I already noted the deal between Netflix and Relativity for streaming content in an earlier post.  Yesterday, Apple announced their revamped AppleTV, which features Netflix streaming and rental purchases from iTunes.

A couple of things stood out for me.

First, it struck me that the interface for the new AppleTV is built around the content provider rather than the content.  What I mean by that is that you first have to select who will provide you with the content (iTunes, Netflix or YouTube etc.), then you select what you want to watch.  I can see why Apple might want to do this, but wouldn’t it be better for the user if they could just say “I want to watch Mad Men”, and have the device say, “Well, you can watch this episode on Netflix for free, or in HD on iTunes for $0.99.”

Second, and rather more importantly for the industry, I think we’re reaching the point where the delineation between online and offline distribution is becoming clear: online content will be rented, offline content will be purchased.  I would contend that, once the pricing is worked out, this should work pretty nicely for the content providers.  Once you work out what a one-time viewing of a show or movie is worth, and you can achieve that price from the distribution channel (be it cable TV, iTunes, Netflix, or any one else), you really shouldn’t care how someone watches that content.  Of course, the fear for the studios is that someone else ends up with a bigger slice of the pie, but I think that can shake out fairly quickly.

The streaming model works particularly well if you have a lot of consumers with AppleTV’s, which are sufficiently locked down that it’ll be extremely hard for anyone to break the DRM and record a show permanently.  The studios might be well served by getting behind Apple on this, rather than running the risk of an open platform that’s easier to crack becoming the de facto standard.  Better to take a small hit now than a larger hit down the road.

One thing I found amusing in the Hollywood Reporter piece on this was the following quote:

Disney strategy in particular was described by one rival exec as “schizophrenic,” considering its series pop up on ABC.com, Hulu, Hulu’s iPad offering and now Apple TV.

To me, this sounds like someone describing a web site’s strategy as schizophrenic because it works on Safari and Internet Explorer.  If you make content, you shouldn’t care where people see it, so long as you’re getting a slice of the pie.

So… another puzzle piece falls into place.  Online = rental.  Offline = purchase.  During the transition, there may be opportunities for other models: Netflix still mails a lot of DVDs, and RedBox kiosks are still going in.  But I think that both of those models will go into decline.  Once you have a $49 box that will stream any content on demand for $0.99 a time (or $1.99 or $2.99 for a first run movie), using a rental kiosk or waiting for a DVD from Netflix doesn’t make sense.  If the studios are smart about this, they could define a walled garden standard that a content platform must adhere to (with a 60/40 revenue split, or whatever), all throw content onto it like crazy, and win the battle for the next generation of distribution before it even gets started.

One piece of news from last week that didn’t get as much attention as I thought it deserved was NetFlix and Relativity’s announcement that NetFlix will start offering Relativity’s movies on their streaming service:

Relativity strikes pay-TV deal with Netflix

This fills a big hole for NetFlix, which is struggling (aside from their deal with Starz) to get good content on their streaming service, and it also makes a lot of sense for Relativity because it cuts out the studio middle-man.

Relativity is also making noises about starting their own distribution arm. That seems like a poor idea to me — in spite of the terrible RoI for producers, the studios have finely tuned marketing operations that do a generally excellent job of establishing awareness for movies. For Relativity, and other major producers, the real profits in the future most likely lie in cutting these kinds of direct distribution deals for online platforms.

I was recently interview by the Blank Stage Productions blog. If you’re interested in some background on what our business does, it’s a pretty good place to start, I think:

http://blankstageproductions.com/2010/06/09/a-numbers-game/

One quick note this afternoon… a good article from Miller-McCune on the art of box office prediction…

I’ve been thinking a lot about the changing media landscape over recent weeks, and will try to put together a more comprehensive post soon. But, for this Monday morning, I wanted to a link about “The Wisdom of Crowds”.

The Dirty Little Secret About the “Wisdom of Crowds”- There is No Crowd, which talks about research from CMU that shows that “crowd” ratings on services like Amazon, IMDb and Digg are highly dependent on a few key community members.

This is one of a number of anecdotes that has convinced me that the “Long Tail” effect (the idea that broader choice helps niche products) is not really occurring online. Instead, what social media does is allow people to cluster more quickly around a few winners.

I think we’re seeing this phenomenon around the spectacular success of Paranormal Activity, which has used a smart online marketing campaign to generate buzz.  That then feeds upon itself to make the movie a must-see for teen and college-age audiences.  This kind of social clustering, I believe, occurs in every niche… with the net effect that the “tail” becomes shorter, not longer.  Studies of the real world are beginning to bear this out.

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There’s been more news this week on RedBox and online distribution, following the Disney/Marvel acquisition announcement on Monday.

Video Business summed up the latest on RedBox yesterday.  The brief version:

1. Indie rental stores are launching a campaign to persuade people to avoid RedBox because it’s “putting the entire entertainment industry at risk.”

2. SNL Kagan has released a report that says that the video-on-demand business model can’t compete against RedBox’s $1 rentals.  (The reason?  The studios get 70% of a $3.99 video-on-demand rental, leaving the provider about $1.20 on each transaction… if you cut the VoD price to $1, the provider gets just 30 cents. — too little to cover costs.)

Meanwhile, the Wall Street Journal (subscription required) reported that YouTube is in negotiations with some studios to start offering streamed movie rentals (aka video-on-demand).  The $3.99 rumored price suggests that this will follow the usual 70-30 split between the studio and the provider.

I think the lines are being drawn in the sand here.  On the one hand, we’re seeing some providers (e.g. YouTube) embrace the revenue-sharing model that exists in the traditional distribution channels.  On the other, RedBox is holding out for a new distribution model that’s less lucrative for the studios (and more profitable for them).

The company to watch right now, in my opinion, is NetFlix.  They’re also hoping to build a business that doesn’t involve revenue-sharing.  Their challenge, I think, is that the financial markets would reward them handsomely in the short term if they just cut a revenue-sharing deal with the studios.  The temptation to do so will be huge, but I suspect they’ll wait to see how the RedBox lawsuits pan out before they move one way or the other.

Disney’s acquisition of Marvel for $4 billion took the entertainment world by storm yesterday, with speculation centered around whether Disney had paid too much, and how they will integrate Marvel’s characters into the Disney brand.

From a purely financial perspective, I think the deal is risky, particularly because Marvel’s characters aren’t a good match for Disney’s core value as “the happiest place on Earth.”  But, even if the move proves to be bad from a cash-in-the-bank perspective, it might still make business sense… and here’s why…

The industry is entering a transition period, with online distribution starting to grow into a significant business and the rental market changing, thanks to the growth of Netflix and RedBox.

Netflix’ streaming service and Redbox rentals both operate without revenue-sharing agreements with the studios.  This contrasts with virtually all the major studios’ other revenue streams: when you buy a movie ticket, the studio gets about 50% of the ticket price; when you rent from Blockbuster, the studio gets about 40% of the rental (a share that also applies to Netflix’ traditional DVD rental business), and the studios, of course, get a healthy slice of the purchase price of a DVD.  Deals with network and cable TV also provide a healthy, and re-occurring, revenue stream.

But when you rent a movie from a RedBox kiosk, RedBox gets the whole dollar, because it bought the DVD outright.  Similarly, the movies Netflix streams are all fully licensed.  In both cases, the studios get an up front payment, but nothing for each view.

This presents a threat to the studios on the distribution side, which is why we’re seeing a seemingly endless succession of lawsuits around RedBox at the moment, and Netflix is finding it an uphill struggle to get good content onto their streaming service.

So the challenge for RedBox and Netflix is getting good content.  The studios own the rights to virtually all the really popular movies that people want to rent or view online, which gives them an in-built advantage in negotiations.  While RedBox might be able to get around this, because the so-called “First Sale Doctrine” allows them to buy DVDs from whoever they like and rent them to consumers, they would much rather have a simple process for acquiring thousands of DVDs and getting them to kiosks.  Netflix really has no choice but to negotiate direct with the studios for streaming rights, although it did find a way around that partially by striking a deal with Starz for some content.

But then… enter Marvel Studios.

After seeing Sony enjoying huge profits from the Spider-Man franchise, Marvel decided it wanted a bigger slice of the pie and started producing movies themselves.  They cut a deal with Paramount for “service deal” distribution of the movies to theaters (where Paramount doesn’t acquire the rights to the movie, but takes a fixed percentage for booking it in theaters, providing the advertising, and so on), and a similar deal for DVD distribution.  Marvel keeps the underlying rights to the movies, which puts them in a position to negotiate on their own behalf as new markets (e.g., online distribution and rental kiosks) open up.

So, as an independent company, Marvel would be in a good position to negotiate directly with Netflix and RedBox (and other new-era distributors like YouTube, say) and use the studios only for legacy theatrical and DVD distribution.  There’s really no incentive for Marvel to put a studio in the middle of such a deal, and the new-era distributors are hungry for content, and might offer very favorable terms to lock down a big franchise.

The studios’ big fear, I believe, is that once someone like Marvel started cutting them out of online distribution, other producers would look to do the same thing.  Steven Spielberg’s new DreamWorks would be an obvious candidate for utilizing service deals for theatrical distribution and direct deals for online distribution (Indiana Jones was already distributed via a service deal last year).  DreamWorks Animation could do the same thing, as could the new United Artists.  And once the floodgates open, the producers who currently operate within the studios would have established business models to follow if they wanted to go it alone.

So, from the studios’ perspective, Marvel could have been the tip of a very big, and very dangerous, iceberg.  Worse yet, Marvel has emerged as a serious player at a time when the studios are badly strapped for cash.  Well, all the studios, except one…

Disney was the only studio with the resources to put together an offer that Marvel couldn’t refuse.  In doing so, it might have taken a risk financially, but it might prove to be a very smart move if they keep the studio model intact.  Better to make a slightly bad deal for Marvel than hand over the industry’s biggest source of new revenue and profits to independent producers, Netflix, RedBox (and maybe Google, Yahoo and Microsoft) over the next five years.

The rest of the majors owe them one.

This is too good not to share.

One of the pleasures of running a data business is coming across people who use our data in interesting ways.  Over the years, I’ve worked with a number of educators from high school through post-grad who use our database in a variety of ways to teach statistics.

Here’s an article that gives a good overview of teaching using our data in a business school:

Movie Data Journal of Statistics Education Volume 17, Number 1 (2009)

Because time series forecasting is such a universal topic in business statistics classes, we have been intrigued with finding data sets that are both current and meaningful for our students. Although there is certainly a huge amount of financial time series data available, we have found that the movie box office data sets provide excellent examples of those forecasting features typically emphasized in business statistics textbooks: trend, seasonality, cycles, and randomness.

GM sent me a nice letter today, thanking me for buying a car from them (many years ago now).

Given that the letter was obviously prompted by their bankruptcy, they could hardly avoid the topic.  But their marketing department excelled themselves in finding a description of, well, their collapse:

 As you may know, GM is using an expedited, court-supervised process to accelerate the reinvention of our company.

Fantastic.