Regal Entertainment: "Exploring options" in a new world

Yesterday, Regal Entertainment, the largest movie theater chain in the U.S., announced that it's exploring "strategic alternatives," including selling the company. Regal has long been the top buyer of theater chains around the country--it now owns 574 theaters with 7,349 screens. However, when there's a run of unpopular movies, as happened this summer, Regal and other theater operators suffer; the company's revenues and profits from the summer quarter fell sharply year-over-year.

Regal's decision to explore a sale is being driven by several trends:

• Industry revenues from theatrical exhibition have increased modestly over the last decade, but the number of tickets sold has been in a long decline. Theaters and movie studios have maintained their revenues by increasing ticket prices, in part by showing 3D movies at higher prices and by installing IMAX and similar panoramic projection systems. No one really knows at what point higher prices will lead to diminishing returns, but many people in the industry are afraid that ticket prices are close to that "tipping point" already.
• Netflix's recent moves to fund and distribute its own movies are sending shock waves through the industry. Regal and the other three of the four largest U.S. theater chains announced that they would refuse to show any movies distributed by Netflix. However, that didn't stop companies like The Weinstein Company and IMAX, or actor Adam Sandler and his Happy Madison production company, from signing up to produce and distribute movies with Netflix. "Direct-to-home" movies have long been a staple of the home video business, but those titles are usually either not good enough or appeal to too small of a niche audience for theatrical distribution. That's going to change with Netflix, and likely other companies, pumping money into producing theatrical-quality movies for the OTT streaming audience.
• As I've written before, High Dynamic Range video, which is under development by several companies, will provide in-home viewers with a picture that's superior to anything other than IMAX. Currently, the only way to view HDR is with a modified HDTV or Ultra HDTV. In order to view HDR in a movie theater, it's likely that entirely new projectors or huge flat-panel displays will be required, which will require major capital investments less than a decade after theaters replaced their film projectors with digital models.
• Many Chinese and Japanese investors, including Alibaba and Softbank, are exploring investments in the U.S. entertainment industry. AMC Theaters, the second-largest U.S. theater chain, was purchased by China's Dalian Wanda Group last year for $2.6 billion.

Put those four trends together, and it's likely that this is the right time for the big theater chains to consider selling. Ticket prices are about as high as they can go without dragging down top-line revenues, non-theatrical competition hasn't yet made a dent in theatrical revenues, the major capital investments to support HDR are still a few years away, and there's a lot of foreign money looking for a home in the movie business. 

Netflix jumps into the movie production business

Many people in the movie and television businesses have believed that given Netflix's success with original television series, it was only a matter of time before the company would begin producing movies. Those beliefs have been confirmed in a big way: Last week, Netflix announced that it has partnered with The Weinstein Company and IMAX to produce a sequel to "Crouching Tiger, Hidden Dragon" called "Crouching Tiger, Hidden Dragon: The Green Legend," and today, Netflix announced a four-picture production deal with Adam Sandler and his Happy Madison production company.

The terms of the deals aren't public knowledge, but some of the plans have been revealed: In the "Green Legend" deal, IMAX was brought in to distribute the film to IMAX theaters. IMAX develops the cameras, projectors, screens and processing software for its various formats, but its theaters are actually owned and operated by other parties, and a number of those parties in the U.S. are very unhappy. The four largest theater circuits in the U.S., Regal, AMC, Carmike and Cinemark, have said that they won't show the sequel. Cineplex in Canada and Cineworld in Europe have also refused to show it. That doesn't completely eliminate IMAX as a viable outlet for the movie, because there are many IMAX theaters operated by museums and public institutions, and smaller theater chains with IMAX theaters may decide to show it.

It's not clear whether Netflix changed its strategy overnight or whether it had already expected the theater chains to react the way they did, but in today's announcement, Netflix said that none of the four movies to be produced by Adam Sandler will be shown in theaters. In addition, they also made clear that none of the movies that Adam Sandler or Happy Madison are already committed to for other producers or distributors are included in the four films.

No one should be surprised that big theater chains won't show Netflix's films--they've pushed back against major studio day-and-date Video-on-Demand (VOD) tests (the movie is released in theaters and on VOD on the same day,) starting with Universal's "Tower Heist" in 2011. By and large, the big studios have backed off of day-and-date VOD, but they're aggressively testing shorter windows between some movies' theatrical release and their availability on VOD. Smaller independent studios such as Magnolia Pictures have adopted day-and-date VOD releases. 2929, parent company of Magnolia, also owns Landmark Theaters, which has 50 theaters in 21 markets, so Magnolia is guaranteed of theatrical distribution in many major cities, no matter what other theater chains decide.

It's likely that Netflix is structuring its movie production deals with the expectation of no domestic theatrical revenues. Whatever theatrical distribution Netflix gets will be promotional, not a significant revenue generator. Over time, if Netflix's movies prove very popular, the big theater chains may be forced to start bidding for the right to show them in their markets. However, for now, the safest move for Netflix is to budget movie production in line with VOD revenues.

Earlier today, The Verge reported on Adam Sandler's deal with Netflix, and wrote:

Under the deal, Sandler removes the burden of risk. Netflix will solely fund the films, taking full responsibility for providing investment — and securing additional investment — off Sandler's Happy Madison Productions. Though Netflix will be the sole financier, the films will still have their $40 million to $80 million budgets. Sandler's payments are a large chunk of his films' budgets. He reportedly receives $15 million and over per film as an actor, and can make an additional $5 million as the producer, which explains how Grown Ups 2, a comedy with a handful of special effects, reportedly cost $80 million. On top of all that cash, it's likely Sandler and his production company will make an additional, undisclosed lump sum of money simply by signing the deal. Netflix decline to provide comment to The New York Times on the specifics of the agreement.

It's inconceivable to me that they would agree to pay production costs anywhere near $40 to $80 million or $15 million per picture for Sandler's acting, especially since Sandler's last several movies have bombed in the U.S. Netflix probably has a "back-end" deal with Sandler that pays him additional compensation if the movies reach or exceed performance targets, such as the number or percentage of subscribers who watch them. As the Verge article points out, Sandler laces his films with product placements, which can defray some production costs, or put money into his pocket. That might be enough to enable Sandler to, say, produce a film for $25 million, get $10 million in product placement funds, deliver the movie to Netflix for $20 million and put $5 million before tax into his pocket.

Netflix may be the first VOD company that will underwrite major motion pictures for its own distribution, but it almost certainly won't be the last. I expect Amazon to follow suit, and possibly Redbox. (Update, October 4, 2014: TechCrunch reported today that Redbox will shut down its streaming service on Tuesday, October 7.  That makes it much less likely that the company will get into original production.) SoftBank, the owner of Sprint in the U.S, SoftBank Mobile in Japan and the single largest shareholder of China's Alibaba, just invested $250 million for 10% of Legendary Entertainment, with options to invest a total of $750 million more between now and the end of 2018. Legendary, whose movies are co-financed, marketed and distributed by Universal, could produce movies for SoftBank and Alibaba should either company decide to distribute its own original titles.

Comcast-Time Warner Cable: Would it really be anti-competitive?

As you probably know, Comcast and Time Warner Cable have agreed to merge. Many consumer groups and some of the companies' content providers and competitors are opposing the merger, while it's hard to find proponents that aren't either getting funding from one of the two companies or are "Astroturf" organizations created to support the merger. However, is the Comcast-TWC merger really anticompetitive? A big part of the answer depends on whether you're looking at the multichannel video services market today, or a few years from now.

If you look at the situation today, whether or not the merger is anticompetitive depends on who you are. If you're another cable company, it's not anticompetitive at all. The reason is that cable operators all have local franchises to be the exclusive cable supplier in the areas they serve. So, Comcast doesn't compete with TWC, which doesn't compete with Cox, which doesn't compete with Charter, etc. The reason for exclusivity is that it was so expensive for a cable operator to lay the wires, put in the plant and equipment, and service customers, that it was uneconomical to do so unless they could serve all the customers in an area without competition.

If you look at Comcast's and TWC's non-cable competitors, the merger is likely to have a modest impact at most. Existing Comcast and TWC customers will still be customers of the merged company, and can switch to a competitor if they want to. It's likely that Comcast will improve TWC's plant and equipment, and improve its cable and Internet services, which would make the combined company a stronger competitor in TWC markets. If you're an existing Comcast or TWC customer, your competitive situation isn't likely to change much, either. The new company will still supply your cable service, most likely your wireline Internet service, and possibly your phone service as well. The same competitors you could switch to will still be there.

However, if you're a program supplier to Comcast and TWC, your situation is likely to change substantially. The reason is that the merged company will have around 30 million subscribers and will be by far the biggest cable and Internet provider in the U.S. (If the AT&T acquisition of DirecTV is approved, that company will have at least as many video subscribers as Comcast-TWC, but DirecTV, which has the lion's share of subscribers, doesn't provide its own Internet service--it resells services from local Internet Service Providers.) The merged company will be the only way for program suppliers (television and cable networks, and movie distributors offering titles for Video on Demand (VOD)) to reach about 1/3rd of all U.S. households. That will give the new company enormous power to negotiate preferential licensing and retransmission fees, and will also give it additional power to negotiate non-fee terms and conditions, such as limitations on content providers' ability to license their content to other service providers. In addition, given that Comcast owns NBC Universal, it can give preferential treatment to NBCs broadcast and cable networks and Universal's movies and television shows similar treatment in its VOD systems, which would put other content providers at a competitive disadvantage.

If you're an Internet content provider, such as Netflix, the merged company will be by far the biggest single provider of ISP services to your customers in the U.S. There's strong evidence that Comcast was throttling the bandwidth available to Netflix subscribers until Netflix agreed to pay for a peering agreement with Comcast. The combined company would have even more power to extract payments from Internet companies.

That's today's situation, but what about tomorrow? Netflix is a nationwide (now also international) service; it can reach everyone in the U.S. who has either wired or wireless high-speed Internet access. Roku, Apple, Sony and others sell set-top boxes and devices that offer similar access to video over the Internet. Verizon, which has long operated its FiOS IPTV service which offers a cable-like video service and high-speed Internet, recently acquired Intel's OnCue Over-The-Top (OTT) Internet video platform. Verizon is expected to use OnCue as the basis of a nationwide video service that will operate over its wireless network, and possibly over the Internet as well. That would give Verizon a nationwide footprint, and would enable it to offer video services in almost every U.S. market. Sony and Dish are also rumored to be in the planning stages for a similar Internet service. Intel's attempt to launch OnCue was stymied by pressure from the cable industry to prevent its program suppliers from licensing their content to Intel, and the same pressure is suspected as the reason why Apple has not yet launched its long-rumored HDTV and video service.

What happens if OTT service and program suppliers find a way to launch viable services that can compete with cable? The video services market could change radically. Instead of today's three or four competitors (the incumbent cable operator, DirecTV, Dish, and depending on where you live, either Verizon or AT&T,) there could be many more:

• T-Mobile and Sprint could use their networks to deliver video to households.
• I've written that there's evidence that Netflix is planning to offer live programming in addition to its VOD offerings; they could expand into a full cable competitor.
• Sony and Apple could offer their own services.
• The existing cable operators could directly compete with each other for subscribers using OTT.

With the exception of Verizon, Sprint, T-Mobile and (if it doesn't acquire DirecTV,) AT&T, all of the other new competitors will have to go through telco ISPs or cable operators in order to get to consumers' homes. If cable operators set prices and/or terms & conditions that make servicing their customers with OTT video unprofitable or too complex, these new competitors could be killed in the womb. That's why I suggest that regulators set and enforce two conditions on both the Comcast-TWC and AT&T-DirecTV deals:

1. Both combined companies must offer all OTT services access to their Internet networks and subscribers under fair, reasonable and non-discriminatory (FRAND) terms.
2. Both combined companies must remove all clauses in their contracts with program suppliers that prohibit them from licensing their content to competitors, or that place significant restrictions on such licenses. In addition, they're prohibited from signing contracts with any such clauses in the future, and from using their influence and market power to informally persuade program suppliers not to deal with competitors.

Both conditions would last for five years from the day that each combined company finalizes its merger and begins operating as a single company. That would give competitors enough time to build their market presence and establish viable businesses, and also give the telecom industry five years to develop new ways for the OTT services to reach consumers without having to go through the incumbent cable operators.

An approach for funding independent films...via Netflix

The business and process of funding, making and distributing motion pictures is going through changes at least as wrenching as those caused by the rise of television after the Second World War:

• Technology has changed everything from movie production to theater projection. You can buy a camera that will give you images that stand up quite nicely in a movie theater for the same price as a big screen TV from a few years ago. Editing and color correction that once required hundreds of thousands of dollars of equipment can now be done on a PC that you buy from Amazon. The only company that still makes motion picture film is Kodak, and they're still in the business only because the big U.S. motion picture distributors agreed to buy a minimum quantity of film per year. Film is almost completely phased out as a delivery medium for theaters; it's been replaced by digital projection.
• International revenues from movies are starting to exceed domestic revenues. In particular, China has become the single biggest and most important international movie market. Dialogue-heavy movies tend not to do well in China and some other markets, so the major studios have shifted their emphasis to expensive, special effects-heavy movies like Marvel's superhero series.
• The shift in emphasis from plot-driven to action-driven titles has dramatically decreased the amount of funding available for smaller, more literate movies that were once the "bread and butter" of the major studios. There are still a few producers who make these kinds of movies (Megan Ellison's Annapurna Pictures is a good example,) but by and large, the major studios acquire these titles for their prestige and award-winning possibilities, not with the expectation that they'll make much money.
• Most of the major studios have shut down their independent divisions, or as in the case of Universal's Focus Features, have radically reorganized them to fit better with the studios' new international emphasis.
• Streaming and Video-on-Demand have largely supplanted, although not totally replaced, DVDs and Blu-Ray discs for home video distribution. The studio revenues from streaming and VOD are significantly less than what they made from physical media, but consumer preferences (a shift back to movie rental after years of purchasing DVDs) have forced the studios to adapt.

All of this means that if you make small, independent movies, it's getting harder and harder to get them funded and onto movie screens. Note that I didn't say "get them distributed." It's easier than ever to get independent movies into consumers' homes, with Netflix being by far the biggest outlet, while Amazon, Apple iTunes, Crackle, Epix, Google Play, Hulu Plus, Redbox Instant, Sony Unlimited Video, VHX, Vudu, Xbox Video, Yekra, YouTube Movies and others also stream movies to consumers. Some of these distributors selectively license titles, while others are open to anyone.

For independent producers, the problem isn't finding distribution--it's making money. Let's take a movie that costs $1 million to produce (including post-production.) You send the movie to Netflix, but they offer you only $1,300 for the rights plus a bonus based on the number of times your movie is watched. Apple's iTunes and Amazon won't pay anything upfront, but iTunes will sell your movie for a 30% commission, and Amazon will take a 15% commission. Unless your movie is very popular, none of the three will do any promotion for you, and the promotion they will do is limited to preferred placement of your movie on their websites and apps. That means that you've got to budget a significant amount of money for promotion, which may include:

• Submissions to film festivals
• "Four-walling" (renting) theaters to get a theatrical release and reviews
• A social media outreach campaign
• If you happen to have a well-known actor or two in the cast, queries to radio stations, local and national daytime news shows, daytime and nighttime talk shows, syndicated daily entertainment shows and celebrity/entertainment magazines.

There's no single rule of thumb that says how much you should budget for your promotional campaign, but for a $1 million movie, the very least that you should expect to spend is $100,000. If you've got a lot of well-known actors and a strong pitch, you could end up spending $1 million or even more (but in this case that's good news, because it means that you're getting lots of coverage.)

So, let's say that all-in, you've got $1.25 million in the movie and promotion. You've got to get back at least that $1.25 million just to break even, and you and your investors would certainly like more. Let's take a simple case: You price the movie at $10, and you sell 60% of your total sales through Apple and the remaining 40% through Amazon. To break even, you need to sell a little under 165,000 copies. 165,000 is a high but not completely unreasonable number if your promotional campaign is successful. However, you have to raise the $1.25 million at the very beginning of the project in the hope that you can sell 165,000 or more copies at the end.

There may be another model, at least for some distributors and filmmakers. Netflix has built a very successful business using an "all you can eat" subscription model. With its recent price hike, Netflix charges $8.99 per month in the U.S. The company has 48 million subscribers worldwide as of their last financial quarter. The cost of the infrastructure and bandwidth to serve those customers is factored into the $8.99 price.

Netflix could create a second tier--call it "Netflix Premiere"--that would offer exclusive new movies 30 to 90 days before they're available through any other outlet, for an additional $5/month. If 10% of Netflix's subscribers sign up for the Premiere service, that would be an extra $24 million of gross revenue each month--largely incremental revenue, because the infrastructure and bandwidth are already paid for. A hefty portion of that $24 million could be used to fund new independent films. If Netflix reserved 70% of the revenue for film production, that would result in $16.8 million that the company could use to fund films each month. To a studio, $16.8 million is chump change, but to independent filmmakers, that could represent two or more complete films.

Netflix could distribute the money in two ways:

• It could be an investor in a film (for example, funding half the film while other investors and distributors fund the remaining 50%.)
• It could fund the entire cost of the film, and own the film outright when it's complete.

Netflix would have the exclusive first distribution window in either case, as a condition of the producers accepting its funding. It's very unlikely that any film funded by Netflix would get domestic theatrical distribution because of the first-showing restriction, but there's a good chance that at least some of the films would be picked up by other streaming and VOD distributors. There might be some opportunities for hotel and airline distribution as well, not to mention international distribution in markets where Netflix either doesn't do business or doesn't exercise its first-showing right.

For the first year or two, Netflix would have to underwrite the Premiere service, acquiring and showing movies until its subscriber base covers its costs. After that, however, the Premiere program could underwrite at least a dozen independent films a year, and potentially many more. This approach certainly won't fix the independent film funding problem, but it will put a dent in it, and if it's successful, it'll encourage other companies to launch similar programs.

Chelsea Handler: Netflix's MacGuffin?

Last week, Netflix announced that it will launch a talk show starring Chelsea Handler. The announcement triggered speculation about Netflix's reasons for launching a talk show, and what kind of a talk show it would offer. After all, Netflix is a video-on-demand service that features movies, old television shows and new series, while talk shows are one of the most time-sensitive show formats, after news and sports. Is Netflix trying to copy HBO shows such as "Real Time with Bill Maher" and "Last Week Tonight?" Would Handler's show be shown the day of production, or even live, or would Netflix delay it? Would Netflix try to create a new type of talk show that's not, as Variety says, "perishable"?

You may know of Netflix's first original series, "Lillehammer," starring Steven Van Zandt. It's never gotten much critical notice; certainly nothing like "House of Cards" or "Orange is the New Black." Netflix has renewed it for a third season, even though I suspect that most television viewers have never heard of it. When Netflix announced "Lillehammer," industry observers thought that was the story, and discounted its (and Netflix's) impact when the show turned out to be mediocre. The real story, however, wasn't "Lillehammer," but the fact that Netflix was targeting HBO with its own original series.

An important nugget in Netflix's announcement of Chelsea Handler's talk show is that the show won't go into production until some time in 2016. That seems like an awfully long time, given that talk shows are usually launched in a matter of months, not years. A daytime talk show can get "greenlighted" in the spring and be on the air in the fall. Why is it going to take Netflix more than 18 months to get Handler's show into production?

I believe the reason is that Netflix is preparing to launch a live service in addition to its existing VOD. Given that all of Netflix's infrastructure and all of the software that people use to watch Netflix was developed solely for VOD, Netflix has a lot of work to do in order to offer live programming. Once Netflix gets it working, however, it opens up entirely new opportunities for the company. One of them is Pay-Per-View (PPV). Typically, PPV is used for big-ticket sporting events, such as boxing and wrestling matches, as well as live concerts. These PPV events are one of the biggest profit generators for cable, satellite and IPTV operators. They would also be a big profit generator for Netflix, above and beyond the company's monthly "all you can eat" subscription revenue.

Another opportunity is live sports--the kinds of events shown by broadcast and cable networks: Football, baseball, basketball, hockey, golf, soccer and tennis. Sports can be very lucrative for networks. Games on Netflix would be very appealing to viewers who could watch them without commercial interruption. Consider something like DirecTV's NFL Sunday Ticket, which offers subscribers every out-of-town NFL game. It costs from $230 to $330 for a six-month (full-season) subscription, depending on the level of service, and it's one of DirecTV's most profitable offerings. In fact, NFL Sunday Ticket is said by many observers to be one of the biggest reasons why AT&T wants to acquire DirecTV. If Netflix develops a live streaming capability, it can offer a similar service to subscribers to any high-speed Internet service. All 99 million U.S. households become potential buyers. No cable, satellite or IPTV company has that kind of reach.

With that in mind, it becomes clear that the real story isn't that Chelsea Handler is getting a talk show on Netflix, it's that Netflix plans to offer live programming--and live programming is increasingly the lifeblood of broadcast and cable networks alike. In short, if your television business is known by initials (HBO, TNT, ESPN, ABC, CBS, NBC, Fox--okay, those aren't initials--etc.), Netflix is coming for you in 2016. And, Chelsea Handler is the least important part of it.

Part 1: Birth, Death and Transformation

We’re in the midst of a massive shift in media consumption patterns. People consume more news than they ever did, but they don’t read newspapers anymore. Magazines, even on tablets, are slowly dying. And, as for books, The New Yorker published an article titled “Twilight of the Books”…on December 24, 2007, before eBooks were even a significant part of the business. Statistics in the article show that the market for books has been declining for at least 30 years. U.S. movie theater ticket sales peaked in the 1950s; the only things that have kept the industry going have been home video sales and higher ticket prices. But, home video sales are also dropping—they’re being replaced by rentals from Redbox, and online streaming from Netflix, Amazon and others.

Let’s be clear: Movie attendance has been declining for half a century, but no one seriously expects the movie business to disappear. The same is true for books; readership will continue to decline, but it’s hard to visualize a world without books, even if most of the remaining books are digital instead of paper. Nevertheless, the balance has shifted. Consumers want their media faster and cheaper. Readers want their news from the Internet, as it happens (if not sooner, leaked out via Twitter.) One can argue that attention spans have gotten shorter—look at the popularity of viral videos on YouTube—but videogames, both casual and complex, can engross players for hours or even days.

The transformation of media in the 21^st Century is being driven by three forces: The Internet, mobile devices and wireless broadband. The Internet provides a conduit for every kind of content. There’s no need to ever leave your house to purchase any kind of media, and it makes possible entirely new types and combinations of media that didn’t exist prior to the rise of the World Wide Web. Mobile devices and wireless broadband make that content available anywhere, anytime, and open the digital world to hundreds of millions of people who can’t afford personal computers or high-speed Internet connections.

Wishful thinking: "Silicon Valley Will Write The Next Big Check For Original Video Content"

At TechCrunch's Disrupt Conference today, Dana Brunetti, Kevin Spacey's partner in Trigger Street, a motion picture and television production company, said that "...Silicon Valley will likely become a major funding source for original content soon. For a company like Google, after all, offering a few million dollars to produce the next episode of a show like Mad Men and to put it on YouTube is pocket change." Perhaps, but that in no way means that it would be money well spent.

For decades, Hollywood producers and movie studios have solicited investment from people outside the entertainment business. The "term of art" for this kind of investment is "stupid money." Producers and studios go from country to country, convincing government leaders that tax breaks and credits for investment in films would results in thousands of jobs, not to mention great publicity for their countries. That's why you see credits for production funds you've never heard of and production sites far from Los Angeles in the end titles of movies. Germany, South Korea, Canada and the U.K. are just some of the countries that have been tapped for production money and tax credits over the last two decades. Almost every U.S. state has offered some form of movie production tax credits or incentives at one time or another. These programs dry up as lawmakers learn that the jobs created and revenues generated don't compensate for lost tax revenues. Producers look for more stupid money elsewhere, and the cycle repeats.

Individuals who invest in movies very rarely get a positive return on their investments. Entertainment industry accounting makes integral calculus look like simple arithmetic. Once money becomes available, a seemingly limitless number of hands reach out for it. Last week, for example, director Christopher Nolan had to file suit against his current and former talent agencies so that a court could decide which ones he must pay commissions to, as well as how much and on what projects. No one in their right mind would build a movie or television production system, or rules for employment, as they work today.

The approach that YouTube has taken with its channels makes sense. YouTube originally funded each of 100 channels with up to $1 million (some channels were rumored to have received as much as $2 million.) That's enough to "move the needle," but not enough for anyone to get rich on. The funding was an advance on advertising revenues, not an unrestricted grant. As YouTube gets actual performance numbers on each channel, it's offering additional advances to some, cutting others off and identifying new candidates for funding.

I have very real doubts about Netflix's original content strategy, which has funded House of Cards, a television series produced for Netflix by Trigger Street. The network television production model calls for hundreds of scripts, which are culled down into dozens of pilots, which are further cut to become the new shows for the next television season. Even at the most successful network, the success rate is pretty low. Netflix is cutting out most of the process and is going directly to production on the basis of scripts and the people involved. Choosing on the basis of name talent is far from a sure bet--for example, look at HBO's Luck, which had Dustin Hoffman in the lead and the directing/writing team of Michael Mann and David Milch. It was a disaster, and not just because three horses died during production.

If you want to invest in a movie so that you can rub shoulders with stars or see your name in the credits, and you have some "mad money" lying around that you can afford to lose, then by all means enjoy yourself. On the other hand, if you're investing in content in order to generate revenue, you've got to be a lot more systematic and much more hard-nosed.

Print vs. eBooks: Deck chairs on the Titanic?

Earlier today, I wrote about a panel on eBook collection development at this year's American Library Association annual conference. You can read the post, or the original article, for more information, but I found a couple of points very interesting (or scary, depending on your perspective):

• The King County Library System has increased its eBook budget by 60% in each of the last three years, but the library's overall budget has been flat. To get the money for more eBooks, the library has cut its reference subscription database budget in half.
• The Free Library of Philadelphia is trying to expand its eBook collection, even while the library's budget for materials was recently cut by 50%.

Libraries throughout the U.S. are lucky if their budgets have been flat; most have had big cuts to their budgets, even while demand for eBooks grows. To fulfill that demand, libraries are cannibalizing their budgets for print books and online content. Heavy book buyers are purchasing more eBooks, because they're less expensive than print, but moderate book buyers appear to simply be substituting eBooks for print equally, and light book buyers are only just starting to buy eBooks. It's highly doubtful that they'll do anything more than substitute eBooks for print.

So, where does that leave publishers? Book sales in general have been declining for years, and print sales are declining faster than eBook sales are growing. Luckily, the problem isn't as serious as the decline in home video sales for movie studios, or the decline in music sales at record companies. In addition, publishers are capturing most of the revenue shift from print to eBooks, while home video revenues are shifting to companies like Netflix and Redbox, and record companies are still fighting a high rate of piracy. However, that's putting the best possible spin on a very bad situation.

eBooks aren't going to save the book publishing industry. In fact, the only thing that can is a reversal in the industry's long-term secular decline trend, and there's precious little effort being put into that.

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.

Justice Department investigates cable and online video companies

According to The Wall Street Journal, the U.S. Justice Department has launched an investigation of the online video market. Justice Department officials have spoken to representatives from Netflix and Hulu, as well as Comcast, Time Warner Cable and other cable operators, about whether the cable companies are acting illegally to limit the access of online video companies to content, limit consumers' access to online video content, and limit the bandwidth that consumers need to access that content.

According to the article, online video services have expressed concern that data caps imposed by cable operators will give those operators an unfair advantage, a fear reinforced when Comcast announced in March that data used by its own Xfinity app running on Xbox 360s wouldn't count toward subscribers' data caps. Netflix's Reed Hastings accused Comcast of trying to skirt FCC rules that prevent Internet Service Providers from giving preferential access to their own content.

The Wall Street Journal's sources say that the Justice Department is examining whether Comcast is violating the legal agreements that it agreed to in order to get permission to acquire NBCUniversal in 2011. It's also looking into whether the TV Everywhere initiative first developed by Comcast and Time Warner is illegally requiring consumers to have a cable subscription in order to access some online programming.

Another area of investigation is the distribution contracts that programming providers sign with cable operators. These contracts usually include "most favored nation" clauses that require programming providers to give the top cable operators the lowest price and best terms and conditions that they give to any of their other customers. The Justice Department is looking into whether there are valid business reasons for these clauses, or whether they're intended to prevent programming suppliers from dealing with over-the-top video providers.

Most favored nation clauses are also part of the Justice Department's case against Apple and five of the Big 6 book publishers. In that case, those clauses were used to insure that all eBook resellers sold eBooks from the publishers under investigation at the same price.

It's important to remember that an investigation doesn't necessarily mean that the Justice Department will prosecute anyone. In some cases, the companies under investigation voluntarily change their practices in order to forestall prosecution.
 

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.

Attention Joe Clayton: Can you call off your comment spammers?

Anyone who's followed the consumer electronics industry knows Joe Clayton. He was a vice-president at RCA in Indianapolis for years, helped to set up and then ran DirecTV, moved into the telecom industry to run Frontier and Global Crossing, came back into media as the head of XM Satellite Radio, and was appointed the president and CEO of DISH Network last June. Joe's very well respected in the industry, but something that DISH is doing is causing me to lose respect for the company, and he can stop it with a single email.

Whenever I post a story about any player in the home video business, such as Netflix, Redbox or Blockbuster, I get comments on the post that are very similar in tone and style, although they're always posted by different people, or at least, people using different identities. My most recent post, on Redbox's latest announcements, got this reply, from someone named "gman":

I agree that “they” have a lot to do in the meantime, but they seem confident that it can be accomplished in the next 6-10 months. Critics aren’t as confident they will be as successful compared to Netflix who has been butting heads with people like HBO and Starz. I do not intend to cut the cord anytime soon, mostly because I get my programming from my employer, Dish, but now that I get the Blockbuster @Home for $10 a month with my TV service AND it includes over 100,000 titles streaming and for disc rental I know that I have something special. The combining of these services is what pleases the distribution companies and I benefit from current TV programs, so win-win.

Notice how the comment starts as a legitimate input but turns into an ad for Blockbuster @Home. Notice also the mention of DISH as the commenter's employer. All of the suspect comments say that the commenter works for DISH, which as you may know, owns Blockbuster. However, the comments never directly acknowledge that DISH and Blockbuster are the same company. Given the similar wording and contents of the comments, there's no way that they're not being written either by DISH or by contractors working for DISH.

If DISH wants to buy advertising space on this blog, I'd be happy to sell it to them, but they'd rather get it for free. I review every comment before it's posted, and I've caught and deleted all of the promotional DISH comments before they've gone live. I'll continue to do so. As far as I'm concerned, it's cheap and sleazy, and puts DISH at the same level as spammers selling fake Viagra. None of DISH's competitors do the same thing, at least to my blog.

Update, February 12, 2012: Apparently, this post really pissed off the DISH spammers who I called out. They didn't have the courage to actually respond to my charges, but they rated the post "one star", hoping that it would deflect potential readers. So, I touched a nerve. I expect to touch a few more in the coming weeks.

Redbox partners with Verizon for video streaming, buys NCR's video rental kiosk business

Coinstar, the owner of the Redbox service that operates 29,000 video rental kiosks in retail locations in the U.S. and Canada, made two big announcements today:

• A joint venture with Verizon to enter the video streaming market, and
• A deal with NCR to acquire its video rental kiosk business

First, the joint venture with Verizon to enter the streaming video market. This deal has been rumored for months, but Verizon and Coinstar made it official today. Verizon will own 65% of the business, and Coinstar will own the remaining 35%. The service will compete directly with Netflix, and will launch in the U.S. in the second half of 2012. Coinstar and Verizon offered very few details about the service, but it will be available to all consumers with broadband Internet service, not just Verizon's subscribers.

Next, Coinstar will pay up to $100 million to acquire NCR's entertainment business, as well as pay NCR $25 million for goods and services over the next five years. NCR's entertainment business primarily consists of video rental kiosks operated under the Blockbuster Express brand; NCR licensed the brand name from Blockbuster. It's not clear whether Coinstar will convert the NCR kiosks to the Redbox brand, or will replace the NCR kiosks with its own devices.

How does all of this add up? Redbox was already the top video renter in the U.S. with 30 million customers, and the acquisition of NCR's business will both give the company even more locations and eliminate a competitor. The net result is that Redbox's video rental business, which is profitable and growing, will get even bigger and be better positioned to take business away from Netflix.

As for the streaming service, Coinstar's approach appears be the reverse of Netflix's, which is deemphasizing its video rental business in favor of streaming. Redbox appears to be betting that its kiosk rental business will remain strong while using Verizon's capital and infrastructure to stake a position in the streaming business. Verizon and Coinstar have released no details about their new service, so it's currently the equivalent of a "Watch This Space" sign. However, they have a lot of work to do before they launch, including:

• Signing licensing and distribution deals with content providers
• Building infrastructure to support video streaming across the U.S., not just on Verizon's own network
• Writing video clients for PCs, Macintoshes, iPhones, iPads, Android devices, Roku, Google TV, etc.

We'll know far more about how competitive the Verizon/Redbox service will be in the next six months.

Update, February 22, 2011: I just noticed that those pesky DISH spammers voted this post "one star" as well. If you're going to "p---" on the people who cover your industry because they refuse to give you free advertising, it most definitely will come back to bite you. At the very least, it opens questions about the financial condition of a company that has to rely on spammers instead of paying for advertising. But, I understand that DISH may be cash-poor after being forced by the courts to pay TiVo $500 million for stealing its technology.

eyeIO: New compression technology company signs up Netflix as its first customer

It's not unusual for developers to claim that they've improved the efficiency of video compression algorithms, but they usually result in one of two outcomes:

1. The changes result in a new compression scheme that's not accepted as a standard, or
2. The changes don't result in the savings claimed by the developers.

A Palo Alto-based startup is claiming that its new compression algorithms result in bandwidth savings of 20 to 50 percent with better quality, and that the output is 100% compatible with H.264, meaning that it can be supported without changes by tens of millions of existing devices. The correct response to such an announcement would usually be "I'll believe it when I see it", but the company, eyeIO, has signed up Netflix as its first customer.

FierceOnlineVideo reports that Rodolfo Vargas, Microsoft's former Senior Program Manager for Video, CTO of three startups and the former co-chair of Video Streaming and Internet Interactivity at the DVD Forum, approached Netflix with a rough version of the algorithms in September 2010. Netflix tested the prototype with a variety of content, and suggested that Vargas start a company to develop the technology. EyeIO started working with Netflix formally last June, but the companies' partnership was only announced today.

Vargas brought in Charles Steinberg, who's well-known in broadcasting electronics circles from his time as CEO of Ampex and President of Sony's Business and Professional Product division, and Robert Hagerty, the former Chairman and CEO of Polycom, to partner with him. EyeIO's market targets are fairly obvious from the backgrounds of the founders: PC and mobile video, broadcasting and videoconferencing. In addition, there's likely to be strong interest from cable and IPTV operators; eyeIO claims that a single 1TB 7200rpm hard disk can serve more than 400 simultaneous 1080p streams, which would have a big impact on VOD systems.

Netflix won't disclose how much content it has compressed using eyeIO; Vargas will only say that it's "a humongous amount". For its part, eyeIO didn't announce any products or services today, so it's not clear how the company plans to distribute its technology. Will it license its algorithms to hardware and software video compressor vendors, or will it sell its own hardware and software? Will it license its technology to cloud compression service providers? All of that remains to be seen.

I'm very curious to see how well eyeIO's technology actually works in third-party testing, which may come in a few months. For now, all we have is the fact that Netflix is using it--but given that company's bandwidth and storage demands, Netflix's endorsement carries a lot of weight.

Vizio launches $99 Google TV set-top box

Dan Rayburn of StreamingMedia.com reports that Vizio's new Google TV-based Stream Player will ship in the first half of 2012, and will be priced at $99 (U.S.). According to Rayburn, the set-top box will only be sold directly by Vizio from its website, but I don't expect that to last--Vizio sells too much product through resellers such as Costco for the company to ignore that channel.

The VAP430 Stream Player uses the new ARM-based Google TV architecture, and Vizio has reskinned Google TV's user interface. It will have HDMI in and out (so it can be connected to a receiver or A/V amplifier in-line with another set-top box or other device without taking up an additional HDMI port), Ethernet and Wi-Fi interfaces, and a USB port that can be used to connect an external hard disk (only for playing, not recording, audio and video). It will also come with a universal remote control with both IR and Bluetooth outputs. The device will support 1080P video in and out, and Vizio claims that the device will have sufficient bandwidth to support 3D streaming.

Vizio has confirmed that the Stream Player will support Netflix, Amazon Instant Video, Hulu Plus, HBO Go (for existing HBO subscribers), YouTube, Pandora, Technicolor's new M-GO streaming video service, and others. Additional services will be announced by the time the device ships.

On paper, Vizio has hit all the right notes: The Stream Player will be priced competitively with Apple and Roku, it will run a more polished version of Google TV, and it can be connected in-line with the user's existing cable, satellite or IPTV set-top box, instead of requiring a separate HDMI connection. It remains to be seen how well the device works when it gets into the hands of consumers, and whether Google and Vizio have smoothed out the many rough spots in Google TV's user interface. If it works well, it'll help put Google TV back into the thick of the over-the-top set-top box competition.

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.

DRM: The product that (almost) nobody wants

A few years ago, I was an industry analyst covering the IPTV (Internet Protocol Television) industry--the video delivery technology used by Verizon (FiOS) and AT&T (U-Verse) in the U.S., and many other companies worldwide. One of the hardware segments of IPTV that I tracked was Digital Rights Management (DRM). When I came on-board, the retiring analyst whom I replaced warned me that the DRM vendors would probably cause me ten times as much grief as those in any other segment. He was right.

DRM is an unusual business: The companies that demand that DRM be used aren't the ones that pay for it. You can't distribute television shows or movies from any of the major television networks or studios unless you have an acceptable DRM system in place. The same is true if you want to distribute eBooks from most of the major publishers (O'Reilly is the biggest exception...in fact, O'Reilly demands that its eBooks be distributed without DRM.)

The movie studios, television networks and publishers often specify which DRM systems are acceptable, but they don't pay for them. That cost is borne by cable and IPTV operators, over-the-top video distributors (such as Netflix and Amazon) and eBook distributors. For their part, cable and IPTV operators have their own conditional access systems, and a nearly foolproof way of keeping unauthorized users from getting their content--in the worst case, they can send out a truck and disconnect the pirates from their network. However, that's not good enough for the movie studios and television networks, who want to make sure that their content can not only not be viewed by the wrong people, but that it also can't be copied.

Over-the-top video and eBook distributors are less concerned about piracy than they are about making their services extremely easy to use, in order to stimulate sales. They already require usernames and passwords in order to download content, which helps to insure that only those customers who are authorized to access their content can get it. They want DRM, but they don't want it to make their services hard for average consumers to use. The more hoops that consumers have to jump through in order to purchase, download and use content, the less likely it is that consumers will continue purchasing from those vendors.

Apple and Amazon developed their own DRM systems, which were designed to protect content while making access as easy as possible for consumers. Most other companies don't have the ability to develop their own DRM systems, and that's where third-party vendors come in. Content distributors want the cheapest DRM systems they can get that are acceptable to their content suppliers, because DRM adds no value for the consumer (it actually subtracts value), and it adds cost for distributors while offering little or no value. The only parties that it serves are the content providers, who don't pay for the DRM systems, implement them or deal with customer complaints.

This has created a field of third-party DRM vendors who are fairly paranoid. DRM vendors regularly compete on price, but some companies have chosen other approaches. Widevine, which was acquired in 2010 by Google, had several patents on its DRM technology and would threaten (and sometimes file) patent infringement lawsuits against competitors who were undercutting it on price. Widevine used the same tactics against market research and industry analyst companies that didn't report on the company the way that it wanted, or that put its competitors in a positive light. In the case of the company I worked for, Widevine demanded that we lower the installation counts that we had compiled for some of its competitors. When we refused to do so, it threatened to file suit against us. We easily could have prevailed in any litigation (simply going public with their threat would have been sufficient to destroy their credibility), but the owner of my company caved in and removed Widevine's name from our report, replacing it with "Anonymous". Shortly after, Widevine signed a consulting contract with us, hoping to have more influence over our reporting. When a subsequent report had installation counts for competitors that Widevine disagreed with, they again threatened to file suit, and my company's owner again caved into their demands. I demanded that the company take my name off the report and resigned shortly after, because I didn't want my reputation to be sullied. 

Another company, NDS (owned by News Corporation) refused to give us any numbers for its installed base, but after each report we issued, they would complain loudly that our numbers were inaccurate. When we said that we would be glad to adjust the numbers if they gave us installed base numbers that we could confirm, they said that they were under no obligation to give us any information. Given that they were unwilling to provide any evidence to support their complaints, we stuck with our numbers.

In short, DRM is a product that (almost) nobody wants, where the companies that want it don't pay for it, and most of the companies that are forced to pay for it don't really want it. That would be enough to make just about anyone a little paranoid.

My year-end waste of time: Predictions for 2012

I've decided to participate in one of the most potentially embarrassing annual blogging rituals: Predictions for the coming year. So, for what it's worth, here are my predictions for 2012, in no particular order:

eBooks and Publishing

• Both the European Commission's Directorate for Competition Law and the U.S. Justice Department will file suit against Apple and five of the "Big 6" trade publishers (Lagadere's Hachette publishing group, News Corporation's Harper Collins, Holtzbrinck's Macmillan, Pearson's Penguin Group and CBS' Simon & Schuster) for eBook price-fixing under the agency pricing model. Bertelsmann's Random House most likely won't be charged, because it joined in agency pricing long after the other five publishers. All the companies charged will strongly deny any conspiracy to fix prices, but they'll all eventually agree to a consent decree (and the European equivalent) before the cases go to court. The settlement will require Apple and the publishers to make cash payments for consumer damages, and the agency model will be discarded. eBook distribution will go back to the wholesale model.
• There's also a possibility that the U.S. government and European Union will use the antitrust litigation as a lever to force the Big 6 to make their eBooks available to libraries on commercially reasonable terms. Currently, only Harper Collins and Penguin make their titles available for library lending, and both companies impose significant restrictions.
• eBook sales in early 2012 will follow the same pattern as the last few years--there will be a huge burst of sales in January and February as millions of consumers who received eReaders and tablets as holiday gifts stock up on titles. However, the year-to-year growth rate in eBook sales will drop, due both to the increased share of eBooks as a percentage of all book sales and higher prices from the Big 6 publishers.
• Even though the growth of eBook sales will slow, print sales will continue to decline. Independent booksellers in the U.S. won't pick up the slack from the closure of Borders, nor will they make big strides in increasing their overall share of U.S. book sales.
• The Big 6 publishers' pricing policies will continue to encourage sales growth for smaller publishers and self-publishing authors, as consumers experiment with less-expensive titles and find that many of them are just as good as titles from the top publishers.
• While the number of titles from medium, small and self-publishers continues to grow, the Big 6 will continue to cut back on the number of titles that they release, focusing even more on pre-sold authors and titles, series and backlist titles that are reissued with a variety of value-adds.
• The "eSingle revolution" (short eBooks, no more than 50,000 words and typically 30,000 words or less) will grow, with more conventional book publishers offering titles. In addition, more media companies from other fields (magazines, broadcasting, cable and the web) will enter the eBook market with eSingles, either by themselves or in partnership with established book publishers.
• $99 will become the top-end price for dedicated eReaders sold in the U.S.; someone (probably Amazon) will go to $49-$59 for an entry-level model. The ad-supported/no-ads issue will become moot, as consumers show that they're perfectly happy with a cheaper, ad-supported eReader.
• The tablet market in 2012 will look very much the same as the market at the end of 2011: Apple will continue to dominate the high end of the market, with two lines of tablets: A new "iPad 3" (although I'm not sure that'll be its name) at the current iPad 2 prices, and the existing iPad 2, possibly with fewer storage and broadband options, at $100 or so below its current prices (for example, $399 for a 16GB model). At the low-end, a variety of tablets will compete in the $149 to $249 range, led (at least for the first few months) by Amazon. I wouldn't at all be surprised to see Barnes & Noble drop prices of both the Nook Color and Tablet by $50, to $149 and $199 respectively.

Cameras & Camcorders

• We're almost certain to see new cinema camera models from Canon in 2012. The prototype cinema camera based on the EOS body will be launched, as well as at least one new model in the C3XX range, with improved electronics including auto-focus, auto-aperture and auto white balance and 10-bit log output. The new EOS model could be announced as early as NAB in April, and the new C3XX model is likely to be shown at IBC in September.
• Panasonic's AG-AF100/101 is getting a little "long in the tooth", so I expect a refresh of the model in time for NAB in April. I also expect the GH3 to be announced in the first half of the year.
• Given all of Sony's 2011 EVIL, DSLR and camcorder announcements, I don't expect any big announcements from Sony in 2012.
• AVCHD 2.0 (also called AVC Progressive) will become ubiquitous on all new cameras and camcorders supporting AVCHD.

Motion Pictures

• We'll see major consolidation at the U.S. movie studios, like what we've already seen at Paramount, with even deeper cuts. Studios will become even more conservative about which titles they greenlight for production, continuing to focus on remakes, series and pre-sold titles (very much like the big publishers). This risk minimization strategy will lead to even more boxoffice and home video revenue declines.
• Online movie rental services such as Netflix and Amazon will continue to increase their share of home video revenues, but what could have been a huge win for Netflix will be a much more competitive market, due to Netflix's self-inflicted wounds from 2011.
• Studios will rethink the value of 3D given audiences' rejection of the format, and will put more effort into using 3D well on a smaller number of "event" titles. That means that 2D-to-3D conversion, which has never worked well, will go away. Studios will have to come to grips with the fact that 3D, like Blu-Ray before it, will not be their financial savior. Even well-done 3D won't save movies that audiences don't want to see.
• UltraViolet, the "online digital locker" system supported by most of the major studios, will fail to get significant market share, although the studios won't give up on it in 2012. Consumers will find it too hard to use, not worth the effort and not a compelling reason to go back to buying DVDs and Blu-Ray discs.
• With an handful of exceptions, independent films will reach audiences through VOD and online streaming services, not through theatrical exhibition or sales of physical media.

The publisher bypass operation

I just read an article in the latest issue of Wired about the new breed of subscription music services--companies like Spotify, MOG and turntable.fm. The problem with these services (and for that matter, conventional purchase services like iTunes) is that artists get a very small share of the revenue. Most artists are now getting the majority of their income from live performances, not music sales. Where concerts once served to promote album sales, now digital music promotes live performances.

Online video distribution has had a similar impact on movies, television and original video. Most of the revenues from movies and television shows sold or rented by Netflix, iTunes, Amazon, etc., goes to the studios and distributors, not to the original producers. Original video produced for YouTube and other services is incredibly hard to monetize; only a few series, like "The Guild" and "Easy to Assemble", have sponsorship or distribution deals that directly compensate the producers. Most original video has to make do with a trickle of advertising revenue, modest sales from iTunes, or nothing at all.

That brings us to books, where the situation for independent authors is very different. Amazon will pay as much as 70% of the revenue from sales of eBooks to self-publishing authors, and other resellers will typically pay 35%. Compare that with the typical 10% to 12% royalty on wholesale price paid by publishers, and self-publishing starts to look very appealing. Yes, the self-publisher has to pay upfront for editing and design, but many publishers recoup those costs before they start paying royalties. In addition, unless you're a top author, publishers will do little or nothing to promote your title, so you'll have to hire a publicist or do the work yourself.

It's true that print still represents the majority of book sales, but the market is quickly shifting to eBooks. Some of the most popular titles are already selling almost as many copies of eBooks as print, and heavy book readers are adopting eBooks faster than any other group. The majority of book sales are likely to come from eBooks by the middle of this decade.

So, where does that leave publishers? Penguin, for one, is getting into the self-publishing business through its Book Country online service. In addition to charging upfront fees for formatting and designing eBooks, Book Country demands a hefty fee for distributing self-published eBooks to online bookstores--which self-publishers can do themselves. Other publishers are experimenting with "augmented" eBooks--containing audio, video and animations--which they believe are beyond the ability of self-publishers to create. There are two problems with that approach:

1. Companies such as Vook are launching eBook creation tools that will allow self-publishers to make augmented eBooks, and
2. Sales figures to date suggest that there's not a big market for augmented eBooks. For example, Vook's original strategy was to publish augmented eBooks itself, but the company couldn't sell enough to sustain its business, so it's now focusing on licensing its platform to others.

To be sure, publishers still provide valuable services, especially for top-tier authors--but book publishing is the first industry where creators (writers) can compete effectively with distributors (publishers). In the near future, the big publishers will likely find themselves focusing on two categories:

1. New releases from "A-list" authors that can command high prices and sell tens of thousands of copies in print, and
2. Milking their existing backlist for eBook reissues, bundles, and other ways of delivering "old wine in new bottles".

Some mid-tier authors may find a home with smaller specialty publishers, but almost everyone below the "A-list" will have to self-publish. We're likely to see some self-publishing authors join together in "United Artists"-like organizations to create "quasi-publishers" that perform some of the functions of existing publishers, such as design, publicity and promotion. The participating authors could serve as editors for each other.

By mid-decade, we're going to have far fewer and smaller "old-style" publishers. On the other hand, we'll have far more self-publishers and quasi-publishers that are performing most of the tasks previously done by publishers themselves. The industry power will reside with resellers such as Amazon and Barnes & Noble in the U.S., and their equivalents in other countries around the world.

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.