The Film Industry That Was 2009

Before we get too far into 2010, let’s take a look back at the film industry’s figures in 2009.

Total Film Industry Spending

• US consumers spent a total of $28.38 billion on feature movies in 2009 – slightly less than 2008’s $28.47 billion

2009 Box Office Numbers

• The domestic box office (including Canada) rang in a record high $10.6 billion
• The 2009 US box office generated $9.87 billion in revenues, up 8% over 2008
• Box office admissions for the year were up 4%

2009 Home Video Numbers

• Total physical media sales (DVD & Blu-ray) for movies declined 13% to $8.73 billion in 2009
• Blu-ray comprised $1.1 billion (12.6%) of movie disc sales
• Online rentals and purchases rang in $361 million in spending for 2009 (this figure is included in the $8.73 billion)
• On demand rentals  though cable and satellite services totaled $1.27 billion (also included in the $8.73 billion)
• The number of homes with Blu-ray players grew to 8 million, up over 260% from last year

Key Takeaways

• Cinema surpassed physical media (DVD & Blu-ray) sales of for the first time since 2002.
• Although rental transactions rose 5.5% during 2009, movie rental spending rose less than 1% to $8.15 billion.

The latter is obviously due to the proliferation of Redbox and Netflix.  It will be an interesting battle throughout 2009 between the studios and these companies.  Just this past Monday, Walmart put a cap on new release purchases, limiting customers to 5 DVD/Blu-ray’s at a time.  In a statement, Walmart says the rules are meant to be “consumer friendly, ensuring that more customers have access to new releases”.   But if you read between the lines what they are really saying is, “the studios keep pokin us with that damn stick… and it’s gettin pretty sharp”.  Adams Media Research estimates that Redbox gets about 40% of its new release DVD’s from big-box retailers like Walmart.  With Netflix recently agreeing to Warner Bros. 28-day new release window, it appears that Redbox in particular is being boxed in (what a cheap, cheap pun ).

Related Links:

• Movie rental kiosks – are they a long-term solution? (audio interview with NCR Corp.)
• Online video statistics revised and updated for 2009 and beyond
• Digging deeper into movie theater attendence

RE: Execs Say DVD Decline Exaggerated

Yesterday Variety posted a panel discussion recap from the Future of Film Summit. The panel was hosted by a group of media execs who reported that physical media declines have been “greatly exaggerated”.  Frankly, their optimism scares me.

While Black Friday weekend’s 220% spike in year over year Blu-ray sales provides a nice morale boost,  it is only temporary.  The $69 million in Blu-ray sales is directly attributed to price reductions in Blu-ray players.  Furthermore, Blu-ray sales come nowhere close to significantly offsetting the continuing decline in DVD sales.

Yes, continued price cuts on Blu-ray players and media will sustain sales for a period of time.  However, the industry needs to realize that the viewer is not the problem, we are the problem.  The film industry needs to take a look in the mirror and stop cannibalizing itself.  Execs need to realize that physical media cannot complete on a basis of price or convenience.

Time Warner CEO Jeff Bewkes recently spoke about the physical media’s consumption by new distribution channels like movie kiosks and video on demand.  He said, “People will pay for quality and convenience, but it has to be a fair deal.”  I completely agree on an ideological level.  However, the reality is that “fair” is irrelevant.  The fact is that these channels do exist, and they will continue to consume traditional and more profitable physical media sales.  The future of film has to be realized through innovation.

His Name is Brian Roberts…

Brian Roberts has long flown under the Hollywood radar, but today’s deal put’s him right in the spotlight.  With Comcast soon to own 51% of NBC Universal, the quiet CEO who prefers to lead by example is now the central focus of the entire motion picture industry.  Since 22, Brian Roberts has been a part of Comcast.  He now sits in the driver’s seat of the most powerful cable company in the United States, and arguably the most powerful broadcast network.

Why Comcast Bought NBC Universal

The acquisition of NBC Universal completes the Comcast ecosystem.  Already the country’s largest cable company, Comcast is also one of the largest internet service providers.  From an infrastructure standpoint, Comcast is easily the most powerful distributor of media.  The acquisition of a content network is a natural progression for the business.  What was a massive concern for NBC Universal prior to the acquisition: the secular downturn in television advertising, hardly registers considering those ad dollars are shifting to the Web, Comcast’s Web.  The synergies that Comcast has with NBC Universal’s film and television networks are wildly obvious.  As cliche as it is, content is king.

Yet, In the spirit of being fair and balanced, some analysts have criticized the deal.  Collins Stewart analyst Thomas Eagan said, “We’re still very unsure about the value created from this deal.“  Is this even worth addressing?  Other critics of the deal say there is too little overlap between the businesses to draw out meaningful savings. …I’m pretty sure this move is about growth, not savings.  However, Variety did post a list of relevant questions that are right on point.

More details on the Comcast/NBC Universal Deal from The Hollywood Reporter.

So, where does the media giant go from here?  How does Comcast solidify complete control across all media channels?  Though the digestion of NBC Universal may take a few years, I would not be surprised to see Comcast make a play in the wireless market.

Disney Reports Earnings: Iger’s Crystal Ball

Disney reported earnings after the bell last Thursday, beating Wall Street’s expectations with Net income up 18% on 4% higher revenue.  Most interestingly on the Q3 conference call is that it was Disney’s media networks that drove growth.  While a secular ratings decline is occurring across all of the major networks, Disney was able to grow operating income for the media division by 26% during the third quarter of 2009.  Though Disney CEO Bob Iger is quick to point out that advertising revenues will continue to decline, Disney will still invest heavily in content creation.  Iger believes that the Company is on the right path toward developing alternative revenue streams.

Filmmakers Should Keep An Eye On Netflix

Since its founding in 1997, Netflix has stayed on the leading edge of market trends.  Over the last 22 years, Reed Hastings has taken the concept of movies by mail from nothing to about 36% of the movie rental market.  Netflix has driven subscriber growth and changed distribution by providing customers the convenience of never having to leave their home.

In recent years, the Company has identified emerging distribution channels and partnered with brands including Vizio, LG Electronics, Samsung, Microsoft and Sony, making it easier for subscribers to access Netflix content.   This month Netflix streaming service comes to the PS3 and in early 2010 Netflix will bring streaming service to the upcoming Wii HD unit as well.

So, what does this mean for filmmakers?

This means that filmmakers should keep a close eye on Netflix as it becomes an increasingly powerful distributor.  Traditional movie rental stores are dead.  And unlike the kiosk market, Netflix has built an engaged community.  The Company has detailed personal information including user preferences and viewing patterns that will allow it to uncover new opportunities that its competition simply cannot.

Netflix currently has 11.1 million subscribers.  According to Wedbush Morgan analyst Michael Pachter,  the Xbox deal has contributed about one million new subscribers to Netflix.  That equates to 7% of the 15 million Xbox units sold.  Assuming the same 7% conversion rate on PS3’s 9 million household units, Netflix will grow its subscriber base by 630,000 (roughly 6%) from the deal.

Netflix’s move to leverage the broad adoption of next-gen gaming consoles and use them as a distribution channel furthers the Company’s competitive advantage.  Though many complain about the lack of content available for instant viewing, as Hastings points out in the New York Times, “Our ability to license more content is based on what checks we can write… If getting on the PS3 [and Wii HD] helps our subscriber base grow, that helps us write bigger checks.”

Because licensing makes up nearly the entire cost of streaming, Netflix has resisted newer and more expensive content.  To date, I believe most of the deals have been bulk licensing and unlimited use agreements.  Going forward, Netflix can accelerate the growth of its instant viewing library if it is better able to directly offset the licensing costs of streaming content.  Because of this, Netflix would be smart to tweak the current subscription model and introduce streaming-0nly plans.

One thing is certain, as grows Netflix’s reach, so grows its power within the film industry.

Blockbuster Kiosks: Interview With NCR Corp.

Blockbuster announced Tuesday, September 15th in an SEC filing that it would be closing around 960 ( 22%) of its stores by the end of 2010.  That is double Blockbuster’s previous projection of 425 store closings.  Many of these locations will be replaced by Blockbuster Express movie rental kiosks manufactured and operated by NCR Corp.  As I stated in an earlier post, Blockbuster’s entrance in to the kiosk market seems to completely contradict their business model.  With Redbox projecting 22,000 units by year-end, it appears Blockbuster is operating under the business strategy of “if you can’t beat ‘em, join ‘em”.  Blockbuster, clearly a late entrant to the market, plans to open 10,000 kiosks by the middle of next year. I recently spoke to NCR Corp.’s Manager of PR Jeff Dudash to hear their side of the story.

Sceneclips Interviews NCR on Blockbuster Kiosks

 
About 15 minutes

Although I still have a hard time understanding how kiosks compliment Blockbuster’s retail stores, current opportunities in the market should not be blinded by the anticipation of future opportunities.  While streaming video on demand is certainly the distribution means of the future, the kiosk market is by far the fastest growing movie rental distribution channel.  Last year, kiosks grew from 2% of the movie rental market to 19% this year, and according to NPD Group the kiosk market will grow to 30% in 2010.  That being said, Blockbuster’s entrance is no doubt an act of desperation to maintain its dwindling market share.  The problem with the initiative and with Blockbuster as a whole is that they are:

• Late to the market – Redbox has already established itself as the dominant player and has nearly 10 times the number of kiosks that Blockbuster has.
  
• In a poor financial situation – They nearly went bankrupt before issuing $675 million in senior bonds.
• Still lacking a streaming media strategy – Netflix takes the crown here, just like they did in the DVD by mail market.

Please note: I am not a Netflix, Blockbuster nor NCR shareholder. My thoughts and analysis bear no interest of personal gain. I express them simply because I care about film distribution.

Paramount’s Breakthrough Distribution Bet

CNBC’s Julia Boorstin talks about Paramount’s “breakthrough” distribution approach with Paranormal Activity.  Through Paranormal Activity’s website, Paramount is putting the audience in control by letting them decide where the film is shown.  The film has already grossed over one million dollars on a $15,000 budget.

The Studio Strategy: Follow The Music Industry

According to Digital Entertainment Group, DVD sales fell 13.5% to $5.4 billion while DVD rentals rose by 8.3% to $3.4 billion in the first half of 2009.  The movie rental kiosk is largely responsible for the growth of movie rentals and is also a primary factor in the decline of DVD sales.  Over the past year, the kiosk market has grown from 2% of total movie rentals to 19% of the movie rental market.  While 850% annual growth is clearly not sustainable, the movie kiosks’ affects on the studios are.

New channels of distribution continue to cannibalize DVD sales and squeeze margins.  In addition to the kiosk market, online stores are booming.  Both Amazon and iTunes have seen 21% year over year growth in digital sales and rentals, while retailers like Borders are experienced DVD sales declines of 48%.  With the demand for DVDs falling, retailers like Borders and Best Buy will reallocate floor space away from physical media in order to maximize revenue per square foot.  This poses a serious threat to the studios, who typically generate 30% profit margins from DVD sales.

It’s rather ironic that while the major studios don’t want to go the way of the music industry, they are making the same mistakes.  Fox, Time Warner and NBC Universal have all become embattled in the lawsuit game.  As analyst Michael Morris of UBS notes, “Investors are growing more concerned with how media companies can monetize their film libraries as DVDs are replaced by other delivery methods.”  My piece of advice: it’s not through lawsuits.

Side Note: My thanks to the people at Shutterstock who threw some free images our way. They have quite a large selection of film related images… but for this post I figured a monkey was more appropriate. 

Below are the two most recent briefs filed by Fox against Redbox.

FINAL Opening Brief in Support of Fox’s Motion to Dismiss

Redacted Transfer Venue Brief

Does Blockbuster Have A Chance?

The New York Times recently published an article about the threat of Redbox to movie studios.  The article gives a brief summary of Redbox’s growth from 12 kiosks in 2004 to over 22,000 by year-end.  With declining DVD sales already a major problem for studios, movie vending machines throw gasoline on a hot fire by renting DVD’s at a fraction of the competitions’ cost.  Redbox is the dominant player in the growing movie vending machine business that now comprises 19% of the movie rental market.  20th Century Fox, Warner Brothers and Universal are fighting back by refusing to sell movies to Redbox for the first month following their release.

The question that I am left with among all Redbox and Netflix’s recent publicity is:  where the hell is Blockbuster?  Blockbuster’s lack of a digital media strategy has already lost them the online battle with Netflix (Dan Rayburn gave Blockbuster a virtual beat-down on the subject) and now it appears Blockbuster is going after Redbox and the DVD vending machine market???  The New York Times reports, “There are now about 500 Blockbuster Express machines, and plans call for 2,500 more by the end of the year; the company expects to open 7,000 in 2010…”  Sooooooo let me get this strait, Blockbuster wants to go into business with themselves and cannibalize their own model?  I have not done enough research to have a definitive opinion, but it certainly appears that way.

Netflix vs. YouTube Market Reaction Poll

When the concept of DVD-by-mail emerged in 1999 from a small startup called Netflix people completely dismissed it.  The common notion was “Why would I ever want to get my DVD’s in the mail when I can just stop at Blockbuster?”  Fast-forward to the present and Netflix commands 36% of the DVD rental market.  Netlfix founder and CEO Reed Hastings has done an incredible job of identifying a problem, building an enthusiastic customer base and leveraging his solution’s largest competitive advantage, convenience.

The chatter about YouTube entering the space, prompts an intriguing question:  how will the market receive YouTube as a competitor?  Sceneclips has a poll running through Friday that we started on Twitter to gauge market reaction.  We would appreciate your opinion below.  Also feel free add comments and send the poll to your friends.

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