Comcast – The Evil Empire?

The internet is as vital to mainstream America as the phone and television, but increasing bandwidth demanded by online applications and services has prompted a heated debate over the issue of net-neutrality.  Are all internet users created equal?  Should all internet users be equal?  Should companies be able to control the content customers view, when they see it, and how often they’re able to?  These are the issues currently being dealt with that will shape the future of The Web.

Media giant Comcast has been at the forefront of the issue, experiencing massive backlash from the tech-community for the Company’s deceptive conduct.  It started in late February 2007 when former Intel engineer Robb Topolski created an application to prove Comcast was blocking file-sharing software (read more about it in “The Dark Lord of Broadband” in this month’s Wired Magazine).  Comcast, a company largely viewed by its customers as arrogant, unresponsive and overpriced, had made a massive mistake by secretly controlling broadband usage.  Because of the Internet’s reach and viral nature the issue spread rapidly, becoming a nightmare for the Company - and rightly so.  However, in this specific case the issue may have been blown a bit out of proportion.  Though exercising secret policies for capping bandwidth and blocking file-sharing applications is certainly not right, it is rational to establish different levels of service provided customers are given a choice.  This has been in effect with transfer speeds across different ISP’s for a number of years – you pay more for faster service.  It is only recently due to an increasingly clogged infrastructure that data transfer has become an issue.

Though it is both stupid and immoral for Comcast to deceive consumers, I cannot help but understand the reasoning for implementing bandwidth caps.  There are about 100 homes sharing each cable connection.  If one of those homes is using far more bandwidth than the rest, they should pay more to do so.  Don’t agree?  Consider the facts: Comcast is imposing a  250GB/month bandwidth cap – far above global standards (AT&T for instance is experimenting within a range of 5 – 150GB/month).  To exceed the 250GB/month limit, you would have to view over 1,750 hours of YouTube videos – that would require three computers hooked up to the same connection to stream non-stop for a month.

While controling the content that people access on the web should not be regulated, I beleive tiered services across different levels of interenet data transfer, similar to cellular service, is fair and will be the model of the future.  However, preserving net-neutrality and demanding provider transparency is paramount.

Ahead of the Curve: Web TV 2.0

As broadband inception continues to grow and bandwidth continues to widen, a new category of cross-platform competition is emerging.  Web TV, which has traditionally been an individual viewing experience, is rapidly moving toward the traditional community experience that television provides.   Tivo has been a first mover in the space, successfully integrating online portals such as YouTube, Amazon Unbox, and CNET TV with their DVR.  Vice President of Content Services, Tara Maitra, said usage has exceeded Tivo’s expectations, with over 60% of broadband-connected viewers using one or more of these services.  To date, the Company has experienced over 30 million YouTube downloads.

Internet giant Google aims to reinvent television advertising in the same way they revolutionized search advertising.  The company has placed former NBC Universal employee, Michael Steib, as Director of Google TV Ads.  Google’s new television platform allows marketers to make on the spot decisions and change them day to day, as opposed to locking in commitments months in advance.  Providing companies this degree of flexibility should translate in to rapid traction for the new platform.  In poor economic climates, it is often the marketing budget that is the first to get slashed.   Though cutting your marketing budget  is a not a very wise long-term decision, (recessions allow best of bread companies to eat up market share) Google is positioned to capitalize off this short-term thinking by providing television advertisers a flexible solution.

Internet research company, ComScore, is also adapting to the new media landscape, telling Fast Company in a recent interview that ”Total audience measurement is the name of the game.”  ComScore now aggregates data from multiple platforms, providing marketers the number of total viewers they are reaching across each platform.  This information allows companies to target the specific platforms and demographics that are generating the most growth, thereby increasing return on investment.

Although it is difficult to define the exact point at which new media and traditional media meet, it is increasingly evident that they will do so in the short-term.  Ultimately, it is the consumer who will make the decision – which is why this landscape is difficult to predict.  We are early in the product cycle of emerging technologies and cross-platform devices which will determine the correct route to take.  One thing that is certain, as this inception grows companies need to stay ahead of the curve.

Searching For Locations?

Ernst & Young just prepared a new study on the economic impacts of the New Mexico film production tax credit program.  The study shows astounding growth in film production that is directly correlated with increasing tax incentives.  “In terms of total spending, when the credit rate was increased from 15% to 20% in 2005, total estimated spending rose from $24 million to $144 million.  In the following year, when the rate was increased to 25%, total film spending increased to an estimated $223 million, a 55% increase from the prior year.”   I think other states had better start taking queues from New Mexico.  I know of one state in particular that is in dire need of a capital infusion… yep, California.

Download the report here: Economic and Fiscal Impacts of the New Mexico Film Production Tax Credit

From the executive summary…

New Mexico has provided tax incentives to film productions since the film production tax credit was adopted in 2002.  The program has attracted more than 115 major film productions to New Mexico since its adoption in 2002, including 22 films that were assisted through the State Investment Council’s loan participation program.  In 2007, 30 films were produced in New Mexico generating $253 million of spending benefiting the New Mexico economy and generating higher state and local tax collections.  This study presents the estimated economic and fiscal impact of the film production tax credit program.

My thanks to Jeseph Guerriero at Tax Credits LLC for passing this report over to me.

Sundance: 2009’s Industry Indicator

The Nation’s most important market for independent film has officially kicked off.  With a struggling economy, this year’s Sundance Film Festival will be a significant indicator of industry trends in 2009.  Though festival submissions have remained steady with over 9,000 feature and short films, festival director Geoffrey Gilmore estimates acquisitions to plunge 66% from $45 million spent in 2007 to only $15 million in 2009.  “I know it’s going to be a difficult year for the festival” says Gilmore, “Buyers just aren’t in the mood to take a gamble…”.  Guy Stodel, Paramount Vantage’s executive vice president of production and acquisitions, sums up the buyer mindset when he told the Wall Street Journal, “You can get emotional about a film and want to buy it because it moves you, but that doesn’t translate to getting an audience on a Friday night.”

Adding fuel to the fire, Studios are in the process of slimming down – several indie distributors are now out of the game.  Last year, Warner Bros. closed Warner Independent and Picturehouse, as well as merging New Line Cinema into its main operations – Viacom followed suit with Paramount Vantage, as did Weinstein Co.  The players that still exist, such as Fox Searchlight, Focus Features and Lionsgate Films, are shifting their models, buying fewer films on the open market and producing more of their own.  In addition to a tough economic environment, this is likely prompted by a year of box office busts from last year’s most buzzed about films, Hamlet 2, American Teen, and Choke.

However, in the midst of an economic recession, Studio meltdowns, and a looming SAG strike, it is not all doom and gloom.  “The appetite for ambitious art films is healthier than many assume…I don’t think we’re in a period where people don’t want to see serious drama.” says Rick Klubeck of UTA.  I believe that in 2009 a beautiful sickness will take over the business and infect the minds of artists and executives that I will aptly call “The Slumdog Affect”.  Studios will embrace cost-cutting measures to lower overhead and sustain profitability, and though the circumstances by which this is forced are unfortunate, the collateral affect is opportunity.  David Carr of The New York Times said it best, “Part of the reason so many great movies come from outside the studio apparatus is that the lack of big shooting budgets and “help” from the people signing the checks forces filmmakers to innovate. Ultimately, you can’t manufacture cinematic excellence; you can only enable it.”

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More on Sundance Film Festival 2009:

• It’s Definitely a Buyer’s Market – LA Times
• Sundance to Screen a Leaner, Quieter Festival – Salt Lake Tribune
• Slowdown at Sundance? – Wall Street Journal
• At Sundance, ‘Slumdog’ Casts a Long Shadow – NY Times
  

The Evolution of Netflix

Netflix is aggressively positioning itself to become a leader in online video.  Strategic Partnerships with Microsoft’s Xbox, Starz, and the Roku player are expanding the platforms by which the Company’s content reaches subscribers.  As consumer viewing habits continue to change, Netflix’s streaming initiative provides these subscribers with options.  By embracing more avenues for content delivery, Netflix aims to increase the Company’s value proposition.  However, as the Company shifts focus from DVD to New Media, they seem to have forgotten one critical element… a business model.

Streaming service is currently a loss leader for Netflix.  As in the initiative continues to gain traction, it also continues to rack up costs.  Netflix needs to quickly implement a viable business model to turn this loss leader in to a money maker as it rapidly encroaches on a new breed of competition from companies like Hulu and the recently launched TV.com.  However, it is early in the game and Netflix is taking the right steps.  They have a number of options to generate revenues – from creating a streaming subscription, to revenue sharing, to advertising.

Perhaps the largest problem lies in the content itself.  With only 15% of the Company’s DVD inventory available for streaming, content is a major obstacle.  Netflix online success is hinged on movie studios providing the Company with distribution rights.  Joint partnerships like Hulu and TV.com have allowed Studios to keep all of the money.  Convincing them to grant rights is a difficult battle in which the terms will likely favor the studios.  The Xbox deals of the world are key in providing Netflix with leverage.  Because of this, I believe you will see more of those types of deals.  (Neftlix recently announced partnerships with television makers Vizio and LG at CES in Las Vegas.)

2009: The Outlook

A couple months ago I wrote a blog titled The CEO Filmmaker.  In the blog I spoke about the importance of filmmakers having a better understanding of film investors’ needs.  I believe it is imperative that all filmmakers, especially those actively seeking investment, keep a close eye on what is happening in the economy and the financial markets.  Though we are not all Wall Street traders, we are all impacted by the performance of the stock market.  In 2008, the majority of investors experienced substantial losses in their net-worth.  Film, often viewed as a recession resistant investment class, was unable to escape the recession of 2008.

I firmly believe 2009 will be a far better year than 2008.  That being said, I do not believe that we are in for a massive bull market.  As unemployment remains high, wages and prices will continue to drop, fueling further deterioration in consumer spending and business investment.  Risk tolerance will remain low, presenting speculative investment classes like film with an uphill battle.

My advice to you – keep your spirits high and focus undeterred.  Sentiment has been overwhelmingly negative during the past few months, but is important to note that this economy is nowhere near another Great Depression.  Between late 1929 and 1933 inflation-adjusted G.D.P. fell by over 30 percent, industrial production tumbled 47 percent, and the unemployment rate hit 25 percent.  The Great Depression amounted to more than 10 times the G.D.P. lost compared to all other recessions of the 20th century combined.  The government was not behind the problem then… but they are now.