Where Netflix Plans to head next

DECEMBER 14, 2009
For an informed view on connected entertainment in the UK & Ireland, visit Cue Entertainment
 

Netflix CFO Barry McCarthy used carefully guarded language when he announced that the US video rental-by-post and VOD supplier plans to expand overseas without saying exactly where.

His words may have sent a shiver through boardrooms around the world, not least in the North Acton offices of Lovefilm. Whether the reaction is one of fear or anticipation depends on your position in the market. The Netflix presentation at a San Francisco conference could signal the emergence of a powerful new player in Europe with the financial muscle to negotiate global deals with the Hollywood studios.

Netflix was among the first to realise that games consoles offer a gateway to expansion in the online entertainment market and McCarthy described the Xbox 360 as “a phenomenal contributor to growth” since autumn 2008. PlayStation 3 delivery arrived in November this year, and strong rumours that the Nintendo platform will be next were all but confirmed by McCarthy when he said, “We would rather have Netflix on all games consoles, rather than none”.

McCarthy said Wall Street underestimated the potential of streaming to games consoles and now he is leading the drive toward Netflix on internet TVs, which are forecast to command a substantial slice of the market by this time next year.

This clear vision of where business might be found in the future is what has allowed Netflix to reach more than 11 million subscribers and swallow lesser operations to become dominant in the US.

Speaking of the company’s plans for international expansion, McCarthy said, “We will not pick the largest of the available markets in order to run our experiments.” That appears to specifically exclude the UK for the moment but he added, “There is no reason to tell our competitors where we are going; it will become clear soon enough where we are headed.”

Lovefilm has been parading its attractions before a succession of potential suitors for some time now. When he announced the 2008 deal under which Amazon acquired 30% of the company, CEO Simon Calver said that plans to float or buy out the business were “more firmly on the table than before”. In June of this year, rumours appeared in the Financial Times of discussions with a potential majority shareholder. They remain unconfirmed, but a buy-out of Lovefilm must remain an option on the Netflix boardroom table.

Some commentators have read between McCarthy’s lines to predict either Australia or Germany as the base for the international Netflix “experiment” followed by an acquisition in the UK. Lovefilm may be waiting at the altar when that moment arrives.

We learned last week that the UK has Europe’s most active online shopping community, with two-thirds of the adult community reporting that they purchased goods on the web in the past 12 months. Over half of those surveyed said that they bought travel and accommodation over the internet, while films and music accounted for a third of online purchases. Across all the EU countries surveyed, more people reported buying books and magazines online than packaged media.

Surprisingly, perhaps, although the UK leads the way in e-commerce, consumers in Ireland figure among the least active internet shoppers in Western Europe, despite having comparable broadband connections. Just 58% of Irish 16-to-24 year olds said they use the Internet every day, compared to 83% in the UK.

The report, which was compiled by the European Commission statistics organisation Eurostat, draws attention to the fact that cross-border internet shopping is still just 6% of the market. An undercover shopping survey run by the European Commission earlier this year found that many retailers refuse to ship products to key countries within the EU, which was described as “a barrier to trade”. A digital single market for online commerce was proposed in November and given the current price advantage that the pound/euro exchange rate confers on the UK it there would seem to be an opportunity for UK e-tailers across the Irish Sea.

Nokia announced on Thursday that four of its flagship stores, including the Regent Street outlet in London, are to be closed. The Regent Street outlet was reported to have cost the company £4 million when it opened in October 2007. The company explained the closures in a statement that was a masterpiece of its kind:

“Nokia is crystallising its branded retail strategy with an aim to improve the operational efficiency of its retail network and further optimise its retail approach according to various market and channel developments in the past few years, as well as ensuring that we have a workable model that is appropriately in-line with the strategy of each individual market. This has resulted in some re-organisation of our retail network and, as a consequence, Nokia intends to close its retail stores in London, Sao Paulo, Chicago, and New York.”

Well, at least that announcement is clear.

Video on Demand?

DECEMBER 5, 2009 
For an informed view on connected entertainment in the UK & Ireland, visit Cue Entertainment

Video On demand has often been viewed as the biggest threat to packaged media after illegal downloading, but despite the fact that it has been around since the early 1990s, VOD has failed to capture the public imagination – until recently. According to media analyst Screen Digest, the VOD market was worth £120 million last year, representing just 3% of the UK filmed entertainment market. Agreements, launches and law suits over the past few days have raised awareness of on-demand services and could signal a turning point for the technology. The announcement that SeeSaw (created from the ashes of Project Kangaroo), under its new owner Arqiva, has inked an agreement to offer BBC Archive programmes online and the pact that BT Vision has signed with NBC Universal International Television for VOD content are just part of an acceleration in interest. Next year may see VOD emerge as a credible alternative to DVD and Blu-ray Discs in the rental market if not yet download-to-own. Online rental company Lovefilm took the Company of the Year prize at the Growing Business Awards on Nov. 29. While mailing polycarbonate discs back and forth remains the primary activity of the company, which owns 40% of the UK market, it has been experimenting with VOD since 2006 and this year Lovefilm began a full VOD service. Chief Executive Simon Calver said earlier this year that the dominance of physical media is unlikely to change for the next five to 10 years. “Digital video just isn't practical yet for everyone, the choice is not available, and consumer inertia is also a huge factor,” he said. Yet when he accepted the award last Sunday, Calver said that part of what made it a great year for Lovefilm was the introduction of VOD. A direct-to-TV service from Lovefilm is planned for 2010. The end of November saw the announcement of the BBC deal with Freesat, which will ensure on-demand iPlayer content will be available in Freesat homes by Christmas, closely followed by the ITV Player in the New Year. In a move towards the delivery of online entertainment direct to the living room TV, the service will be available to the 230,000 homes that have Freesat digital boxes with a broadband connection. The service will be invaluable for the 80% of Freesat viewers who don’t have a digital video recorder (DVR), adding a competitive edge to the Freesat package when Digital Britain arrives nationally. Although Freesat remains a free service, there is nothing to stop pay-per-view (PPV) and subscription channels charging for access to sports, films and other content available through the same Freesat box that is used to watch TV and Marketing and Communications Director Will Abbott acknowledged that channel owners make their money from selling content. “Freesat would make it clear to customers that the content owners were retailing content, not us,” he said. Since what happens in the US is often cited as a guide to developments in the UK, it is worth noting that the FCC, which regulates broadcasting and media in America, announced this week that it is keeping a close eye on how television can drive broadband adoption. “It is time for a set-top that works across all delivery platforms,” the FCC said in statement. The regulator is examining proposals for a single standard for digital boxes that would combine broadband and video. Should this be adopted, it could put pressure on European countries to follow suit, providing an incentive to adopt the common technical standards that the just launched Project Canvas.info website described as an “essential precursor to the Canvas project.” At Virgin Media, where the iPlayer has already proved very popular, a deal has been announced that will return the Tivo name to UK living rooms six years after it retreated to the US following a losing battle with SkyPlus. Next-generation boxes bearing both the Virgin and Tivo brand are to be launched in 2010 offering standard and high-definition programmes as well as on-line catch-up TV services. Tivo began as little more than a hard disk drive in a box but it is the company’s expertise in Electronic Programme Guides (EPG) that appeals to Virgin Media, which currently serves up 66 million VOD views each month. Tivo Business Development and Strategy VP Naveen Chopra said that focusing on the EPG “reflects the fact that the real magic we do increasingly relates to the software and the user interface.” The value placed on the EPG can be judged from the bitter two-year battle between Virgin Media and Gemstar, which this week came to a head in the High Court. Gemstar, the company bought by Rovi in 2007 for $2.8 billion, claimed that three patents relating to programme data and information were infringed by the Virgin EPG. Rovi is to appeal against Justice Mann’s ruling, which dismissed two of the claims on the grounds that Virgin had infringed the patents but they were too general to be enforced. The third Gemstar patent claim, covering transfer to other playback devices, was upheld. Both parties declared victory in the dispute, though Rovi SVP of Worldwide Patent Licensing Samir Armaly said, “We intend to continue to pursue Virgin and other unlicensed companies for their infringement of our intellectual property.” The battle for control of the household TV set will no doubt continue beyond this week but once a standard technical interface has been agreed, which will happen through legislation or market forces, VOD will have arrived in the home. At that point, the EPG becomes the main marketing force for paid-for online content – and the home entertainment business will discover whether the collecting instinct will outweigh the advantages of Video On Demand.

Spontaneous Purchasing

DECEMBER 1, 2009 
For an informed view on connected entertainment in the UK & Ireland, visit Cue Entertainment

Many in the home entertainment business were hoping that last year's turbulent times would not be repeated this Christmas. Having survived for a year without Woolworths and Zavvi on the high street and without wholesalers Entertainment UK, a period of stability in the key months of November and December would have been welcome. Retail remains in choppy waters, however, as Borders UK entered administration just 12 months after Woolworths walked the same plank. With WH Smith reported to have looked at Borders and turned away, the outlook is grim both for the suppliers who are owed money and the 1,000 or so employees. Financial commentators have been quick to blame the growth of online shopping habit for the demise of a business that never really found its feet in the UK. Bricks and mortar retailing has been at the heart of the Borders concept since the company arrived from the US in 1998 and, despite two changes in ownership, the company does not appear to have reacted adequately to the threat posed by the internet, losing ground while others have benefited. According to e-commerce service provider The Hut Group, which runs online retail platforms for Asda, WH Smith, Argos and Lovefilm among others, Nov. 30 was set to become the busiest online shopping day of the year. UK e-tailers expected more than 1,750 transactions a minute, the company predicted, adding that 71% of consumers surveyed believe that online shopping is the best way to buy Christmas presents. The same Cheshire-based Hut Group acquired the rights to the Zavvi website in March, added the Woolworths entertainment site to its portfolio in June and is today the owner and operator of the Borders Entertainment web site. Although the Borders UK site displays a terse message from administrators MCR, Borders Entertainment appears to be open for business. The Hut Group was ranked No. 1 in this year's Sunday Times Tech Track 100 with sales that have grown 189% a year from £997,000 in 2005 to £24 million in 2008. In September this year, it clinched a multi-million pound private funding deal to support its target of operating 30 sites by 2010. In the same week as the Borders announcement, research agency TNS Omnibus reported, "One in 20 UK shoppers expect to do all their Christmas shopping online this year, which for many could be an opportunity to avoid spontaneous purchases." Impulse sales of Blu-ray and DVD titles can be counted on to generate revenue throughout the year, whether for blockbusters or catalogue titles. As they walk the aisles of supermarkets or specialist retailers, shoppers might add "Ice Age 3" to their basket of groceries or pick up "Fawlty Towers" to keep the party spirit going through Boxing Day. The possibility that consumers are actively avoiding "spontaneous purchases" should be a concern to all involved. Online shopping is enhanced by recommendation engines - the "items to consider" prompt on Amazon's home page is a good example - but the chance discoveries made by browsing thousands of titles in-store would never be found this way. Similarly, the static on-screen pack shots that populate online sites fall far short of the appeal of eye-catching in-store displays, which from last week can include animated graphics, thanks to the Belgian start-up Lumoza. The downfall of Borders, which had a 5% share of the book market, will benefit competitors, whether traditional or online. Play.com, for example, the third most visited online retailer in the UK, has reported book sales up by 55% so far this year and supermarket sales are nudging a 10% share, according to TNS. Without physical product on display in retail stores, however, it is hard to be optimistic about the outlook for "the long tail" of home entertainment titles. Unless shoppers can browse through physical product and make those spontaneous purchases, Christmas stockings this year are likely to be filled with "Transformers 2", "Star Trek" and very little else.

Never really went away

It has been a long while since my last post here but I have not been idle. On December 1 2009, I started a weekly blog for the trade publication, Cue Entertainment, which continues to this day. Some 120,000 words later, I have decided to post the archives here. As this means that my comments, forecasts and random jottings from past years can be assessed for consistency by any passer-by, there is a risk that I will be found out! However, I am prepared to take that chance. Current posts are behind a pay wall at Cue Entertainment, nothing here will be topical. I recommend that you subscribe to Cue Entertainment if you want informed comment on today's video home entertainment industry in the UK.This is simply an archive.
So here goes with the first of 111 contributions...

September Events

In the month of September events come thick and fast.
IFA, IBC, CEDIA, ESCA - you need a dictionary of acronyms just to keep up. This year's crop has been particularly fruitful, despite the financial climate, and some of the annoucements look set to affect the way we look at home entertainment and packaged media in the future.

You would have to have your eyes closed to miss 3D. And thanks to the CE manufacturers – notably Panasonic – Blu-ray has been presented as being at the heart of the stereoscopic revolution. So many 3D 'standards' have been presented that you could be forgiven for thinking that 3D in the home was upon us. The trouble is, so many of them are mutually incompatible that consumer confusion is inevitable.

IBC was notable for its contribution to the 3D knowledge base, with the conference including presentations from content providers like Fox Sports, Sky and the BBC and a one-day masterclass. Both sessions opened a few eyes to the challenges that lie ahead. Who knew, for example, that all the 3D content ever created could be broadcast in a week and a half of 3DTV programming? Or that the fact that a child's eyes are closer together than an adult means they perceive 3D differently than their parents?

David Hill, Chairman and CTO of Fox Sports Television, showed a fifteen-minute trailer of what could be possible, if he were to be given "a very big cheque-book". Impressive though the sequence of NASCAR racing, NFL cheerleaders and Madison Square Garden boxing was when projected on the large screen, it was a good demonstration of another challenge inherent in 3D: the need to shoot and post-produce for a pre-determined display size.

That's right, the theatrical version of a 3D movie is not optimised for the home screen. It is (relatively) easy to re-render an animation title and release it as a Blu-ray title, a challenge to do the same for a live action feature. These challenges will no doubt be met but, as Hill asked, "Can we charge any more for advertising on a 3D channel?" What is required to bring 3D home is a large chunk of interest-free, no strings attached investment. Anyone ready to step up to the plate?

Such vulgar considerations were of no concern to consumers who flocked to IFA in Berlin earlier in the month. Alongside the washing machines, in-car audio systems and wireless gadgets were 3D displays and Blu-ray players foretelling a future in the third dimension. A bevy of analysts were there too, praising the earnings potential of companies involved in the new world.

Obviously, making 3D-ready kit for the home is a breeze. Just double-up the bandwidth, double the screen refresh rate, sort out the HDMI connector, distribute millions of pairs of glases and you are home free. No wonder the BDA promises a 'standard' before the end of the year, even though SMPTE will not publish their standard before mid-2010.

Then again, maybe not home free for 3D... The issue, as always, is money. Brian Lenz at Sky is a great believer in the economics of delivering 3D through the 2D infrastructure. This is done by using the simple trick of squeezing the pictures for the left and right eye, widthwise by 50%, so they fit into a single 2D frame. Transmit it like that and then unsqueeze at the other end and Voila! 3D TV in the home. If you are a major international broadcaster wanting to get into the market with a splash, this is the perfect route. It mirrors Sky's earlier decision to abandon component TV, favoured by BSB, and stick with PAL. Commercially, it was the right decision the time, regardless of the impact on image quality.

Visitors to CEDIA in Atlanta will not be convinced by the '3D on 2D' approach. They were treated to a display of what Panasonic refers to as 'Full HD 3D', two separate 1080p channels, combined at the point of display. "That's the way to do it!" as Mr Punch would have said, were it not for the fact that Punch and Judy shows were established four centuries ago. And they were in 3D.

Blu-ray is the only consumer format able to deliver two concurrent video streams in HD 1080p So if - and it is a big if - consumer 3D takes off, packaged media can expect to survive for several more years. Since no-one looks crazy enough to launch a competing format, maybe now is the time for replicators to buy that additional line.

Battle for the home network - which CE device has the power to win?

DSL, WiMax, LTE or whatever, when it enters the home, broadband has to be distributed from somewhere. So which device should be the gatekeeper for the home network? It was easy in the days of dial-up. The computer had a modem and home networks barely existed, so you time-shared the telephone line between voice and data communications and everything worked passably well. As long as you hadn't subscribed to call waiting.

Meantime, the TV was lord of the video world. Whether cable or broadcast, pictures came down the coax into the set and on onto the screen. Where they stopped. Or rather, were converted into coloured light by knocking photons off phosphors and into your eyeballs. Where the pictures definitely stopped.

And then things started to get complicated. Video recorders delayed the passage of photons to eyeballs. ADSL meant you could talk on the phone and check the sports results. The word multitasking entered the vocabulary of consumer as well as computer geek. But the CE world still comprised islands of connected devices. Of course, as readers will know, we long-ago entered the joined-up era of convergence but it is only recently that device manufacturers have begun to worry about their place in the connected world.

The Digital Living Network Alliance (DLNA) has so far done a great job in getting its logo on a wide range of devices, providing reassurance that device A will connect with (and talk to) device B. Sony, Philips and most other major hardware companies have shared some of the device protocols so that one remote can at least turn two devices on and off. But a bigger battle looms and millions of dollars will be spent in a battle that most consumers will find hard to understand.

Take that shiny new Blu-ray player, for example. (Please - we need the sale!) It probably has a network connection on the back, which will allow the lucky owner to connect it to the internet. BD-Live features depend on persuading an increasing number of people to do just that. But do they have the cat 5 cabling necessary to make it work? And importantly, can their i- phone talk to the Blu-ray player? Don't look to the DLNA to sort that one out.

How about the new set-top box with built-in 320 GB drive, supplied with your satellite of cable subscription? Can you copy data and from the hard drive on your PC or play the stored video on your laptop when you're laid-up with the latest version of porcine or poultry flu? Or transfer the emails in your inbox to the Yahoo Widget on the TV?

This isn't a plug for the Slingbox, great device though it is, I'm simply pointing out that one or other of these electronic boxes has to take charge, or the result will be a cacophony of devices switching each other on and off and demanding priority. The ensuing chaos could make the Sorcerer's Apprentice look like the most polished System Administrator in the broom cupboard.

It's an issue that is not going to go away, as Yahoo and Intel realised when they drew up designs for TV Widgets. If the TV is going return to its primary place in the sphere of home entertainment, the connection to the world outside needs to go direct to to an in-built router in the set. That way, VoD, downloads, IP cable and all manner of other video services can be delivered straight to the screen. But what about other consumer devices with an IP address, like the games console, the mobile phone, the security system, the smart metering, the set-top box? Should they all rely on the TV? Clearly not. And the manufacturers and suppliers would not want it that way.

If the Xbox 360, the slimline PS3, the HDTV STB or any other device is going to be the main revenue earner from paid-for online services, the hardware will have to be 'friendly' to the incoming data. And that becomes harder the more devices are conected and the more diverse they become. WiFi enabled mobile phones won't let you access VOIP services, for example, or go places outside the "walled garden" authorised by the network operator. The same principle could soon be applied by cable operators who deliver IPTV services as long as you use their phone network (and pay their prices), or take advantage of high-speed internet from your power company, as long as you buy their energy and install their smart meters.

So is the answer an industrial-strength router at the interface with the world outside? It may work for the small business user but will homeowners pay for and maintain the beast? Probably not. And what are the implications for BD Live? To extract the last dollars and cents from a BD-enabled product, people who buy the disc need to go online and access the content linked to the title. Getting them to put that network plug into the back of the player is going to be an increasingly tough call unless, like mobile phone companies, an inbuilt WiFi or other network connection broadcasts its availability and connects to the world outside.

Philips understood this with their Streamium WiFi audio range but networking has to extend to every audio-visual device in the home - securely and simply. Wireless connection may have advantages for hand-held devices but there is another option, which perhaps ought to be inbuilt into every consumer electronics device in the home, from Blu-ray players to PCs, TVs and home security cameras.

Powerline would not solve every problem of CE device interconnection but it would be a major step along the road. And if you could plug just two cables into your Blu-ray player (Power and HDMI) and get all the promised functionality, surely a lot more people would be online right now...

Toshiba Blu-ray player readied for market

Spin that past me again – The Toshiba Blu-ray player? Well now you mention it, it's kind of inevitable. While everyone regrets the 'format war', it did awaken consumer interest for a while. Unfortunately, it also led to a long period of indecision at a time when other delivery options - satellite, broadband and even USB flash drives - were moving forward at high speed.

Blu-ray players have evolved, along with almost every other CE product from Widget TV to iPhone, and it is the concept of the connected device that is now centre stage, not the way data is written to polycarbonate discs. How HD video gets to the home has become a battle of the marketing departments, and currently Blu-ray is losing the war.

Philips tried to promote Compact Disc interactive (CD-i) in the early 1990s with the slogan "You're only using half your TV". The billboard showed a split screen TV, with color bars on the left, half a picture on the right and not a lot more to explain what was going on. Consumers had no idea how that related to their real lives and ignored CD-i in their millions.

Jump forward to the 21st century and compare the way Sony promotes Blu-ray. OK, there's the financially crippling decision that put a BD player into the PS3. It created an almost instant Blu-ray player park but what else did it do? It made PS3 too expensive, it delayed the focused roll-out of stand-alone Blu-ray players and, above all, the implied message is that Blu-ray is "something games freaks use when they're not blasting aliens."

You may not like it, PS3 users don't like it, but DVD is quite big enough to store the data for most games, so why burden it with a 50GB player? The Blu-ray player has done little for the gaming fraternity, so perhaps Sony is simply happy that all those PS3s are being used to watch movies. Well, the fact is, they're not. Apart from the early rush to buy BD titles for the PS3 "just because I can", there is very little evidence that the games console is regularly used for anything other than its main purpose.

So how does this affect the average consumer? The overall impact has been negative. Blu-ray brings fantastic picture quality to the home, great sound, terrific interactive extras, maximises your investment in the giant 1080p plasma screen but has this message got across to the customer walking the aisles at Best Buy? Not at all.

What is the received message about Blu-ray? It's a way to play HiDef video. Ask "Have you seen HiDef Video?" and you'll be told "Sure, I watch it on my Notebook and we've signed up for HDTV from Dish Network. Don't see the need to spend money on another box that does the same thing." Clearly, all HDTV is not made equal, but if you try to promote a technology rather than its advantages, don't be surprised if the message doesn't get through.

How do satellite broadcasters promote HDTV? Well, in Europe, Sky HD takes customers by the hand. "Experience television like never before with sharper detail and superb quality sound. Feel closer to explosive dramas, hear all the big moments in sport and see the latest blockbuster movies in your living room, all in stunning high definition. Join Sky+HD and get the true high definition picture on your HD ready TV".

Are you ready to sign up? Or would you prefer a Blu-ray player that delivers "Ten times the sound quality and five times the picture quality of DVD"? Come on Sony, you can do better than that. Actually, you need to do better than that if Blu-ray is going to make it in a world of competing formats. The battle against HD DVD was won, at great cost to us all. Now fight the battle against connected devices, superfast broadband and satellite TV with the same enthusiasm.

And let's welcome Toshiba to the world of Blu-ray. It's great to have you on the same side at last. Now get your marketing team up to speed and sell, sell, sell. Consumers would love to have a connected Blu-ray player at the heart of their home entertainment. Will someone take up the task of explaining why they should...