Archive for August, 2009

Blockbuster Bleeding DVD-By-Mail Subscribers

Aug 21

Posted by Davis in DVDs, Netflix, SA | Comments off

not-blockbusterPhoto by C-Bunny.

Just in case you think Blockbuster’s problems are isolated to a declining video store industry, I’d encourage you to take a closer look at their latest 10-Q filing. Despite there being clear growth in the DVD by mail category, Blockbuster is hemorrhaging subscribers. In fact, the percentage of people giving up on their by mail service is almost as high as the percentage of people giving up on their video stores. According to their 10-Q,

“Rental revenues decreased mainly as a result of: a $76.3 million decrease in by-mail revenues driven by a 30% average decline in by-mail subscribers, which was more than offset by related cost reductions described below under “Domestic—Gross profit;”

At one point in early 2007, Blockbuster had the pedal on the metal and was boasting of having close to 3 million subscribers. Since then, they’ve been understandably quiet, but I had no idea things were this bad until I read their most recent filing.

After piecing through other filings, I was able to come up with an estimate of 1 – 1.25 million current subs.

Here’s the math for those playing at home.

At the end of 2006, Blockbuster had 2.2 million subscribers and had brought in approximately $250 million in revenue. By the end of 07′, they were flirting with 3 million subs and had $525 million in DVD-by-mail revenue.

From a historical standpoint, this tells us that Blockbuster’s subscribers tend to average between $9.49 – $14.60 per month, but these figures are a bit skewed by their total access efforts. Since most of their subscriber gains were added at the end of 06′ and the beginning of 07′, it pushes both numbers to an extreme. Their actual monthly average is probably closer to somewhere in the middle.

By comparison, Netflix subscribers were averaging $12.84 per month as of their most recent quarter.

The information that Blockbuster discloses doesn’t allow us to get at an exact figure, but if we also dig through past filings, there is more than enough info to extrapolate a reasonable estimate for their current number of subs.

In December of 2006, they had just passed 2.2 million subscribers. Two months later, they were predicting that they’d be at 3 million subscribers by March 07′

A year later the first sign of trouble shows up when they disclosed that they saw “significant” subscriber losses after pulling total access in 07′. If we assume that 20% of their subscribers left after they cancelled the free in-store exchanges, it would bring you to an estimate of 2.4 million subscribers for midway through 07′.

By Oct 08′, Blockbuster admits that their by mail revenues decreased another 21.5%, so if you subtract another 500,000 subs you get a total of 1.9 million from 9 months ago.

Since we know that they’ve lost 30% of their subscribers over the last 12 months, it gives us an estimate of 1.3 million subscribers today. With some of these number being moving targets, I wanted to check to my math to see how reasonable this guess was and I actually think it’s a tad high. If you take a look at their most recent by-mail revenue number, it suggests that the total is slightly lower.

Since Blockbuster has plans that range from $9 – $17 per month, it gives us a range to consider. If a decline of $76 million represents 30%, it would suggest that they are currently earning $14.8 million per month from by mail subscribers.

If we assume that 100% of them were $9 per months subs, it would mean that the maximum number of subscribers that they could have at this point would be 1.64 million and if 100% of the subscribers were paying $17 per month, it would peg the minimum size of their subscriber base at 870,000.

Since $12 – $14 is a more reasonable estimate for what the average Blockbuster by mail subscriber pays each month, it gives us a ball park range of 1 – 1.25 million current subscribers.

I wasn’t surprised to see a drop in subscribers right after Blockbuster abandoned their total access plans, but to see them drop below TA levels has to be concerning for Blockbuster Execs. This is the one part of the company that should be firing on all cylinders, but clearly Netflix’s Watch Now service has been poaching their members.

Blockbuster may have put up a good fight in the DVD wars, but with nearly 10 times the number subscribers, Netflix is now threatening to do to them, what they did to Wal-mart’s DVD by mail program.

The smaller membership gets, the harder and harder it will become for Blockbuster to run their by-mail program at a profit. They could always raise prices, but that would only lead to additional defections. With Blockbuster on the ropes, don’t be surprised to see Netflix maintain the price war for another 12 months while they wait for Blockbuster’s bond owners to take control of the company.

In the meantime, this data only highlights the fact that Blockbuster’s problems aren’t because of a lack of opportunities, it’s an issue with their execution.

Over 40 Million P2P Customers Served

Aug 11

Posted by Davis in DRM, Technology, VOD | Comments off

Video Moving Online

Anyone who has paid attention to digital distribution knows that P2P is a popular way for people to download content, but how popular it is may surprise more than just angry content owners. Last June, Futuresource Consulting released the results of an in depth survey called “Living With Digital: Consumer Insights into Entertainment Consumption” which examined legitimate and illegitimate video usage in the UK, France, Germany and the USA and came up with some pretty interesting data.

According to their survey’s, 8% of consumers in these countries have admitted to using p2p in order to get content.

With these countries representing approximately 500 million of the 6+ billion global population, it would mean that approximately 40 million people are participating in illegal downloading in just these four countries alone.

In France, where the p2p movement initially got started, as many as 25% of the population admits to downloading illegal content. What is so amazing about this statistic is that it stands in stark contrast to the draconian rules that the French government has tried to impose on their citizens. How elected officials think they can get away with making behavior a crime that one out of four is engaging in, I’ll never understand, but there does seem to be strong political support for banning downloaders from the net.

If you’re a content owner not all hope is lost. Some are taking advantage of this huge audience by encouraging them to share their films with friends, while others are finding that if they put their content online at a reasonable price, plenty of consumers don’t have a problem with paying for it. In fact, according to Futuresource’s report, 48 – 65% of residents in the respective countries mentioned that they watch TV sometimes or a lot on their PC or laptop. This would suggest that as many as 200 -300 million people in these countries are consuming legal internet content.

With more and more people turning to their computer as a television, the popularity of P2P will have a profound effect on video. Already we’ve seen content starting to become more bite sized for the web and smart producers turning towards alternative distribution systems to get their films out there. Competing in a world where you don’t control the entire chain of distribution may be scary for the big studios, but for small independent films, this rabid 8% could be your biggest source of marketing for your film.

Judge Denies Further Extensions, DivX/UMG To Be Resolved By Christmas

Aug 7

Posted by Davis in DivX, SA, VOD | 1 Comment

You Win Some You Lose Some

Additional ruling
3 good transcripts with background on case to date (1 , 2 , 3 )

It’s been nearly two years since DivX filed their “pre-emptive” lawsuit against Universal music group and so far, there really hasn’t been much to talk about. DivX’s original lawsuit was thrown out after UMG removed the overhanging legal threat against Stage6 by actually filing a suit alleging copyright infringement.

Given the hurry that DivX was in to have this case resolved, one would have thought that consumers would have had a digital betamax decision by now, but once DivX abandoned Stage6, their strategy towards the case took a 180.

With DivX seeking Hollywood approval, I’ve no doubt that they would like nothing more than to sign a content deal and settle the matter with a small token of goodwill. Last November, they tried to reach a settlement with UMG, but UMG seems out for blood on this one. If they were to actually get the $300 million in damages that they are seeking, it would not only bankrupt DivX but would give UMG control over their technology.

While it may still be in UMG’s best interest, not to establish a legal precedent on the DMCA safe harbors, there’s no doubt in my mind, that they’ll try to extract more than a pound of flesh, before they let DivX off the hook on this one.

Over the last year and a half, the case has largely been hung up over petty issues related to discovery. With DivX in stall mode, they tried to ask for a mountain of documentation from UMG. Specifically, they wanted the entire chain of copyright documents for all 2,600 allegations of infringement.

With some songs requiring over 500 pages of contracts, UMG was reluctant to help DivX on a fishing expedition, especially when they have “certificates” that certify their ownership of the works in question.

Meanwhile, UMG wanted to use Audible Magic, in order to detect every instance of copyright infringement on Stage6. DivX understandably wanted to make this harder for them. DivX argued that since UMG failed to use their voodoo technology, while the site was up, they shouldn’t be compelled to power all 750,000 videos back up.

Eventually, they gave UMG an index that let them search for the name of a video and then request a copy from DivX for review.

Of course the problem with this approach is that as anyone who used Stage6 knows, the studio files were never labeled with the proper titles. Search on Stage6 was always pretty terrible and this was made even worse by members trying to hide themselves underground.

Rather then using search, browsing through tags was a much more efficient way to find content ;) Since most visitors were coming from link aggregation sites anyway, it wasn’t all that necessary for the movies to show up in search.

Most of these differences could have been worked out pretty easily, but with DivX trying to let YouTube set the precedent, and with UMG trying to go after the lower hanging Veoh fruit instead, neither party has been very incentivized to move this case forward.

In fact, just last week, both UMG and DivX asked the judge to add on an extra 60 days before they would have to do battle, specifically so Veoh could go first. The judge, who has clearly been frustrated by the petty antics of both parties, finally put his foot down and denied the extension despite both parties being in agreement. Now, Veoh’s case has been pushed back while they wait to see if DivX walks away a free entity or facing an executioner.

Like a man on a mission, the judge has followed up his denial with two rulings, that settle a laundry list of squabbles and should make the rules of engagement crystal clear.

At one point, DivX may have been able to convince the judge to let them have wider access to the copyright records, but after failing to cite a single “widely distributed” modern act, he put an end to this discovery requirement.

Because a healthy part of the legal paperwork is obscured by sealed records, it’s not exactly clear what happened with audible magic, but from the way I read it, it looks like DivX was able to limit UMG to finding the content the same way that users had to. The judge did give UMG access to the search terms, (which will enable them to use the tags in order to find more potential violations), but he didn’t require DivX to turnover the metadata on the files.

DivX wasn’t able to get emails of record label employees, but did get an order for “actual or prospective policies or practices from January 1, 200o to the present.”

As part of their defense, DivX is trying to assert that they put in measures to help prevent copyright abuse. Specifically, they used technology that would prevent the same video from being uploaded, if it had already been subjected to a DMCA notice.

UMG is trying to argue that the copyright violations on Stage6 were so blatant that DivX would have had to have known that infringement was occurring (even if UMG didn’t complain about it first.)

The key issue here, will be whether or not the technology that DivX employed, was considered an “industry standard” for preventing infringement. If they can show that UMG had previously endorsed the technology that they were using, it would make it hard for them to argue that DivX wasn’t taking reasonable steps to prevent pirates from ransacking Stage6.

With the legal maneuvering, finally out of the way, the biggest obstacles to a trial have been removed and we should have a resolution before Christmas.

Of course, if you’re hoping that DivX is going to make a stand for consumers by establishing the legality of video sharing for a site that is all but dead to them, I wouldn’t get your hopes up too high.

DivX and UMG may have failed to reach an agreement last November, but they’ve “tentatively” agreed to go in for couples counseling and have a mediation date scheduled for Sept. 21st.

I don’t know that DivX will be willing to write a big enough check to satisfy the music conglomerate’s greed, but if UMG begins to doubt their case, it wouldn’t be hard to get a little bit of money and a passive admission that they can enforce whatever rule of law they want.

If we do get a trial, it will be a fun one to watch. Here is an estimated schedule based upon the most recent developments in the case.

August 17th – Non-expert discover cutoff/last day to conduct settlement conference
August 18th – 25th – UMG begins depositions of DivX employees and witnesses
Sept 29 – Last day to hear motions
October 26th – witness list is due
Nov 24th – Trial Begins
Dec 10th – Jury reaches verdict

Whether or not DivX will stick to their guns remains a question, but there is finally light (or darkness) at the end of the tunnel. We don’t know how this will get resolved, but it shouldn’t take much longer to find out.