Archive for category Media

Unable To Raise Money Blockbuster Turns To The Lucrative Used DVD Market


Blockbuster Store Closing
Originally uploaded by Michael Kappel

Poor Blockbuster, even after wiping out their debt via bankruptcy they still can’t seem to figure out the home entertainment market. When he noticed that a nearby Blockbuster was closing down, Dan Rayburn with StreamingMedia.com decided to pop in for some bargains. After a closer look however he noticed that prices for used DVDs were 2 times the cost of a new one at Amazon.

“Apparently Blockbuster doesn’t know what movies rent OR sell for these days. I don’t like seeing a company go under, it puts a lot of people out of jobs, but in this case, as a consumer, one can’t help but be happy to see Blockbuster closing down. Any company that treats consumers as if they are idiots and thinks they don’t already know of other options in the market for getting movies cheaper and in better quality, does not deserve to stay in business.”

Harsh words, but he hits the nail right on the hammer. I get the sense that Blockbuster’s creditors never really took the problems at the company all that seriously. Nevermind having to be crazy to loan them money to begin with, the way they’ve chosen to negotiate is nearly schizophrenic. Even before they went into bankruptcy there were all kinds of mixed signals. Now they can’t seem to figure out whether they want to save the company or just liquidate it for the pocket change that is left. My guess is that they thought they could turn this thing around by raising prices and injecting a little bit of cash, but now that consumers have walked away and are clearly not interested in paying these prices, they are bleeding cash in a bad way.

Fast forward to today and their creditors seem like they are having second thoughts about throwing good money after bad. With each delay, it’s looking increasingly likely that Blockbuster’s bankruptcy will end up getting a sequel (or at least a chapter 11 written.) Blockbuster may try to put what’s left of their company on the auction block, but unless they can prove that they can stop losing money, there’s no way that they’ll get anywhere close to the $300 million they’ll need to survive. My advice for the savvy bargain shoppers . . . hold off on your DVD purchases for six more months so you can take advantage of their real liquidation sale.

FCC’s “Handcuffs” On Comcast Will Allow Internet Rates To Rise At More Than Twice The Average Rate Of Inflation


Screenshot showing Comcast’s current prices in the bay area as of 1/19/2011

I’ve got to hand it to Comcast, it may have taken them a year to get their merger approved, but the “handcuffs” that the transaction will impose may as well have been handed to them on a silver platter. Frankly, I’m less concerned with the monopoly that this will give them on content and more concerned with the monopoly they already have on my internet access, but irregardless of what I think about the merger, the one thing that’s abundantly clear is that the FCC is certainly no friend to the consumer.

Most of the conditions around the Comcast merger seem to deal with content, but the one piece that actually “sounds” like it could help consumers is the requirement that Comcast provide $49.95 stand alone internet access to their customers for the next three years.

On the surface, I like the idea of a price cap, but when you do the math, it’s clear that the FCC has left plenty of room for profits in Comcast’s future.

Because Comcast currently offers stand alone internet access at $40.95 per month (or at they do in the SF bay area), it means that their prices can go up by $9 over the next three years, before they’ll have to worry about hitting the cap. This means that they get to increase rates by 21% to comply with the program.

Ouch, I’m sure that it will be painful to comply with this condition :roll: When you also consider that the price cap is only for 3 years (despite all the other conditions being for 7 years), it means that Comcast could effectively increase rates by 7.3% each year. With the historical rate of inflation around 3.25%, it’s clear that consumers are getting bamboozled on this one.

The Compuservation of Television

Gossip Dirt

The more things change, the more things seem to stay the same. Over the last ten years, the internet has redefined nearly every aspect of our lives. Whether it’s how we communicate with old friends, how we get our news or how we do our shopping, I could give you countless examples of how this technology has changed the way we interact with the world.

Thinking back to when dial up was first getting started, it’s not too hard to imagine an entirely different future. You see, when internet service providers first got into the business, they didn’t want to provide unrestricted access to their subscribers. Instead, they wanted to create a massive intranet where they could charge businesses fees to reach their customers.

In this bold new world that they envisioned, people wouldn’t be buying search terms on Yahoo!, they’d buy keywords on AOL. Instead of being able to use any email provider you wanted, they would only allow you to log into Compuserve accounts. This balkanization of the internet almost succeeded and for a time, Compuserve actually ran one of the top airline ticketing services, but eventually consumers saw the forest for the trees and instead of paying $19.99 a month for a stripped down version of the world wide web, they insisted on unfiltered access to the internet.

Once a few consumers started to move, the rest of the industry followed and as a result we now have third party sites like Facebook, YouTube and blogs, that have been able to build an audience on the free and open web.

With online video still coming of age, it’s interesting to see how the same Compuservation is occurring again, except this time it’s around the television. NewTeeVee has a provocative post out where they argue that the smart television providers are becoming the new gatekeepers for content. This is better than having the cable companies control your television, but it’s is still a watered down version of what you deserve.

I don’t care whether we’re talking about TiVo, Boxee, Roku, AppleTV or any of the latest digital video solutions, all of them have placed restrictions (albeit sometimes unwillingly) over how much their customers can do with their hardware.

Some of these restrictions are because of frightened content owners. For example, customers who rent their TiVo from a cable company aren’t allowed to access Netflix because of agreements Netflix made with the studios. Some of these restrictions are because of plain old fashioned greed. Hulu has already had more than their fair share of conflicts from disabling access to their videos on devices that are designed to sit next to your TV and would love to charge hardware companies for access. Some of these restrictions are self imposed. There’s nothing stopping Apple from offering flash on their iPad, except for their own selfish desire to control 100% of their media eco-system.

Whatever the reason, no matter how you slice it, these “internet” enabled devices have all failed to actually bring the internet to your TV. Looking over the headlines from CES, it’s clear that tablets and “smart TVs” were all the rage in Las Vegas this year and while it’s neat to see content companies start warming up to these devices, if consumers are forced to continue at big media’s pace, it will take another 10 years before you’ll be able to access even 90% of the content that’s out there today.

Because of these restrictions, it’s become increasingly difficult for me to endorse these options as adequate solutions. Over the years, I’ve managed to sample and collect a large number of different media streaming devices, but by far, the most powerful digital media device that I’ve ever used was the cheapest laptop that I could buy from Walmart. Maybe I’m crazy and other people don’t actually want access to the internet on their TV, but from the very first moment that I plugged it into my television, it was just as liberating as the first time I used TiVo to free my TV.

Since almost all new laptops include an HDMI port, getting it connected to the big screen was as easy as plugging it into an HDMI cable. Not only will this setup let you access sites like Hulu without big media interfering, but I can also do PC related tasks on a big screen environment. For example, over the holidays I was able to connect to Skype and do a video chat with the entire family on the big screen. I’ve always been a fan of comic books, but the comic book experience is very different when you’re looking at the action at 40+ inches. Do you ever play video games like Axis and Allies? Being able to see the entire war map actually changes your strategy compared to when you have to view troop movements region by region.

The point that I’m trying to make is no matter how progressive and advanced these technology companies are, no matter how many “apps” developers create, until the CE industry and the content industry abandon their gateway plans, you’ll never get to experience everything that the world wide web is capable of.

Instead of navigating this minefield of short sighted media companies and a CE industry that has lost sight of who their real customers are, take my advice and buy an HDMI enabled laptop before you buy the latest and greatest half baked technology product. A cheap laptop won’t necessarily make it easy to record your broadcast television, but if you’re only going to own one media device for your TV, an HDMI enabled laptop will beat the pants off of any digital device on the market today.

Why Are Cable Prices Moving Higher? Because There Are More Of You Than There Are Of Me

Undercover

Looking for more proof that the pay television industry still doesn’t believe that cord cutting is really a threat? Analysts are predicting that those of you who haven’t cut the cord yet are likely to see price hikes across the board in 2011. Given all of the cool digital distractions that are out there, one might argue that this doesn’t make a whole lot of sense, but the reality is that the telcos will continue their rate increases until the higher prices don’t offset the subscriber losses.

Last year may have been a watershed year for the cord cutting movement, but a closer look at the data reveals that most consumers haven’t been as price sensitive as those who quit pay television. As of October 2nd 2010, ESPN had approximately 100 million subscribers. I use this as a proxy for the pay tv industry since most basic cable, satellite and fiber customers receive the channel by default. A year earlier, ESPN had approximately 99 million customer. If we assume that the telcos averaged $75 for a TV subscription in 2009 and that they increased rates by 5% last year, then this means that not only were they able to net an extra $5.4 billion in fees last year, but they’ll get to collect again on these fees in 2011 and into the future.

So what happens when consumers finally start to resist these fee increases and the trend reverses, the cable companies still get fat and happy until they have a full scale revolution on their hands. Even if we assume that 2% of all telco customers will quit pay TV over every 5% increase in price, then we’re still guaranteed to see fee increases into the foreseeable future.

Don’t get me wrong, losing 2 million subscribers would hurt the pay TV industry, but at the new $78.75 average price, it would only cost them $1.8 billion in lost revenue each year, while they would be gaining an extra $4.125 billion with the higher subscription fees. While the pay TV industry may realize that their golden years for growth are now over, that doesn’t mean they can’t do basic math and engineer higher revenue while they have you over a barrel. Until a significant number of people say enough’s enough, they’re never going to take the threat of cord cutting seriously, so if you are still paying for your television, then you’re part of the problem, instead of the solution.

Over the long run, defections will accelerate and eventually they’ll be forced to abandon their annual price increases, but until then it’s clear that the pay tv industry is going to milk consumers for as much as you will let them. The only silver lining that I see in all of this, is that a 5% increase for the pay television industry is equivalent to a 50% increase in what Netflix’s charges for a digital subscription. This should give Netflix a lot of room to remain competitive while poaching the digital living room.

Has The DMCA Created A Legal Bermuda Triangle For Downloads?

For the last several years, the entertainment industry has been doing their darndest to put The Pirate Bay out of business. Whether it’s been suing TPB’s users, going after TPB’s hosting providers or trying to make the site’s founders criminally liable for the behavior of their customers, it’s clear that TPB doesn’t have many friends in Hollywood. More recently, we’ve seen a legal settlement industry spring up where mass lawsuits are threatened against consumers for allegedly participating in P2P activities. Whether or not the entertainment industry has been successful in these endeavours is open to interpretation, but in their zeal to put an end to filesharing, they may have created an even more dangerous monster.

One could argue that it all started with YouTube, but over the past few years we’ve seen a shift in consumer behavior away from P2P and towards streaming and downloading services. To see proof of this trend, all one has to do is compare the traffic of TPB with the streaming/downloading search engine FilesTube.

According to Compete.com, over the last year FilesTube.com has been able to consistently attract 50% more visitors than TPB. Not too shaby of a feat considering that Filestube.com didn’t even exist 3 years ago.

Given their animosity towards TPB, one would think that entertainment executives would be celebrating the cultural decline of TPB with a round of cold beers and high fives, but the reality is that instead of curbing piracy, they’re merely redirecting that illicit traffic towards safe harbors where consumers don’t appear to be at risk. In the immortal words of Princess Leia, “The more you tighten your grip, Tarkin, the more star systems will slip through your fingers”

By continuing to squeeze P2P users with countless numbers of lawsuits, the entertainment industry may have been able to establish a precedent that uploading content to the internet is a copyright violation, but what’s less clear is whether or not simply downloading that same content is actually illegal?

According to the Copyright.Gov FAQ website, “Uploading or downloading works protected by copyright without the authority of the copyright owner is an infringement of the copyright owner’s exclusive rights of reproduction and/or distribution. ” [Emphasis added by me]

Setting aside the ethical question of whether or not it’s moral to download grey area content, it is clear that US Copyright law places some restrictions on infringing downloads vs. legitimate ones. From the same FAQ page,

Whether or not a particular work is being made available under the authority of the copyright owner is a question of fact. But since any original work of authorship fixed in a tangible medium (including a computer file) is protected by federal copyright law upon creation, in the absence of clear information to the contrary, most works may be assumed to be protected by federal copyright law.” [Emphasis added by me]

Now I’m not a legal beagle, but I believe that this means that consumers can’t be prosecuted for downloading a movie, if the service they are using claims to be offering content with the blessing of the legal copyright owner. For example when I’m streaming (making a cached copy) of old episodes of Battlestar Galactica from Netflix, I’m not actually breaking the law because I have a reasonable belief that Netflix has licensed this movie for their subscribers.

Since many streaming sites are largely controlled by the company that is paying for the bandwidth, it would be relatively easy for the studios to hold these companies accountable if they did stray off of the straight and narrow path. Where the legal waters become more murky though is when service providers (streaming companies) allow others to upload content instead of taking charge of this themselves.

With YouTube receiving 35 hours of content per second, it would be impossible for them to screen every second of footage that is uploaded to their site. Because of this the DMCA offers YouTube a safe harbor as long as they respond to DMCA takedown requests and don’t encourage piracy. To date we’ve seen several lawsuits that have tried to challenge this exemption, but so far they’ve all been a bust for the entertainment industry.

So on one side of this digital triangle you have consumers who are exempt from legal liability as long as the service provider requires uploaders to claim ownership of everything that they upload, on the other side of the triangle you have the service providers who are exempt from liability as long as they respond to DMCA request and don’t uploading anything themselves and on the final side of the triangle you have the content owners themselves who must choose between trying to police an endless stream of piracy or to quietly embrace the millions of consumers who are now streaming their television instead of paying for cable.

In a perfect world, only the actual copyright owners would be uploading their content to these digital locker services, but because sites like Megavideo.com pay users based upon the number of plays their videos get, there is an economic incentive for rouge operatives to cheat the system by claiming content as their own. To Megavideo’s credit, they have a history of refusing to pay copyright violators, but from a practical standpoint there are many who’ve been able to collect royalties on other people’s content.

Also to Megavideo’s credit, the entertainment industry has a long history of embracing “piracy” while staying in the closet about this. For example, when Viacom sued YouTube for copyright infringement, some of the clips they sued over were uploaded by Viacom employee’s themselves. It would hardly seem fair to hold either YouTube or consumers who watched those clips liable for copyright infringement when Viacom was creating a honeypot to tempt web surfers with.

Some will argue that content owners would never do this, but there are many reasons why someone would choose to embrace piracy and the popularity that it can bring a film. Whether you’re trying to jumpstart a struggling TV series or you’re trying to increase licensing opportunities, just because someone doesn’t pay to view a video doesn’t necessarily mean that the creator won’t benefit from that attention.

One of the things I’ve noticed when browsing through the FileTube.com search results is that often times studios will be unrelentingly aggressive about filing DMCA takedown requests the minute infringing files are uploaded while other files will remain online for over a year without even being “noticed.” While it would be tough to argue that 100% of these files are being monetized by the original copyright holders, I do believe that many copyright holders have chosen to secretly monetize their content in this way, but aren’t able to publicly disclose this because of how it might impact their negotiations with more traditional video distributors.

While the uploaders who falsely claim ownership of copyrighted material certainly put themselves at legal risk, with most of the uploading activity occurring outside of US borders, it’s unlikely that many infringers will find themselves being dragged into US court.

Some will cry foul over this latest trend, but I do find it fascinating how alternative business models can thrive when copyright issues aren’t strangling internet startups.

For example, one of the unique ways that Megavideo is able to sell memberships for their service is by letting consumers watch a certain amount of video each day for free before being interrupted with a time out. By running their business this way, they are able to use each and every video as an advertisement for their paid service. Since you may be 80% of the way through a movie when the time limit hits, a consumer is given the opportunity to ask themselves whether or not the content is really worth paying for to see right away or if it is a piece of garbage that you don’t care about finishing anyway.

Can you imagine if you were able to go to a movie theater and didn’t have to pay for your ticket until you had already watched 80% of the film? It would probably hurt ticket sales for a lot of the big budget flops, but the really well made movies would be incredibly successful because they’d be able to convert a larger percentage of those free eyeballs into paying customers.

Whether or not content owners are embracing this business model may be unclear, but by aggressively pursuing P2P users, the entertainment industry has made it clear that downloading without uploading is a much safer alternative for consumers then participating in the P2P movement. As technology marches forward, we’ll find out whether or not this Bermudian Copyright triangle gets sorted out, but in the meantime the efforts to prosecute P2P users, only seems to be driving consumers from a clunky bandwidth intensive technological solution to offshore providers who are offering a more elegant experience.

It’s probably worth pointing out that the MPAA has claimed that movie streaming is still considered a form of theft, but instead of backing up their position by citing the appropriate copyright laws, they instead try to equate digital streaming with physical theft.

The problem with this position is that companies like Sony (one of the MPAA founding partners) is apparently offering a shoplifters paradise in the form of all you can stream free movies on their Crackle.com website. Other MPAA partners like 20th Century Fox have not only made their movies available online at their official sites, but have also licensed their content to a number of different distributors like Comcast’s Fancast.com. Since it would be impossible for the end consumer to know the contractual details of every one of these down stream relationships, it would hardly seem fair to hold the consumer liable if someone uploaded a clip that actually infringed.

While I’m entirely open to exploring other opinions that downloading (without uploading) is still a copyright violation, I’ve yet to see any legal evidence indicating that this is actually the case. What do you think, when you hit play on a Simpson’s clip on YouTube have you actually committed a crime?

The Netflix Cartel

Netflix CartelSince bursting on the scene 13 years ago, Netflix has been a huge ally for consumers trying to save money. For years Blockbuster had dominated the rental industry and whether it was abusive late fee practices or high rental prices, they took advantage of their strength. The value that Netflix passed onto consumers injected some good old fashioned competition back into the DVD market and led to new forms of innovation. While Netflix continues to remain one of the best values for your entertainment buck, the firm has recently started to engage in some very anti-consumer behavior.

Most notably, they’ve been trying to strike agreements with studios to delay when they offer new release DVD rentals to their customers. In exchange for lower prices, they’ve agreed to put all of the new movies by Warner Brothers on very long wait status for their customers. In exchange, they get lower prices that will help them to drive brick and mortar competitors out of business. So far most studios are only watching these experiments from the sidelines, but Warner Brothers has embraced this scheme with gusto and has followed up their agreement with Netflix by striking a similar deal with Redbox.

Ironically, Redbox actually dismissed an anti-trust claim against Warner Brothers, in exchange for being invited into this exclusive club. Now some will argue that the beauty of Netflix is their deep archived content and while 487 or the 488 movies in my queue currently show availability of now, they’re customers who do like to rent new releases. By making them wait, Netflix is creating an artificial rental window that allows Warner Brothers to charge higher prices for new release DVDs and causes the price for rentals to rise at rental firms like Blockbuster. In fact since striking these agreements, Blockbuster has raised prices on their DVD by mail program and reinstated late fees to their customers. This is a reversal of the price wars that consumers enjoyed over the last decade.

While Netflix and Redbox haven’t seen much in the way of customer defections from implementing this hostile policy, they may find their activities under closer scrutiny thanks to Susan Uman from Manhattan. In a lawsuit against Netflix, she argues that this latest rental window is nothing but anti-competitive collusion. Already, Netflix has been sued over a different arrangement with Walmart to carve up the sales and the rental markets, so it will be interesting to see how this one plays out.

According to USLegal.com, “collusion occurs when two persons or representatives of an entity or organization make an agreement to deceive or mislead another. Such agreements are usually secretive, and involve fraud or gaining an unfair advantage over a third party, competitors, consumers or others with whom they are negotiating. The collusion, therefore, makes the bargaining process inherently unfair. Collusion can involve price or wage fixing, kickbacks, or misrepresenting the independence of the relationship betweeen the colluding parties.”

While there is a fine line between collusion and standard industry business agreements, the deal that Netflix made cheats customers out of new releases and I think it crosses that line. They have in effect sold their first sale rights, in exchange for financial terms that give them an economic advantage over smaller competitors in their industry. According to this primer by the Justice Department, collusion tends to occur when we see some of the following conditions.

“-Collusion is more likely to occur if there are few sellers. The fewer the number of sellers, the easier it is for them to get together and agree on prices, bids, customers, or territories. Collusion may also occur when the number of firms is fairly large, but there is a small group of major sellers and the rest are “fringe” sellers who control only a small fraction of the market.

-The probability of collusion increases if other products cannot easily be substituted for the product in question or if there are restrictive specifications for the product being procured.

-The more standardized a product is, the easier it is for competing firms to reach agreement on a common price structure. It is much harder to agree on other forms of competition, such as design, features, quality, or service.

-Repetitive purchases may increase the chance of collusion, as the vendors may become familiar with other bidders and future contracts provide the opportunity for competitors to share the work.

-Collusion is more likely if the competitors know each other well through social connections, trade associations, legitimate business contacts, or shifting employment from one company to another.

-Bidders who congregate in the same building or town to submit their bids have an easy opportunity for last-minute communications.”

Looking over this list, it would appear that Netflix is very much in a position to abuse their market leadership status. With Movie Gallery in bankruptcy for the 2nd time and Blockbuster getting close to a date with the grim reaper themselves, Netflix and Redbox represent the future of the DVD rental industry. This limited competition has made it easy for them to enter into agreements that wouldn’t have been tolerated by customers five years ago. If Blockbuster had the finances to actually keep new releases in stock, one might argue otherwise, but their company is in survival mode and are now having to pay Warner Brothers more for each new release then their two biggest threats.

While Netflix and Redbox may not have their headquarters located in the same town, both have been aggressively courting Hollywood for access to their movies. Since the studios are largely controlled by a small handful of companies, it gives them the ability to collude with the limited DVD renters that are left.

Prior to their agreement with Warner Brothers, Redbox was on the outside of this club and was being forced to acquire their DVDs from outlets like Walmart because Warner Brothers refused to even do business with them. Now that they’ve stopped sticking up for the consumer, they have access to all the DVDs that they want to buy. If this doesn’t qualify as collusion, I’m not sure what does.

It’s hard to say how much legal merit this lawsuit will have, but from my viewpoint, I believe that Netflix, Redbox and Warner Brothers have created an illegal cartel to try and carve up the DVD market. Warner Brother’s gets to force consumers to buy new release DVDs, instead of being able to rent at lower prices and the rental companies get cheaper supply which helps to boost their profits. While I’m sad that Redbox gave up on fighting for consumers, I am glad that consumers aren’t afraid to fight back. Hopefully, Ms. Uman takes this case all the way, instead of settling at the last minute for a million dollar windfall.

Forget Net Neutrality, What About Media Neutrality?

Media NeutralityOver the past five years, there’s been a lot of debate around the topic of net neutrality and while there have been a few examples where internet providers have tried to favor their own services over the competition, by and large this has turned out to be little more than a boogey man. Don’t get me wrong, I think that it’s important to keep the playing field level, but I also believe that there are bigger issues where consumers are being harmed.

While many media companies would like to see the first sale doctrine done away with, ever since the supreme court established the doctrine in 1908, consumers have enjoyed tremendous benefits from it. The concept, which was later codified into law in 1976, allows businesses and individuals to resell goods that they’ve legally purchased. Without it, companies like Ebay, Craigslist and Blockbuster Video wouldn’t even be possible.

Having the right to resell goods benefits consumers in two major ways. First, it reduces the risks that consumers have to take when making purchases. This ultimately makes things cheaper for all of us, because companies are forced to compete with their own products and consumers have a way of recouping part of their initial expense.

When I first purchased my TiVo series 3 for example, I spent over $800 on the product. While this may seem like an insane amount to spend for television, I was able to justify the cost in part, because I sold my original TiVo on eBay for $200 and knew that one day I would be able to resell my Series 3 (currently worth approximately $400 on Ebay) to recover part of my expense. As a result, I’ve been able to enjoy a premium DVR experience for about 1/3rd what it would have cost me to rent an inferior DVR from my cable company.

The second benefit to the consumer is that by having a robust resell market, it allows more businesses/middlemen to participate. This ultimately increases demand, stimulates innovation, and drives down prices. Redbox for example is able to rent you a DVDs at 1/20th of the cost or what it would cost you to buy the actual DVD thanks in large part to the first sale doctrine. Because Redbox knows that they can get more than 20 people to share the same product, it enables consumers to save money, the media companies to sell more DVDs and for Redbox to still earn a tidy profit in the process.

While the first sale doctrine has been a huge benefit for consumers over the last 100 years, these benefits are rapidly being eroded as media moves digital. Because the first sale doctrine was based on physical goods, it hasn’t aged very well in the digital realm. As a result, consumers have been forced to endure awkward DRM implementations, limited availability of digital content and higher prices for media services.

As the top media conglomerates have sought to seize more and more control over the distribution of their products, they’ve shifted from a world where you have the ability to “own” your media, to one where you only have the option to “license” your content.

For a lot of consumers, this distinction may not seem important, but it has profound implications on the future of digital entertainment. Since firms aren’t allowed to buy products at a wholesale price and rent them to multiple consumers, they’ve been forced to negotiate agreements one by one. This is a costly and time intensive process that has limited how quickly media can migrate online. It has also given the media conglomerates monopolistic control over prices. Instead of being forced to compete in an open environment, they are able to take their ball and go home, when they haven’t liked the terms and conditions that innovators offer them.

The result of this transition from ownership to licensing has increased costs for consumers even beyond the price of media. Take for example, the various hardware devices that we’ve seen released over the last five years. If you want to watch digital copies of old movies and TV shows, you can do it through Netflix, but only if it’s on a device that has a business relationship with them. When Sony decided to release a digital copy of Cloudy with a chance of meatballs at the same time the movie was in the theaters, consumers could only participate on select Sony TVs.

If you prefer to watch new releases from Apple’s iTunes store, you’ll need to buy an AppleTV to easily watch that content on your TV. If you want to watch a DivX file that you purchased from CinemaNow, you’ll need to illegally hack your AppleTV or purchase a DivX certified device instead. It’s fantastic that consumers have the ability to record HD cable TV through TiVo, but if you subscribe to AT&T or Dish Networks, you’ll need additional (proprietary) hardware to decode their signals.

While many of these businesses have come a long way towards opening up their systems and fulfilling the digital dream, they’ve all been limited by what content holders allow. As a result, consumers must face a digital minefield where DRM and file formats are used to limit what you can do with the content that you’ve paid for.

As we continue to move forward into the digital world, I think it’s important that consumers shouldn’t have to abandon the first sale protections that have served us so well over the last century. What I propose is a new set of rules that would allow media companies to control their prices, but would also give consumers (and businesses) a way to move past some of these restrictions.

While the DMCA has been a mixed blessing for tech companies and consumers, it is in desperate need of an update (and one that isn’t written by the lobbyists.) For example, currently, it’s illegal for consumers (or businesses) to circumvent DRM, even if consumers are being harmed by the DRM. This has led to situations where people who have purchased media, later lost access to those rights because a provider went out of business. Situations, where companies are unable to offer lifetime licenses in the cloud, because of exclusivity clauses in contracts with pay TV channels.

What I purpose is that if media companies want DMCA protection for their content, it should come with strings attached. In crafting new rules for a modern first sale doctrine, I would require content owners to set a wholesale price that all businesses would be allowed to buy content at. They could still require minimum purchases sizes and would have complete control over what they wanted to charge for that content, but they shouldn’t be allowed to sell a license at one price to one company and then exploit another company for political reasons.

What this would do is create a level playing field for all of the digital retailers. If UMG wants to charge $50 for a download, they would have the right to do this, but they couldn’t favor one vendor over another and they couldn’t punish innovators for being successful or passing on value to the consumer. This would also bring welcome competition to the pay TV market because media companies wouldn’t be able to play MSO’s off of each other.

For example, I’d love to be able to see every NFL game each season, but I can’t unless I’m willing to subscribe to DirecTV for service. Instead of making consumers fight and choose over exclusive content, everyone should be given fair access to that content. If cable companies don’t want to pay the price of admission, they would be less competitive with consumers. The end result would be more demand for NFL content by consumers and more competition for their dollars. If we allow media companies to continue with exclusive content in the digital realm, it will only makes it more expensive for everyone.

I also think that if the media wants to continue to have DMCA restrictions on their DRM, that they shouldn’t be allowed to use that DRM to discriminate between hardware partners. It’s great that I’ve got the ability to record HDTV on my TiVo, but since cablecards don’t work with satellite or U-verse, it essentially gives Comcast a monopoly on pay television for TiVo households.

As a result, Comcast is able to provide abusive cablecard support without having to worry about competition. If they knew that they had to actually compete for the $50 – $200 a month that they charge, it would encourage them to provide better service and to continue to innovate, (even if consumers decide not to use Comcast’s equipment.) Instead we’ve seen cable companies limit the ability for consumers to take their programs on the go and prevent consumers from accessing VOD services on DVRs that aren’t rented from them, all without having to worry about repercussions.

The same is true for digital downloads. If Apple wants to use DRM to help protect their content partners, they should be allowed to, but not at the expense of consumers. If other hardware manufacturers want to build support for iTunes’ product they should be allowed to license the DRM (at cost) from Apple. This would prevent Apple from offering exclusive downloads that lock consumers into their own hardware ecosystem. The end result would be more devices that could play Apple content and more competition among set top box manufacturers. This competition would cause prices to drop and would encourage Apple and others to be innovative with the features and services that they offer to their customers.

While some may be content to let the media industry continue to grow inside of these walled gardens, I’d like to see a world where someone can legally purchase media and play it on any device that they want to. By creating new laws to help better regulate the abuses of our current licensing system, consumers, businesses and the online video industry as a whole, would be allowed to flourish across many different platforms. Instead of being forced to buy the same content over and over and over again, consumers would be allowed to license their media under fair and reasonable conditions.

Friends Don’t Let Friends Subscribe To HBO

HBO NY OfficeHBO may stand for Home Box Office, but it may as well be Hates Being Online given their objections to internet video. According to Time Warner, HBO has over 40 million subscribers and while this lucrative revenue stream allows them to produce some of the most compelling content on television, it also gives them an extraordinary amount of influence on the entertainment industry. Not only is the company owned by one of the major studios, but because of the billions that they take in each year, they’ve been able to outbid small nimble start-ups for access to content. Instead of using this power for good though, they’ve chosen to fight against consumer’s interests by restricting your ability to watch digital content that you’ve legally purchased.

With consumers clearly wanting to access content online, one would think that HBO would be the first in line to embrace this trend, but because of their status quo, they’ve chosen to fight progress instead of helping to usher in the digital age.

Over the last two years, a group of digital and traditional media companies have formed an impressive collective known as the Digital Entertainment Content Ecosystem (DECE). This diverse group of firms includes firms ranging in diversity from Sony to DivX. While each company has their own agenda, the goal of the group is to try and create a media framework that allows consumers to purchase downloadable media and to play it on a wide range of consumer electronic devices.

While I do think that there are some problems with their proposed implementation, I’m also pragmatic enough to see this consortium as our best chance of furthering the internet video revolution. To date, media companies have fought digitization tooth and nail, but this co-op between Hollywood and the Silicon Valley could create an environment where more new release content is made available to the public.

Anyone whose used Netflix’s Watch Instantly program knows that there is a ton of content from the 1980′s, but very few titles from the last decade. One of the biggest reasons for this, is that companies like HBO have used their vast financial resources to outbid them and other digital players for these films. With studios scared to death of upsetting deep pocket partners like HBO, it’s created an environment where consumers must either pirate recent content, set an appointment to see TV or stick to watching it on a disc.

While, HBO has made some of their content available through Comcast’s TV anywhere initiative, it’s only includes their weakest titles and you must be a cable subscriber to get access to the content. Contrast this to Showtime’s digital experiments and it’s clear that HBO is standing in the way of progress.

Like Netflix’s Watch Instantly platform, DECE has proposed a system where consumers can store their media content in the cloud and then stream it whenever (and more importantly wherever) they want to view the film. Yet, according to the industry trade publication, The Wrap (via Inside Redbox), HBO isn’t a fan of this system and is actively trying to block it’s implementation. Since they insist on legal language in their contracts that prevent consumers from accessing digital content while it’s playing on their channel, it’s possible that you could purchase a film and then be blocked from seeing it while it’s playing on HBO.

Imagine paying a steep premium to see a recently released film and then being told that you can’t watch it on certain dates, just because HBO is afraid that you might not subscribe to their channel. Clearly, this isn’t in the interests of consumers and yet HBO is using their financial resources to try and create this very scenario.

“Paying hundreds of millions of dollars a year for output deals with Warner, Fox and Universal, HBO currently restricts these studios from distributing their films digitally during its exclusive pay-TV window. Typically, that window starts six months after a film debuts on DVD and extends for 18 months. It already has presented itself as a challenge for established download sellers including iTunes and Netflix.”

HBO is free to run their business anyway that they like, but I believe that policies that are downright hostile to consumers should not go unpunished. Because of this, I’m asking HBO subscribers to call your cable company and cancel the channel. I know that this may mean giving up some great content, but if HBO starts to feel the sting from a consumer backlash, perhaps they’ll rethink their position and start to embrace the digital revolution. Currently, only 3% of the entertainment industry’s revenue come from online, but if just 3% of HBO’s subscribers were to cancel service, it would have a profound effect on the company’s profitability.

For too long, consumers have been abused by these exclusivity agreements and if you sit back and allow them to walk all over you, then you’re only part of the problem. Instead of rewarding an outdated analog business model, we need to be demanding that studios and their partners join the 21st century and make their content available online.

Is Google Pulling A Bait And Switch On Their Users?

Search Spam
It’s no secret that newspapers have been challenged by the rise of the internet. Whether it’s pesky bloggers like myself giving content away for free or social networks redefining what a hot news story actually is, things have gotten incredibly competitive for traditional news organizations. As a result, we’ve seen everything from pleas for government assistance to blaming Google for directing massive amounts of traffic their way. While I’m sympathetic to anyone who is being displaced by innovation, as a consumer I’m also glad to have a ton more options for finding content.

I may have less brand loyalty to any one particular publication, but thanks to the magic of Google, it’s a lot easier to find a diverse set of opinions on topics that I care about. For the most part, I think that Google is the best thing since sliced bread, but that doesn’t mean that they can’t improve their product.

As the media landscape has gotten more competitive, I’ve noticed that publications are becoming increasingly aggressive at trying to monetize the eyeballs that they do get. This really started with the pop-up ad, but after the web browsers figured out how to turn this control over to the users, news companies seem to have switched tactics.

The latest trend is to insert an interstitial ad between you and the content. Usually, there’s some tiny link where you can bypass it or it auto-forwards after 30 seconds, but anytime I’m forced to watch an ad before knowing how good or bad the content actually is, it creates a lot of frustration with my web experience.

Don’t get me wrong, I’m actually a strong supporter of smart and innovative ways that advertisers can bring their messages to the public and I’m happier than most to support newspapers who are creating great content, but with so much bad content out there, I don’t feel that consumers should be forced to roll the dice, when there’s no payoff on the other end.

I could probably list a dozen major companies who are offenders, but my biggest beef is actually with Google. If I know that someone uses this type of aggressive advertising, it’s easy to quit visiting their site, but because Google is indexing billions of web pages, there’s no way to know which link is going to take me to real content and which link will take me to an ad.

As an example, if you search for the phrase “hardware spec for Microsoft’s pink phone” the first result is a story by ZDnet showing the first line of the blog post, but if you actually click on that link, it takes you to a page that is missing the content and only displays an ad instead. If you wait long enough you will be forwarded to the right destination, but isn’t this false advertising on behalf of Google?

If they know that someone’s browser is going to be hijacked, then why are they taking you to a different page instead. It’d be one thing if Google was trying to actively stop the process, but they’re actually helping publishers create more of these roadblocks on the web.

While Google is free to advertise (or link to anyone) that that they see fit, they should realize that this harms their own user experience while benefiting no one but spammy news publications. If a company like Bing or Ask.com were to come out with an interstitial ban, it would take me about a half a second to change my default search engine. It may be that this isn’t seen as a big enough annoyance to do anything about or it could be too late and is considered an industry standard now, but to show one search result and then take a user to an entirely different page (albeit temporarily) feels an awful lot like a bait and switch tactic to me. What do you think, would Google be better off banning these ads from their search results or is content from newspapers so valuable that it would do more harm than good to blackball offenders like Forbes and ZDNet?

How To Save Blockbuster

SuperBlockbuster

Ten years ago, Blockbuster video was on top of the world. They didn’t know it at the time, but it was the golden age for the video store. After years of reminders to be kind and rewind, consumers were adopting DVD players en masse and needed a source for their entertainment needs. For better or worse that source was Blockbuster.

With the internet buzz hitting a fevered pitch, Blockbuster was already hard at work creating a digital strategy. Given their dominate position in the video store industry, they even flirted with the idea of buying a small internet start up named Netflix for a mere $50 million.

With the entertainment world seemingly in the palm of their hand, Blockbuster was positioned to make the jump to digital better than anyone, but over the last decade they’ve made a series of blunders that now threatens to bankrupt them today.

Yet, in looking at their rise and fall, it’s easy to make the quick assumption that their problems were a result of technological innovation, but the truth of the matter is that they have no one but themselves to blame for the weak position that they find themselves in today.

Of all their missteps, the biggest blunder was assuming $1 billion in debt, so that Viacom could collect an obscene dividend payment when they sold the company to a naive public. That debt now hangs over them like an albatross across their their neck and has caused them to lose pace with their unencumbered competitors.

With revenues in steep decline, it will only get harder and harder for Blockbuster to continue to meet their obligations under this debt. Without the firepower to compete on a level playing field, their situation will only get worse

With the precariousness of their position becoming increasingly clear, Blockbuster has done everything from paying a high price to refinance their debt to hiring a bankruptcy specialist to help salvage what is left of their business.

Yet, despite the clear and present danger of their situation, Blockbuster has continued to keep their head buried in the sand. Over the years, I’ve offered my fair share of suggestions criticism for how they could improve their business model, but we’re now at a point where a tourniquet won’t save them, they must do massive surgery and Stat!

In an effort to try and preserve a dying part of the entertainment industry, I present to you, my plan to save Blockbuster.

With the future looking pretty bleak for just about any video store, how can a company like Blockbuster save themselves? By sacrificing their media business in exchange for an opportunity to reinvent their retail business.

What I’m proposing would be tricky and the devil really would be in the details, but with the right execution, Blockbuster could shed their legacy of debt, future proof their business and position themselves to take market share, instead of losing it.

Essentially what they’d need to do is create a “good Blockbuster” and a “bad Blockbuster” to isolate their problems.

On one side you would have their DVD by mail program, their DVD kiosks and their digital business. On the other side, you would have Blockbuster’s traditional video store business that so many are quick to write off.

Together, the two businesses are slowly strangling Blockbuster, but split apart, they could free them from the impact of years of stagnation and ineptitude on their part. What I’m proposing is that they spin off their good assets and use that money to pay off their debt.

In the past, Blockbuster tried to launch an aggressive initiative to boost their DVD by mail program, but by doing so, they only ended up cannibalizing their in store customers. As a result, they’ve all but abandoned the program and have allowed their future to slip away.

If an independent Blockbuster.com doesn’t have to worry about that cannibalization, they could focus on going head to head against Netflix. They could create a subscription program for their kiosks that could offer value that Redbox couldn’t match. They could be price competitive without having to worry about their legacy stores. The result would be a smaller Blockbuster with less meaningful revenue, but it would represent profitable revenue instead of losses.

Neither Netflix nor Redbox would be able to offer DVD exchanges at the kiosk level and through the mail, but Blockbuster could capitalize on both strengths. Yes, the company would be a mere sapling in the larger entertainment industry, but Netflix was once a sapling and they’ve been able to grow into a very large oak.

From the video store side of the equation, Blockbuster could focus on what they do best, maximize cash flow while transitioning their stores into a new business. Whether that means turning their stores into modern day Starbucks or a replacement for the now defunct Circuit City, there are still plenty of opportunities for smart and nimble retailers.

To date, Blockbuster CEO Jim Keyes has made this transition a priority for the company, but when they are forced to forgo tens of millions in capital expenditures, just so that they can service their debt, it limits how quickly they can make this jump. As a result, they continue to face pressure to close stores instead of turning them into cash flow producing machines.

Given all of the negative media attention, it may be hard to believe, but Blockbuster still does a ton of business. For the first 9 months of 2009, Blockbuster brought in over $1.9 BILLION in revenue. By comparison, Netflix brought in $1.22 billion during the same period. Yet, when you look at the differences in market capitalization, Netflix is over 20 times more valuable than Blockbuster.

Perhaps even more surprising is that Blockbuster would have turned a profit of $38.4 million during that 9 month period, had they been able to ignore their debt. Instead, that $38.4 million profit turned into a loss of $131.6 million for the company. Now you don’t need to have a Phd in math to know that losing over $100+ million per year starts to get expensive fast and perhaps even more damaging than the loss of the cash is the effect that these interest payments are having on their competitive ability.

Instead of being able to invest in their future, they’ve been forced to make cut backs. Instead of retrofitting their stores, they’ve been closing them instead. Instead of stepping up the marketing, they’ve been forced to dial back. The result is that more revenue shifts to Redbox and Netflix and their cost to acquire customers has plummeted. If this trend continues, you don’t need Dr. Doom to tell you that it will be curtains for Blockbuster. They must stop the bleeding and they must stop it now.

Now I know what you are thinking, if Blockbuster is a penny stock today, how are they going to come up with $1.6 billion to pay off their long and short term debt. Part of it comes from the assets that they are holding today. With $980 million in current assets, they should be able to keep a good chunk of their leverage in check. The remaining $620 million worth of debt would be paid off by spinning off their new media divisions.

According to the most recent data, Blockbuster currently has 1.6 million online subscribers. As of last September, they had deployed 1,000 kiosks, but were anticipating that they would have over 10,000 deployed by the end of 2010. While Blockbuster doesn’t break down their digital revenues, I think that it’s reasonable to suggest that this division would be worth anywhere between $25 – $75 million based on their market position and intellectual assets.

If you look at Netflix’s current valuation, it works out to be approximately $255 per subscriber. Assuming that you discount Blockbuster subscribers by 30%, it would value Blockbuster’s DVD by mail business at $285 million.

In February of 09′ Coinstar completed their purchase of Redbox at a valuation of approximately $350 million. At the time, Redbox had 12,500 kiosks suggesting a value of approximately $28,000 per kiosk. Assuming that Blockbuster can get to 10,000 kiosks, even at a 50% discount to what Coinstar paid at the bottom of the market, one could assume that this stake would be worth approximately $140 million without Blockbuster’s legacy stores or debt.

What these numbers suggest is that if Blockbuster were to do a spinoff, it’s easily conceivable that they could raise at least $500 million in the offering. Assuming that they start to market their DVD by mail and get it up to 2.5 million subscribers, it would value their new media business at approximately $660 million.

If they did the spin off in the form of a convertible bond, I believe that this number goes even higher, because bond investors could be given the option to return to their current position, if the spin off flopped.

While this sort of transaction would create a new competitor for Blockbuster Video, by getting rid of their debt, it would enable their stores to become profitable once again, which in turn would make it easier for Mr. Keyes to raise money for the marketing and store improvements that Blockbuster so desperately needs.

While I believe that this rescue plan could make Blockbuster competitive again, I don’t believe that their current management is willing to sell off their future, even if it means saving themselves. Despite all evidence of a dying industry, Keyes continues to insist that the video store is the cornerstone of what they do and has consistently defined Blockbuster’s competitive advantage as being able to offer entertainment across multiple channels. While it’s easy to point to Netflix and Redbox as the source of Blockbuster’s kryptonite, I believe that it is their own unwillingness to let go of the past that is preventing them from being a video superhero of the future. Only time will tell how indestructible they really are, but if they continue down the same path, they’ll end up as a mere footnote in the history of the entertainment industry.