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Patrick Goldstein and James Rainey
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Consumers to DVD-profit-hungry Hollywood: Drop dead!

October 19, 2010 | 12:22 pm

Reed_hastings When Peter Chernin was still running News Corp.'s sprawling entertainment empire, I remember him offering a smart piece of advice over lunch one day: You can't try to hold on to the profits from your old business model if it forces you to put an unnecessary stranglehold on innovation and growth in your new businesses. As I recall, Chernin's maxim was directed at my business -- the newspaper business -- which has been ever-so-slow to adapt to new technology, but the lesson applies to the entertainment business as well.

It would be hard to find better evidence of Hollywood's foot-dragging approach to new technology than this perceptive story by my colleague, Ben Fritz, which reveals that while consumers have long ago embraced shopping online when it comes to buying everything from cameras to cars, they still aren't flocking to buy movies online. Why not? In a nutshell, because Hollywood put so many clamps and constraints on downloading movies that consumers decided to do almost exactly the opposite of what Hollywood wanted them to do: They rent instead of buy.

Even though there's a deluge of consumer friendly devices such as Apple TV, PlayStation 3 and Web-enabled televisions that make it easier to watch movies, the real growth online is in rentals. As Fritz writes:

U.S. consumers will rent 37.7 million movies online this year for $3 to $5 each.... That's a nearly sevenfold increase from 2007, and it doesn't include the more than 300 million estimated videos streamed via Netflix's subscription rental service. Meanwhile, consumers will buy about 20 million movies this year for $10 to $15, a less than threefold increase since 2007.  

Why are rentals soaring? As Fritz points out, renting is way simpler. If you buy a DVD, you can watch it as often as you want. But even though online digital purchases cost as much as a DVD, they can't be easily transferred between different devices. Because of ancient studio deals with pay cable channels, movies often disappear and reappear from online stores with no explanation, further confusing consumers. The end result, as a research director for digital media at Screen Digest told Fritz, is that Hollywood is moving toward an age where "download-to-own is a niche business." In other words, not a very big business at all.

That's not at all what Hollywood wanted. The studios have a possible solution, which -- surprise -- entails charging consumers a premium price, perhaps as much as $30, for video-on-demand before a DVD release. But I think the cat's out of the bag. Too many movie fans have decided, especially in the midst of a prolonged recession, that a one-time viewing experience is just fine, thank you very much.

For me, the most telling detail in the story comes at the end, when Fritz talks to Jim Ramo, the chief executive of Movielink, a joint venture cooked up by the studios to sell movies online. Ramo says the studios fell into the same trap that Chernin warned me about: They wouldn't risk their traditional business model unless they saw an opportunity to make more money online. Perhaps that's why when Fritz talks about Movielink, he uses the past tense -- the company is now defunct, having failed largely because it never offered consumers an easy way to buy a wide variety of new films. In other words, it was another victim of Hollywood's inability to embrace change. 

Photo: Netflix chief Reed Hastings at the launch of a new subscription streaming service in Canada.

Credit: Mike Cassese/Reuters

 

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