V I D E O • A G E OC T O B E R 2 0 1 1 58 (Continued from Cover) U.S. Studios Challenges middlemen will become studios on their own. However, in this latest corporate game the match is yet unresolved. This is what we understand: Studios are moving into several different digital delivery initiatives — on one side B2B, for a fully automated tapeless delivery of content to clients (the so-called tapeto-file, in order to eliminate physical media. See separate story on page 40), on the other side B2C, for the purpose of eliminating intermediaries and to quickly replace declining DVD revenues. Indeed, the studios have both an immediate and a long-term challenge. The first is to replace DVD revenues (which used to reach $20 billion a year) with digital sales, which, in turn, would allow the production of more movies. (With the demise of DVDs, studios cut movie production from 204 in 2006 to 141 in 2010). The long-term problem is not to give away the store to Internet companies (“Incos”). Why, after all, do studios have to pay “commission” on their product to middlemen in the linear business such as TV stations and cable networks; in the consumer areas, such as home video stores; in the theatrical arena, such as cinemas; and in the digital realm, such as Apple, Google, Yahoo, Microsoft, Amazon, AOL and Netflix? But this is not all. By continuing to supply content to Incos, the studios are basically selling digital media the rope with which the studios will be hanged. Indeed, the ambition of Internet companies to become media companies is not new. It began in 1995 when telco’s MCI invested $2 billion in News Corp., proceeded in 2001 when Yahoo hired Warner Bros.’ Terry Semel (he left in 2007) and continued last year when Yahoo hired Ross Levinsohn, a former News Corp. executive. However, the biggest precedent of them all is when, in the year 2000, Time Warner(TW)mergedwithAOL,possibly anticipating the inevitable amalgamation between online distributors and content providers. Reportedly, at that time TW CEO Jerry Levin was thinking about how to transform TW for the digital age by looking at Yahoo as well. The merge was widely maligned (by VideoAge too) and failed for several reasons, including bad execution, a clash of cultures between content and Internet executives, and the 2000 Internet bubble. But most importantly — it was well ahead of its time. This is what we suspect: Digital companies are mammoths just as big as the studios. Imagine, Disney, a company valued at $80 billion and revenues of $39 billion a year, is compared in a Yahoo Finances report to Amazon (valued at $80 billion with revenues of $37 billion). Apple (valued at $290 billion with revenues of $87 billion), Microsoft (valued at $168 billion with revenues of $68 billion) and Google (valued at $139 billion with revenues of $31 billion), together with Yahoo, Amazon and Netflix could easily match the financial power of the six major U.S. studios. With its $7 billion cash reserves, Amazon could easily mount a takeover of a U.S. studio, especially considering how traditional media companies, in the scheme of things, have become relatively small (see related story on page 46). For now the confrontation is kept at a minimum since both mammoths need each other. Indeed, as the recent CBS second quarter results showed, the studio is receiving about $200 million from Netflix (for the U.S., Canada and Latin America) and will be getting an estimated $100 million from Amazon, both over two years. Reportedly, CBS is negotiating similar deals with Microsoft and Facebook. However, none of the content licensed to digital distributors is currently on the air. Similarly, NBC Universal sold streaming rights to Amazon for 1,000 movies. Recently Amazon launched Prime, a video subscription service with five million subscribers. Nevertheless, studio executives are vocal about their new competitors. At a recent Royal Television Society conference in London, Warner Bros. CEO Jeff Bewkes, for example, joined other studio executives (such as Viacom’s CEO Philippe Dauman) to complain about Apple TV’s low-cost rentals. Nowadays, all major Incos, including Google and Yahoo, are buyers of studio product, which will ensure the supply of content at least over the medium term, but there are signs that at least some studios are becoming reluctant to cut new pay-TV deals. This is because Incos, such as Apple, want to get one notch above the studios, and become what the studios used to be, a consumer provider of all entertainment needs: music, movies, TV and games. Last March, Netflix, 25 million subscribers strong, commissioned its first original series, a U.S. version of U.K. political thriller House of Cards, for an estimated $100 million. Not to alarm the studios, Netflix announced that original content will be a small part of the company’s line up. Meanwhile, Yahoo’s Levinsohn wants to make the Inco a media company with its own full-fledged TV network. Yahoo already has sports and news channels that are watched by 18 million viewers. However, according to an article in the Financial Times, Yahoo will not be investing $100 million for original series as Netflix has done. Instead it aims to produce up to 30 percent of its own content. Currently, Yahoo produces about 200 episodes of 20 original series a month. The studios are also aware that the poor economy is helping the Internet companies. It has been reported that about 15 percent of U.S. TV households (TVHH) receive TV with aerials, plus 15 percent of TVHH do not have pay-TV subscriptions. In addition, according to Craig Moffett, an analyst at Sanford C. Bernstein & Co., U.S. telecommunication and cable companies have a “poverty problem.” Many lowerincome consumers (estimated at the bottom 40 percent of U.S. HH) are shunning pay-television services because they can’t afford them, Moffett wrote in a May 25, 2011 report. Instead, they are turning to cheaper alternatives, making video-streaming services and other “good enough” options more appealing. The short-term plan for the studios has been the development of UltraViolet (UV), a consortium of U.S. studios (excluding Disney) for a cloud-based system to be launched soon for electronic sell through (EST). This is to keep the retail business model going, since profit margins on an EST are much higher than a DVD sale (which averages 65 percent) because there are nomanufacturing costs. At the same time, UV allows studios to keep a sort of “stable instability” with their middlemen. UltraViolet is a “cloud-based” system where content doesn’t sit on the computer (or the consumers’ own storage device) but in the retailers’ system or “cloud.” When the content is stored in the consumers’ devices it’s called a download (and can be a rental or a sale), while if content sits on “cloud” it is streamed from any device and, once again, it can be rented for a period or acquired as EST. But, history shows that consortiums like UV have rocky corporate structures, as the Hulu experience demonstrates. With close to 27 million viewers per month, Hulu can be considered a success, however its ownership structure (Disney, News Corp. andComcast/NBC Universal) created conflicts of interest that prevented Hulu from growing. What is also problematic for the studio owners is that they’ve enhanced their own competition, if Hulu is sold to one of the Incos as it has been predicted. So, the battleground is shaping up, since neither camp wants ultimately to be dependent on the other. The Incos have the delivery services to reach the masses, but need content from the studios. The studios have the popular content, but need extended delivery services. The solution is for both to gradually enter each other’s field, and they have the financial power to do it. It is thus envisioned that, in the near future, the six major studios will be competing with a similar number of Incos, which will have become bigger than any media company.
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