Posts tagged ‘studios’

Best Buy is Exiting the Entertainment Business

As if I need to continue harping on the fact that entertainment retailers are dying, but get this: Best Buy is exiting the entertainment business.

Best Buy announced their plans to abandon their direct relationship with entertainment and has begun taking actions such as closing its entertainment distribution center in Indiana.  The spin doctors at Best Buy have done a nice job in downplaying this story, because the implications are huge.

What it means

Best Buy is handing over their entertainment business to a third-party provider that will essentially sublease the space in Best Buy stores. Sure, you can still buy CDs, DVDs and BDs.  But, a company called Anderson Merchandisers will run the CD/DVD/BD categories.

BIG news

Here’s why:

  • Best Buy was the only traditional US retailer that was involved in UltraViolet.   Now that Best Buy has ditched entertainment, I see no reason why they would maintain membership.  What’s the point of signing up for membership fees, operational costs and the list of issues that I have spoken of here?  Ultraviolet will lose the only US retailer that has a store presence to explain to customers what UltraViolet is all about.  That will be a big blow.
  • Anderson Merchandisers….They do the same thing for Wal-Mart stores!  Isn’t that rich.  So now Best Buy has not only left the business, but they have given it away to their mortal enemy.
  • With Best Buy out of the picture, the studios and labels have one less player in the mix to cut deals and use as leverage in negotiations with other companies.  I’d hate to be in a sales role for a studio or label.  Just think of the terms that Anderson/Wal-Mart will be able to extract.  That makes my shoulders tense up just thinking about it.
  • Napster and CinemaNow have an uncertain future. These are fairly recent additions and represent Best Buy’s efforts to do something in the digital space.  With Best Buy leaving entertainment, I’m not sure why they would continue running these businesses.
  • Job loss at headquarters.  In addition to the 301 jobs lost at the distribution center, many people will be impacted at HQ.  I bet the total number of people is close to 400. Ouch.  To date, some high profile entertainment leadership has left, and I am sure more are considering.

Trouble ahead

I am very surprised that nobody has talked about the implications.  Best Buy’s move demonstrates that entertainment retailers continue to struggle, while savvy companies downplay the seriousness of it all.  But let the entertainment industry beware: there is no foreseeable calm in these troubled waters.

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Entertainment Retail is Dying: Follow Up

Friday’s post laid out some grim evidence about the state of entertainment retail.  It seems that Nipper, the loyal old dog that got so famous for listening to His Late Master’s Voice through the gramophone, has gotten fat.  If it’s not the economy or other lame excuses, then what’s going on?

Sales of discs are NOT being replaced by digital

As physical sales began declining, many in the business began to assume (and hope) that the declines would be offset by digital sales.  However, the transition to digital from physical is nothing short of a catastrophe.  Total revenue from the sales and rental of content (physical and digital) has been declining over the last several years, and nothing seems to be working to reverse this trend.   The industry is in free fall.

We got here because content owners chose to hang on to the old model and get fat and lazy rather than nurture the development of an inevitable new digital model.  That attentive and amazed terrier somehow turned into a territorial pit bull that didn’t want to switch to a more lean and nutritious bowl of food in the name of health.   Here’s what happened.

Content protection

Content owners began emphasizing how to protect their content as it changed from digital on a disc to digital in the computer.  The music business stood by in paralyzed disbelief as fans turned to crime and stole entire music collections.  In the movie world, studio execs focused on preventing illegal file sharing and created complicated content protection that had the unintended consequence of making it nearly impossible for customers to enjoy content across a variety of devices.

What was great about the DVD – the convenience of using it in any DVD player – was completely undone in the digital world.  What a pain it would be if you had to buy three different DVDs to play in your computer, on your phone, or on your TV!  With the difficulty of watching movies across devices, consumers have checked out and don’t really care about digital.  The irony of all this content protection is that it hasn’t done a thing to stop illegal file share.   Not to mention the content owners have allowed a near Apple-monopoly.

Backwards economics

The next big issue concerns the economics that motivate retailers to sell products to its consumers.   In the DVD world, studios pay to manufacture a DVD – the plastic disc, the case, the paper on which the artwork is printed – and then ship off the package to the retailer.  The retailer pays a wholesale price to the studio and then in turn sells the DVD to its customer with hopefully a bit of extra margin to make some money.  Easy, right?  In the digital world, something happened that I really don’t understand.

Digital files have manufacturing and distribution costs associated with them.  But for some reason, content owners began pushing these costs onto retailers.  As a result, retail margins to sell digital goods took a hit.  When retailer margins take a hit for no good reason, retailers lose interest in selling a product.  Consequently, retailers haven’t readily adopted digital.  There is simply no motivation to help a customer transition to digital.

So, here we are.  The industry suffers as DVDs and Blu-rays sales continue to decline and customers opt for a cheap and easy subscription or rental offer (think Netflix, Amazon, Vudu).  The last standing retailers don’t know what to do with the dying entertainment category.  As smaller retailers go out of business, the big ones are looking at other more profitable things to sell their customers and fill the space in their stores.

The prognosis for the now fat and lazy Nipper is not looking good.  He needs to get up, move around, and start thinking of doing something different.  Otherwise, he’ll become another obesity statistic.

Entertainment Retail is Dying

Things seem to just be getting worse for retailers as difficulties mount.  In turn after unfortunate turn, the stories seem to end up with retailers shutting down.  And this is especially true with retailers that sell DVDs, Blu-ray discs or CDs.  Unfortunately, the broader entertainment industry is not doing much to help out.  In fact, the finger of blame for much of the closing of these very important channels for entertainment companies can be pointed directly at…the content owners themselves.

Entertainment Retail is nearly dead and is gasping for air

In today’s news, Nipper, the loyal old dog that used to listen to His Late Master’s Voice, seems to have turned on all of his owners and has lived up to his name by biting one of the last surviving entertainment retailers in the UK.  You see, HMV – the retailer with the logo of the cute little terrier listening to the gramophone, is pretty much a goner.  The share price hit its lowest level ever during trading today and closed at 10.25 penceRecently, in a not-so-amusing gaff, an important Englishman named George Osborne (he’s the Chancellor of the Exchequer) basically stated that HMV is just about dead.

After three profits warnings in the past four months and continually trying to sell different chunks of the business, the future does not look so good.   They continue to fight for their life, but let’s just say that HMV is not a particularly appealing stock.

On our side of the pond, Best Buy in a recent press release talked about some not-so-good Q4 results. No, Best Buy is not going out of business, but their entertainment category might.  In Q4, entertainment declined by low double digits.  And their recent erratic behavior (buying the CinemaNow name to try to win its own Best Buy digital customers while recently doing a deal with Roku that hands customers directly to Roku and its content partners), indicates that they have no idea what to do.

Now try this:  Think back to ten years ago.  What retail stores did you go to in oder to buy your music?  Name three stores.  OK now think of today.  What retail stores do you go to in order to buy music from your heyday?   Not so easy to think of, right?

You get the evidence

So what is going on here?  Sure, there’s the lame excuse about the economy, the proliferation of entertainment options, the shift to other ways of consuming.  But, there is something else going on.  I believe the content owners have been playing games that have led to the destruction of entertainment retail.  As if on cue, Kevin Tsujihara of Warner Brothers Home Entertainment today announced a “Mega-App” that basically cuts retailers right out of the picture so Warner can go direct to customers.

How’s that for kicking a dog while it’s down!

Amazon’s Cloud

Cloud computing, cloud syncing, cloud services, cloud storage.  It seems like anything these days with that ambiguous (and overused) word is sexy.  And the Cloud got a huge jolt of tangibility from Amazon’s launch of Cloud Drive and Cloud Player this past week.  But, the content industry is not too thrilled; more on implications in a bit.

Suffice it to say that the Amazon Cloud Drive and Player are consumer-oriented services that allow users to back up their local music libraries and play them remotely from anywhere via the Web or an Android device.   For you and me, that means if our tablet, laptop or smart phone crashes, our music would be left untouched and ready to be accessed on another device.  We can expect that Apple and Google will follow shortly with their own cloud offerings, but Amazon wins the First to Market Contest. For a decent read, check out the New York Times for an overview.

In terms of the experience, user reviews are also beginning to land (here’s a good one, there’s a decent one).  The most consistent positive callout is about the interface and ease of use.  On the negative side is the fact that uploading your entire music collection takes a ton of time and is generally a pain in the derriere.  Costs seem reasonable enough (free 5GB and $1 per GB thereafter).

OK enough facts.  Let’s now riff on the impacts of Amazon Cloud services on the music and movies businesses.

The labels are annoyed

Record labels are pretty well pissed off at Amazon for going to market without really consulting them and seeking out the appropriate licenses to stream music from the cloud to your devices.  Labels are concerned because they feel that some music in your collection isn’t “legit:” some music is either stolen from file sharing sites or ripped from friends’ CDs.  Besides offering a service that cuts revenue from labels on inappropriately obtained music, labels are worried that Amazon Cloud services will encourage friends to rip – and share – their music collections.

As Copyright and Technology points out, Amazon’s likely attitude toward the labels is “So sue me.” Simultaneously Amazon will argue that the labels owe them a favor for offering a competitive service to iTunes.  All I can say is that lawyers are licking their chops on the ensuing litigation that will undoubtedly occur.

And how about the studios?

While Amazon Cloud services are limited to our music collections for use across our non-Apple devices, Amazon will likely allow you to put your movie and television shows in the Cloud in the not so distant future.  Studios will undoubtedly resist Amazon Cloud services without the appropriate protections in place to make sure we nasty customers don’t steal and share with our friends.  I think we should expect some interesting (and litigious) discussions to come.

What about current industry efforts with the Cloud?

In an interesting twist, Ultraviolet, which has studio backing from all but Disney, is now faced with a few interesting scenarios to consider as the Cloud space materializes.  On the positive side, with Amazon’s launch into the Cloud, Amazon is educating consumers to what life looks like with “up there.”  So an optimist could argue that Ultraviolet will benefit from drafting Amazon’s efforts.  Another outcome for Ultraviolet is if Amazon joins the consortium and then potentially leverages Amazon’s considerable Cloud infrastructure. Good for Ultraviolet, but bad for the only member company that has skin in the game.  Neustar will need to figure out how to avoid being squeezed out by Amazon.

Another scenario includes Ultraviolet being a potential competitor to Amazon’s Cloud.  If the studios get a sudden change of heart to license content to Amazon, Ultraviolet may just evaporate.

Wrap up

The Cloud is heating up, for sure.  Google and Apple will launch something, and soon the Cloud will become a must have feature in any content service.  But the content industry will not go quietly into this Cloud-based world.  And like the legions of lawyers out there, I’m grateful for the job security and the articles to come.

What do you think?  What are scenarios with labels, studios, industry consortia?

Savvy

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