for conventional "windowed" VOD releases.) By comparison, Netflix's model is that they essentially pay the manufacturing cost for the DVD when they purchase it (often no more than a dollar or two (U.S.)) and then pay the studios a small amount every time a subscriber rents the title. Redbox purchases the DVDs at wholesale, and that's the only revenue the studios get; there's no revenue sharing beyond the initial purchase.

The problem is that the studios are making a lot less from VOD than from DVD sales, even though they don't have any manufacturing and shipping costs with VOD. Consider a DVD with a list price of $19.95; studios typically receive 50% of that, or $9.98. Manufacturing costs for most DVDs in the quantities that studios purchase them are $1 or less, so that leaves almost $9.00 for the studios for shipping and warehousing, advertising, royalties, etc.

Compare that with the $4.99 that cable operators charge for SD VOD films. Studios get 70% of that, or $3.50, and they have no manufacturing, shipping, or warehousing costs, but let's assume that shipping and warehousing adds $0.50 to their costs. That means that they get $3.50 from the VOD showing and $8.50 from the DVD sale. The $3.50 that they do get is much more than they get from Netflix or Redbox, but it's still $5.00 less than they get from DVDs.

The implications of this shift are much bigger than simply making less money per transaction. For more than ten years, DVD sales have been the profit engine driving the movie studios. Theatrical attendance has been dropping for years, and the only reason that the studios have been able to maintain their theatrical revenue stream has been increased ticket prices. The profits from sales of DVDs have enabled studios to dramatically increase their production and advertising budgets for feature films. These profits enabled studios to go ahead with films that cost $200 million or more to produce; their expectation was that with break-even performance in theaters, they could make a big profit from DVD sales.

Now, the DVD profit well is drying up, and Blu-Ray, which was once seen as the successor to DVD, isn't making up the difference and will likely never generate the level of revenues that DVDs once did. This explains the desperate push on the part of studios to adopt 3D. Theaters charge more for 3D tickets, and studios get as much as 80% of the ticket price for releases in their first few weeks in theaters. In addition, Blu-Ray supports 3D, and studios hope to push more Blu-Ray sales through 3D. However, the studios are at risk of killing 3D by flooding the market with cheesy post-production 2D-to-3D conversions.

Without the DVD profit engine, and without anything to replace it in the near term, studios are going to have to cut back on spending. That might mean betting more on blockbusters and their huge budgets, and cutting back the total number of movies they release each year, or maintaining the same number of releases and cutting back on budgets. Either approach means big changes for the movie industry.

The independent filmmaker's paradox

Several years ago, I ran a DVD distribution business. I didn't do a very good job, but sometimes you learn more from your failures than your successes. We were looking to license the home video distribution rights for a number of feature films, and worked with a company in Los Angeles that keeps track of all the independent films that are in production or completed and are looking for distribution. This was a few years ago, but there were more than 4,000 independent films produced each year without committed distribution deals. That's an enormous number by any measure. According to the Motion Picture Association of America, there were 610 movies released in the U.S in 2008. That's about the capacity of the U.S. theatrical exhibition system; they could of course show more films, but it probably wouldn't be profitable for either the exhibitors or the distributors.

Home video used to be a good outlet for a lot of titles that couldn't find theatrical distribution, but independent movie rental stores are all but dead, Blockbuster is "circling the drain", and the other leading rental chains are nearing, in or just existing bankruptcy. Home video is being driven by Netflix and Redbox; Netflix with a huge selection, and Redbox with a very small selection but low rental prices. DVD sales have dropped off due to the economy, and Blu-Ray is nowhere near picking up the slack. The big-box retailers like Wal-Mart and Best Buy no longer discount the new releases as heavily as they once did, slowing sales even further.

For an independent movie producer, the "conventional" outlets are becoming less and less viable. When shelf space is determined by how many discs can fit into a vending machine, the chances for small feature films to get distribution, let alone get noticed, drop to almost zero.

The Internet is seen by many as the savior of independent film, but that's where the filmmaker's paradox kicks in. You can produce and edit a movie today for less money than ever before. Distribution via the Internet is less expensive and more democratic than any method ever available to filmmakers. However, there's very little chance of making enough money from the Internet to cover the production costs of even a small independent film. So, even though it costs less to independently produce and distribute a movie than it ever did, it's no easier to turn a profit.

For decades, independent film financing has relied on an ever-changing assortment of starstruck investors, government agencies offering tax breaks and the families of filmmakers who want to help them make their dreams come true. Every year, there's a new set of players: One year there's money from South Korea, and the next year Germany becomes the big player. Canada and Louisiana compete to see which one can offer the most tax subsidies and the lowest overall production costs. Nothing, however, changes the fact that independent film funding is a sucker's game for the vast majority of investors. Subsidies allow you to save money, but you usually have to make some in order to get the benefits.

So what's the solution? It's attitudinal rather than structural. The Internet is not going to change into a profitable distribution channel any time soon. If you're making an independent film with the intention of making money, you're very likely to be disappointed. In you invest in an independent film with any expectation of making a return on your investment, you're also likely to be disappointed. The trick is to make and invest in independent films with no expectation of getting your money back. Make them because you want to tell a story, because you deeply believe in a subject, or you just want to pal around with actors and directors you admire. Take advantage of the lower costs of production and distribution to make films that otherwise would never have been made.

Video Business Magazine closes

Today, Reed Business Information announced that it had shut down Video Business Magazine, effective immediately. Both the print magazine and the website were shut down. They were apparently victims of the recession, the decline in DVD sales, and the long-term closure of thousands of independent video rental stores, all of which resulted in lower advertising revenues.

Given that Video Business was one of two remaining magazines focusing on the home video industry in the U.S., the outlook for independent coverage of the industry isn't good. Also, speculation is high that Variety, Reed's flagship entertainment publication and newspaper, is either already on the block or soon will be for sale.

People are Buying Blu-Ray Players, But Not for Blu-Ray

Regular readers of this blog (okay, I admit that there are no regular readers of this blog) know that I've been skeptical about Blu-Ray. It took far too long to resolve the Blu-Ray/HD DVD battle, and then to actually get Blu-Ray players to market at a reasonable price. However, I'm willing to admit that I was wrong. People are willing to buy Blu-Ray players...just not to play Blu-Ray discs.

The Blu-Con conference was held this week in Beverly Hills, and if there was one overriding theme, it was that the motion pictures studios are really, really desperate. DVD sales were down more than 13% in the third quarter, and the studios depend on the profits from DVDs to underwrite the cost of producing blockbusters. As DVD sales drop, film financing gets riskier. We may be heading back into an era when a single bomb can sink a studio, as the movie "Cleopatra" almost did to 20th Century Fox in the 1960s.

As DVD sales are dropping, Blu-Ray sales are increasing, but at nowhere near the rate needed to compensate for DVD's decline. However, sales of Blu-Ray players are growing proprotionally much faster than sales of Blu-Ray movies. Why? The biggest reason is that the prices of the least expensive Blu-Ray players are now overlapping the high end of DVD player prices--around $99. At that price, why not buy a Blu-Ray player, which can also play DVDs?

Another key reason, and the biggest motivator for sales of Blu-Ray players in the $200 range, is Internet connectivity. The studios thought that the Internet connections on Blu-Ray players would be used for games, chatrooms and other content connected with Blu-Ray movies, but that's not been the case. The biggest use for the Internet connections is to play online movies from Netflix, Amazon.com, CinemaNow and Vudu, and Internet videos from sites like YouTube. The Blu-Ray player manufacturers are in a race to add more and more online services, and retailers are racing to drop prices in time for the Christmas season.

So, are Blu-Ray players going to have a big Christmas? Yes, but I suspect that the movie studios won't be so lucky. The very Blu-Ray players on which they've been pinning their salvation have turned into Trojan Horses, bringing streaming movies right along with them. It's ironic that the success of Blu-Ray players is now no longer in serious doubt, but the success of Blu-Ray as a medium for distribution movies is still questionable.

Put a Roku in your Cable Set-Top Box

For years, I've doubted the ability of third-party set-top boxes from companies like Apple and Roku to make much market impact. Consumers generally detest adding more boxes and more wiring to their televisions. That's why home theater-in-a-box systems have been so successful, and a big reason why TiVo, which still has the best PVR, has struggled to build a viable business selling hardware. Consumers know that they have to have a set-top box from the cable or satellite company, and they accept two other boxes: DVD players (slowly morphing into Blu-Ray players), and game consoles.

In turn, both Blu-Ray players and game consoles are morphing into Internet digital video players. Netflix's streaming movie service is integrated into many Blu-Ray players, and with Microsoft's XBOX360. Earlier this week, Netflix made official support for Sony's Playstation 3, and support for Nintendo's Wii is right around the corner. However, none of these devices have anywhere near the household penetration of the ubiquitous cable or satellite set-top box.

Cable and satellite set-top boxes have always been closed, monolithic devices--they act as the gateway to the service provider's content, and nothing gets on them or through them without the service provider getting a cut of the action. Even with initiatives like Tru2Way, there's been little progress on opening up service provider STBs. Perhaps now is the time for them to do so.

Network-enabled Blu-Ray Players and game consoles represent the first viable competitors to the service providers' programming hegemony in the living room. The cable and satellite operators can rail against the competition, try to keep their content suppliers from working with them, and try to limit the value of competitor's services with artificial release windows for movies, none of which are likely to work in the long run. Or, they could add network-enabled features to their own set-top boxes and make the competition irrelevant.

Consider a cable or satellite set-top box that allows subscribers to access the same content as Roku. That means Netflix, Amazon, Major League Baseball, and in the near future, YouTube, Hulu, Revision3, Mediafly and a host of other services. You may be thinking, "Netflix? Amazon? Are you out of your mind? Don't the cable and satellite operators have their own Video-on-Demand services that they've spent millions of dollars to build?" Yes they do. But, those VOD systems have limited capacity and are extremely expensive to expand.

According to Comcast, in the first quarter of 2009, over half of its new VOD movies were available the same day as the DVDs. To limit the impact of $1-a-night services like Redbox, the movie studios are pushing to require Netflix and the kiosk operators to get their titles a month or so after the DVDs are shipped to retailers. The way things are going, if you want to see the movie as soon as it's out on DVD, you can buy the DVD or Blu-Ray, or watch it on cable or satellite VOD and pay a premium. If you're willing to wait a month, you can watch it on Netflix.

But, under the model I'm proposing, even if it's from Netflix, you'll still watch it on your cable or satellite set-top box. The service provider will charge Netflix a small fee for access to your set-top box--perhaps pennies per title viewed or a dollar a month. The service provider will get to brand and sell advertising on the interactive program guide and menus that subscribers access in order to find titles. A similar approach would work for other content providers: The cable or satellite operator gets the right to surround the content with advertising, and possibly to even insert advertising directly into the content.

Is the service provider cannibalizing itself? Yes, but it's capturing a chunk of the revenue that it's now losing, and will lose in even greater amounts in the future, from over-the-top (OTT) services that completely bypass the cable or satellite operator's set-top box.

The OTT services also offer leverage that the cable and satellite operators can apply to providers of conventional cable networks. For example, many service providers have long wanted to move ESPN to a premium sports tier, but ESPN demands a fee for every subscriber, even if they have no interest in sports and never watch any ESPN channels. OTT services like Major League Baseball can be integrated into the service providers' offerings to make a premium sports tier more popular and provide negotiating leverage to move ESPN's services into the same tier.

It's time for the service providers to stop trying to prevent the growth of over-the-top services like Netflix, and to start working with them.

Are DVD "special features" doomed?

Once upon a time, there were VHS videocassettes, which could hold a movie, a few trailers, and nothing else. When DVDs hit the market in 1997, they could hold not only a movie and trailers, but subtitles in multiple languages, multiple soundtracks and menus for navigation. However, DVDs were initially much more expensive than videocassettes, and their usability features weren't always enough to justify the price difference. So, home video distributors hit on a strategy of adding value with commentaries and "the making of" documentaries. Before long, they learned that they could release the same movie title two or three times, each time adding more special features. A small but determined group of fans would buy every version, just to be sure that they got all the special features.

Today, we've become accustomed to getting a commentary and some documentaries on every DVD. In fact, many people won't buy a DVD if it doesn't have a sufficient number of special features; they'll either rent it or watch it on a Pay-per-View service. I used to be one of those people, but I recently took a look at a wall full of DVDs and realized that 1) I had never watched them more than once, and 2) I rarely watched any of the documentaries or listened to the commentaries.

And so we come to Blu-Ray and digital downloads. Early Blu-Ray discs had far fewer special features than their DVD counterparts, although that gap is narrowing every day. Digital downloads generally don't have special features (except for subtitles in some cases). Is the presence or absence of special features going to drive user acceptance, as it did with DVD?

I don't think so. While Blu-Ray has been far from a big success, it's clear that consumers are buying it for image quality, not special features. Digital downloads are being rented and bought for convenience; the absence of special features is actually a benefit, because it keeps file sizes smaller and shortens download times.

The implication of all this is that commentaries and documentaries are on their way out. As a former DVD producer, I can tell you that special features cost a lot of money. As they're increasingly seen as "nice-to-haves" rather than "must-haves," producers will cut back. By and large, I don't think that viewers will miss them.