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Frederic Guarino

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Netflix Killed the DVD Star... And Other History Lessons

Posted: 10/30/2013 9:54 am

Tech and media have been nurturing each other for 100+ years and they hate it.

Those whose paths I've crossed over the years have heard me repeat what has become a motto of sorts: "Everything Old is New Again" in media.

My main point is that the dogfighting we've just seen between Netflix and NATO (National Association of Theater Owners) on who is really killing film as a business and an art, is but the latest episode in a century-long battle between technology and media, between incumbents and new blood.

Auguste and Louis Lumière held their first public screening of films at which admission was charged was held on Dec. 28, 1895, at Salon Indien du Grand Café in Paris

At the dawn of cinema and the Lumières brothers' invention in 1895, vaudeville theatre owners cried wolf and tried to get cinemas shut down because they competed with their moneymaking live theatre. This was Tech vs Media Battle #1  --  vaudeville theater vs. cinema. Fast forward to the 20th Century, teens and these same vaudevillians had taken over the industry and were building the integrated studio system which lived on until the U.S. Supreme Court decision of 1948. Cinemas were sprouting up everywhere in the US, there were 5,000 screens in 1905 and 20,000 in 1920.

The second battle was shaping up as home entertainment was on the rise with the advent of radio as a mass medium but the apex was television which became de rigueur in the 1950s. The radio networks  --  CBS, ABC, NBC  -- morphed into television networks and live television gave way to recorded shows, financed by a steady stream of advertising. The promoters of branded content in 2013 should also remember that Procter&Gamble started its production division in the 1930s and that the "soap operas" that they produced and financed ran for decades  -- Guiding Light for example started in radio in 1937 and only ended in 2009 !

Cross-country radio networks set up in the 20s, RCA-NBC in 1926, CBS in 1928. Their corporate "children" are still very much around...

Motorola print ad circa 1950

Television became the battleground for Tech vs Media Battle #2, now incumbent cinema vs. television. The studios vociferously argued that television was unfair competition, that tv was "giving" its product away as opposed to paid movie tickets, etc. These arguments from the 1950s are almost identical to the ones that entrenched incumbents of today use against digital media. This battle was being fought as the US Supreme Court broke up the integrated studio system in its 1948 US vs Paramount Pictures decision. The studios kept kicking and screaming against television, until they came to terms with it. They shrewdly realized that the switch from live television to recorded meant they could resell their ENTIRE film libraries and create a steady revenue stream, a "second window" for films. A modus vivendi lasted from the 1950s to the early 1970s, with Tech vs Media Battle #3, now incumbent cinema/tv against cable and VCRs.

An early push button cable tv box

The studio system was pretty much dead in the early 1970s and the corporatization of the industry was accelerating. MCA took over Universal in 1962, Gulf&Western acquired Paramount in 1966, Seagram bought MGM in 1967 only to sell it to Kirk Kerkorian in 1969, and Steve Ross's Kinney bought Seven Arts-Warner in 1969. The stage was set for the corporate-run studios to launch one of its most epic battles, which also ended in front of the Supreme Court,the Sony vs Universal "Betamax" case, which cemented the concept of recording shows as fair use. Yet again short-sighted incumbents were fighting windmills as they rambled against the unfair competition. The MPAA president Jack Valenti, testifying before the U.S. Congress in 1982 said: "the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone... We are going to bleed and bleed and hemorrhage, unless this Congress at least protect[s] one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and ravages of this machine."

Circa 1978, the taglines are eerily similar to the promise of VOD and SVOD.

The Court ruled against the studios in 1984 and cemented the "fair use" concept, aided by none other than Fred Rogers, yes Mr Rogers saved the VCR... All was forgiven and forgotten when the third window for films came forth with home video, which soon became the studios' main revenue stream. Plus ça change....

We're hearing the same ramblings today against digital media, as Netflix is being called the "Albanian army" by TimeWarner CEO Jeff Bewkes. The same apocalyptic tone as in past scuffles surrounds Tech vs Media Battle #4, with analog incumbents vs digital upstarts. The media conglomerates enjoyed the benefits of VHS and DVDs for a couple of decades and ran very profitable quarters. They are up in arms again with the logical consequence of the digitization of entertainment ie the disappearance of physical formats in favor of streaming. Legal streaming took root with iTunes and most spectacularly with Netflix which now accounts for a third of all U.S. bandwidth during prime time hours.

Netflix now totals 31M US subscribers vs 29M for HBO. Its international presence is also growing fast.

Just as HBO revolutionized pay television by developing its own original shows, Netflix did the same with House of Cards and Orange is the New Black. This strategy worked, as Netflix recently overtook HBO, totalling 31M US paid subscribers vs 29M for HBO. Netflix is paving the way for non-linear television, and just as HBO was followed by Showtime and Starz in the 1990s, Hulu and Amazon have now also commissioned original programming of their own. My prediction is that others will quickly follow suit, like Walmart's VUDU. Walmart has been the US's top DVD retailer and also foresaw the demise of physical formats and reacted wisely with the purchase of VUDU. Alongside subscription VOD (SVOD), the VOD market is blossoming,thanks to an aggressive push by the cable companies. VOD is becoming a key revenue-generating platform for studios and independent producers. VOD has allowed indie films to go beyond somewhat limited platform releases and address an underserved market, the roughly 100 million homes that had no access to art house movie theatres.


The two prime examples are Margin Call and Arbitrage, two moderately budgeted films that over-performed on VOD: Margin Call is reported to have generated more than $5 million through VOD and $5.3 million in US traditional box office. Arbitrage did better: it grossed $8 million in theatres and $14 million in VOD revenue. It remains to be seen if VOD is the new DVD but audiences at home are responding to the call.

Fast forward to the battle of words between Netflix's Sarandos and NATO's Fithian. Both make valid points but in the end, we are all serving one master, the consumer. Event films still get people into theaters but rising costs per ticket, coupled with audiences increasingly enjoying long form television on large screens at home is disrupting the theatre-first model. Illumination's Chris Meledandri also spoke this weekend about his sons' rapport with film: "I observe in them is a very different relationship to the cinema than I've ever seen in previous generations. Simply put: They don't have to go to the movies. I worry about a generation growing up without that habitual commitment to the movie theatre." The question is: are we still in Battle#4 or is this already Battle #4.5?

NYC's Rooftop Films (http://www.rooftopfilms.com/)

One (not so) crazy idea that I've been toying with: given the relative low cost of home theatre setups, why wouldn't the entertainment industry foster neighbourhood cinemas in the back of bars, cafés, etc. and create new, communal venues for a common cinema experience ? Rooftop cinemas in NYC, Melbourne, London are leading the way. Neighbourhood cinemas could compliment multiplexes and offer an additional alternative to VOD for non-tentpole, indie films that warrant a theater experience. One of the missing elements in the puzzle is VOD data, kudos to John Sloss from Cinetic for posting the data from the release of Escape From Tomorrow and for daring other distributors to follow in his footsteps.

Storytelling and technology have been unruly partners for more than 100 years, with a never ending cycle of new tech challenging the entrenched interests of incumbent players. When's the next battle?

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  • HTC Droid DNA

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