Game Changer

Two items in the Wall Street Journal on Wednesday, July 29, 2009 together portend a big change in the way entertainment, both movies and “serial entertainment” aka series, are produced, distributed, and watched by US and global consumers. Together they have the potential to shake up Hollywood the way Toyota and Honda did in the late 1970’s and early 1980’s.

First, the article in Marketplace, B3, “Price War Dividing Grocers into Winners and Losers” has big changes in consumer behavior providing ripple effects in supermarket retail. Now, 1 in 3 consumers (that’s one third) buy exclusively items on sale, twice as many as 18 months ago, according to market researcher Information Resources Inc. Or, in other words, from 16.5% 18 months ago to 33% of all shoppers today are buying items only on sale. Safeway, which sought to lure shoppers with upscale stores and high-quality fresh produce, reports same-store sales declined 2%. Result? The stores have lowered prices on thousands of items and run heavy discount price promotions. Retailers with low price reputations (paging Wal-Mart) are posting strong same-store sales increases [same-store sales are sales for stores open at least a year] while others are posting losses. The change in consumer behavior is best summed up by a quote from the article:

At Supervalu, the percentage of items purchased on sale rose four percentage points in the past year and items-per-transaction declined, as cash-strapped shoppers sought out the best deals across a variety of retailers. “If the item is not on sale in our stores, it is far more likely to remain on the shelves,” Mr. Herkert said.

This is an earthquake in consumer behavior, and has profound implications for the entertainment industry.

Amazon posted weaker than expected second quarter results due to a decline in sales of books, music, dvds, games, and consoles. Analysts expect a 20% decline in video game sales from June 2009 compared to June 2008. Consumers are cutting back on groceries, and on entertainment even further. People have to eat. They can play the same video game another year longer.

The entertainment industry has long ridden a wave of profitability, based on nearly fifty years of almost uninterrupted economic expansion. When recessions have come, they have been limited in duration and scope. This recession promises to be different. More wide-ranging, and longer lasting. Some economists talk of a “lost decade” as with Japan in the 1990’s.

A lot of analysts have described the fractured and niche status entertainment as a function of technology. And doubtless the new technologies: FM radio, the Walkman, the VCR, cable and satellite channels, and the Ipod have contributed to fragmented entertainment and the death of mass culture. But just as important is the ability of wealthy consumers to pay premiums for niche entertainment. For example, to receive Logo, the gay channel from Direct TV, costs $55 a month as part of their package sign-up. That’s $660 per year. Even if not many sign up for the package, and it’s sliced up many ways per each channel in the package, that’s still a considerable sum of money. But the business model rests on enough consumers having both enough cash and economic security to spend the money. Just as the Long Tail hypothesis, which states that there is a lot of money to be made selling lots of “non-hits” such as hard to find CDs or mp3 tracks, books, dvds, and so on, rests on the assumption that there will be enough consumers with both willingness to buy non-hit massively popular items, and the money to purchase them. There have been criticisms here on just how accurate the Long Tail model is (i.e. niche content makes aggregators like e-Bay or Amazon money, and perhaps content creators), but the underlying economic model of “Laissez les bons temps rouler” requires, well, good times rolling.

The fundamental attribute of consumer behavior for every good or service purchased during long-lasting recessions is scarcity. Scarcity of consumer dollars, meaning that purchasing a dvd means forgoing purchase of another. This behavior drives consumers towards known “bang for the buck” entertainment, and of course “free” or advertiser supported (or already purchased DVDs) movies and serials are better than paid ones, within acceptable quality bounds. We already see that behavior in supermarket purchasing.

The second item in the Wall Street Journal was the July 29, Personal Journal, D1 story “Video on Cellphones: the Uncut Version”. The story concerns bleeding edge cellphone users with expensive setups (using the Sling Media Slingbox and software for select phones) to view satellite or cable tv on their phones. The hardware alone costs between $200 and $300, plus a monthly service charge. Sling Media claims nearly a million people have signed up for the service for the Iphone. Problems remain with this service, besides the price, including battery drain, and jitter due to network latency (best performance is seen in WiFi hotspots using Wifi instead of the cellular network). Sling Media’s Iphone service is limited to WiFi hotspots for just that reason. Still, Nielsen estimates 13 million people this year and last watched video from their mobile phones.

Nielsen estimates only 18% of the nations 270 million cell phones, or 48.6 million, are capable of receiving or playing video. That’s still a sizeable number. Apple’s basic Iphone 3G is $100 (with a year service plan that has it’s own monthly fees). Apple has shown flexibility on the low end of its Ipod and Iphone devices. Their Ipod Shuffle is $80, with 4GB. Other manufacturers like Palm and Nokia are capable of producing low cost video phones as well.

It’s highly likely that some manufacturer will produce cheap, sub $100 video-capable phones. It might be Apple, it might be Nokia, it might be someone else. Perhaps even Sony. But suddenly, the phone becomes a way to play not just music, which many phones can now do, but video. Which will change the way video is viewed and distributed the way the Ipod and Itunes changed the music business.

Of course convenience will matter too. Many consumers will purchase from Amazon’s mp3 downloads since they lack Digital Rights Management, making use over multiple computers and Ipods easier, but Itunes still predominates as a means to manage Ipods and media. Some estimates place Amazon at around 8% of all music downloads in 2008 while Amazon claims to be #2 behind Itunes in downloads.

Of course, video Ipods have been around since 2005, and the Archos and other players had video before that. But then the Diamond Rio and Saehan (Korea) devices came out in 1998, but did not really catch on until the first Ipod in October 2001. A lag of nearly three years, and in boom times as well. It’s certain that during a recession, most of the 270 million phones will be replaced only as needed. But it’s certainly probable that a basic phone with adequate video capacity could be marketed at prices even cash strapped consumers will pay, and at screen sizes that make video viewing comfortable enough. After all, CD and records and even cassette tapes have superior audio quality compared to mp3s (which samples only part of the digital audio file), and consumers like listening to mp3s on Ipods just fine over expensive stereo systems.

What cheap video phones will do, particularly coupled with a convenient service or software for transferring video to phones, is allow people to watch video entertainment whenever and wherever they want. Much like the MP3, Ipod, and Itunes did that for music. This will not happen all at once, in a “big bang” any more than the changes in the music industry happened all at once in 1998 or 2001. But it will happen.

What this means, if most people consume video entertainment, apart from live sports and other band-width hogging video streams, from a stored file on their video phone, is that distribution will no longer require huge sums of capital. To get movies into theaters, apart from major marketing efforts costing between $30-40 million, prints (or pirating friendly digital copies) must be sent to theaters. Even with digital files, this is a major pain and can require expensive courier services or leased fiber optic lines for high-speed transfer. To get a tv series into a cable or broadcast network also implies a lot of capital, not just for the series to be made but the overhead for the network.

The new Itunes-like distribution model also changes consumer behavior. One study of an un-named UK music service claimed that 80% of all music tracks sold no copies over a one year period. Most of Amazon’s sales in music downloads comes from popular acts, and then just a few popular songs. The same holds true for Itunes.

Which means, given scarce consumer dollars, it’s winner take all. A sale of an episode of a serial, or movie, means no sale for a competitor as consumers have to choose. The way around this of course, given quite likely the difficulty of streaming video content over even the most advanced 3G cell phone network, and the clumsiness of using WiFi hotspots, is to make content “free” but advertiser supported.

With the ads “unstrippable.”

Many, many consumers have stopped listening to radio, and use their Ipods to play music. The music changed from being played over the radio, for free, to downloaded at modest prices. Particularly with compressed video files, low cost or no-cost video entertainment is probably the wave of the future. With “ads” consisting of massive product placement. Not just products or services, but companies playing a major role. Such as Federal Express in “Cast Away.”

In the near future, it’s not at all implausible, that consumers could download free adventures in a serial format of an investigator working for Farmer’s Insurance, or a Doctor for a hospital group, or an airline pilot flying for United. The ad being part of the plot itself. Obviously in that case, the more artful and entertaining efforts will crowd out the blatantly bad ones. But nothing beats “free.” Which leads to another effect, long term. Price cuts for DVDs and other forms of video entertainment (downloads). Hollywood has long tried to keep price floors on DVD and other ways of viewing movies and tv series, and it’s likely that advertisers seeking to create more potent ads can undercut not just Television broadcasting (both cable and over the air) but also studio movies.

None of this will happen overnight, but it will happen. If I had to bet, I’d bet on Apple delivering a “recession beater” Iphone with a price point of around $50, with decent video capabilities, and content creators rushing to provide first cheap content for such a phone, and then “free” content with product placement as described above. Because the market for an always-around video phone plus existing Video Ipods will be irresistible.

That in turn will mean lower margins for everyone in Hollywood. Stars will still make obscene amounts of money, but the margins will be thinner, and the ability to bank on a few mega-profit movies like the Transformers series will be impacted. Since a lower margin means less vanity projects that will lose money (such as “Milk” which probably lost money with a marketing budget of around $30 million and only partial revenue from both foreign box office — rule of thumb is half the gross revenue goes to the studio — and similar numbers domestically outside the seventy-five percent kept by the studio in the opening weekend) can be effectively carried by the big budget films that make money. Even Hollywood, it seems, will run out of other people’s money eventually.


About whiskeysplace

Conservative blogger focusing on culture, business, technology, and how they intersect.
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8 Responses to Game Changer

  1. Anonymous says:

    Whiskey, this comment will appear to be completely unrelated to your post, but its also kind of tangential, because in my mind, its a different kind of game changer via the Financial Times. (Ive long since warned this kind of thing was going to start happening BTW):India plans to build 100 warships By James Lamont in New Delhi and Varun Sood in Mumbai Published: July 30 2009 19:28 | Last updated: July 30 2009 19:28India has plans to add about 100 warships to its navy over the next decade as it seeks to modernise its armed forces, and develop its low-cost shipbuilding capabilities. Captain Alok Bhatnagar, director of naval plans at India’s ministry of defence, said on Thursday that 32 warships and submarines were under construction in the country’s shipyards. Work on 75 more ships, including aircraft carriers, destroyers, frigates and amphibious vessels, would begin over 10 years. EDITOR’S CHOICEUS agrees sales of weapons to India – Jul-20.Analysis: Troublesome trophy – Jul-30.Peace the prize that drives US wooing of India – Jul-21.Analysis: Fear of influence – Jul-12.India to launch first nuclear submarine – Jul-08.US plays for fighter domination – Jun-15..New Delhi is sensitive to lagging behind Beijing's naval might in the region. China has three times the number of combat vessels as India and five times the personnel. Officials are wary of port developments in neighbouring Pakistan and Sri Lanka that offer Chinese warships anchorages and potentially greater control of the Indian Ocean and Arabian Sea.However, India has one of the fastest growing navies in the world. Its fleet of about 120 vessels is the fifth largest. At the weekend, it launched a locally built nuclear-powered submarine, based on a Russian design, to join only a few countries with the technical prowess to produce such a war machine.Speaking at a seminar on naval self-reliance in New Delhi, Capt Bhatnagar said it was a “strategic necessity” for India to develop its own naval shipyard capabilities to avoid “being held hostage to foreign countries in a crisis situation”.Since the end of British rule 62 years ago, India has relied heavily on Russia to supply its fleet. Capt Bhatnagar identified its maritime priorities as energy security, protecting sea lanes, combating Islamic fundamentalism and responding to China’s aggressive modernisation plans.“China is developing its navy at a great rate. Its ambitions in the Indian Ocean are quite clear.” Admiral Sureesh Mehta, chief of naval staff, said the navy would spend more than Rupees 200bn ($4bn, €3bn, £2.5bn) a year on new capabilities, with about 60 per cent devoted to acquisitions of naval hardware. He stressed the need to develop the indigenous defence industry with a view to becoming an exporter of technology to Middle East and south-east Asian countries. He advocated the creation of a business framework that encouraged international defence companies to “set up shop” in locally-based shipyards. India has partnered Italy’s Fincantieri in the design of the aircraft carrier, and Thales, the French defence company, to build six Scorpene submarines in Mumbai. Larsen & Toubro, the listed Indian engineering company, is building a Rupees 30bn shipyard near Chennai and supplies weapons and steering systems.A Mumbai-based defence contractor said the government was considering raising the foreign direct investment cap in the defence industry to 49 per cent from 26 per cent. .Copyright The Financial Times Limited 2009The rest of the world isn't going to need us militarily in 25 more years. Why would they keep buying our debt at that time? Man we are being short-sighted. India and China will not have the racial problems that we have either. They will have united, not divided, populaces.

  2. Whiskey, the entire money-making edifice surrounding entertainment content depends on IP. Which itself depends on the muscularity of the American and European governments to enforce the media company's monopoly.Do you think that China and India's ascendance and their less than robust support for IP spells doom for wringing much in the way of profit from content production and delivery?

  3. Anonymous says:

    People aren't going to watch tv on Iphones. They will always sit in front of a television.

  4. Whiskey says:

    Anon — thanks, I saw that.Elusive, yes ALL BRIC nations (Brazil, Russia, India, and China) have questionable commitments at best to enforcing IP, as Disney among others found out. They are also major pirate sources. Denzel Washington's "American Gangster" was sold on the streets of LA and Shanghai for a dollar as bootleg dvds, through high quality piracy orginating in China.That also will create price pressures.Third anon — for Live TV such as sports, surely. But for scripted entertainment? Why? It wasn't true of the Ipod and music (i.e. music consumed at home in technically superior stereo systems). What factors would force people into watching TV at home when 12.6% of 18-49 (Black and White) alone watch network TV?

  5. The rest of the world isn't going to need us militarily in 25 more years. Why would they keep buying our debt at that time?I don't know if they will be buying our debt, but they will be buying our weapons.Man we are being short-sighted. India and China will not have the racial problems that we have either. They will have united, not divided, populaces.Technically, they may not be "racial" problems but India and China both have massive ethnic and religious problems. The 130 million Muslims in India are a huge problem especially with Pakistan making trouble. China has problem with Tibetans, Inner Mongolians, and with the Muslims in Xinjiang just to name a few.Do you think that China and India's ascendance and their less than robust support for IP spells doom for wringing much in the way of profit from content production and delivery?The ascendancy of China and India is very overstated. Plus, India has Bollywood and China has its own equivalents. Soon enough they will have their own problems with their lax enforcement of IP laws. After all, India for example wants Bollywood to make money.People aren't going to watch tv on Iphones. They will always sit in front of a television.It depends on what you are talking about here. If it's just a random show, then many people would watch it on a cell phone or portable media player. If its a movie in 1080p with 7.1 channel DTS-HD master audio, then its a different story. You will need a TV and surround sound speakers to get the full effect of that, true. However that is still streamable/downloadable. You just need a bigger data pipe and in the case of a TV that will be a wired connection so it will always be faster than wireless. In the end, it doesn't matter if you're watching it on a TV or a iphone. It breaks the current model.

  6. Anonymous says:

    Off topic:I found this today and noticed something I thought you might find interesting. the main point, that cancer survival rates are higher in the USA than in "single-payer" countries, is something that has been talked about. But one thing that the writer glosses over is that in the USA the cancer survival rate is higher for men than for women (66% vs 63%), whereas in USSE and Canada men have a much lower survival rate than women (47% vs 56%).No wonder the nascent matriarchy is so intent on adopting their system.

  7. Anonymous says:

    I was really hoping… I enjoyed NBC's newest tragedy show, "Trauma", until last night when they POORLY revealed one of the paramedics to be gay. I was enjoying the show because the other shows in that slot suck – Two and a Half Men, Dancing with the Stars, and So You Think You Can Dance.I told my wife that I would watch trauma until they advanced the gay agenda – I think it took three or four episodes.The way it was revealed was tasteless, too. "Stoic Paramedic" Derek Luke (sounds a bit like David Duke, doesn't it?) is volunteered by his "Edgy EMT" partner Kevin Rankin to sit a shift outside a gay club during a Halloween party. Obviously uncomfortable, Rankin essentially tells Luke to chill out and enjoy himself. Later, when two costumed party goers show up and start flirting with Luke, he politely and appropriately informs them that he's very much not gay and married. ONLY when they cross boundaries and physically touch him does he put them in a headlock. Rankin then describes how he is a part of that scene.NBC fails miserably when they push the gay agenda. ER failed after a long run, not long after they pushed and pushed the head doctor to become a lesbian (converted, not biologically created a lesbian); The New Knight Rider lasted all of about two episodes and featured lesbian police officers. Crossing Jordan on the other hand survived season after season even though NBC kept meddling with the schedule during the Olympics.Sadly, a search on Google with the phrase "NBC Trauma Gay Agenda" is filled with GLAAD praises that 3% of the actors and actresses are gay or lesbian. Never mind that the agenda is almost 1/4 to HALF of the show!NBC is done for. CBS: You touch NCIS, CSI, Criminal Minds and you're done, too. I don't mind the gays on Amazing Race and Survivor – in fact it is nice to see them, because they are a part of our culture, like it or not. Amazing Race got it when they stopped pushing the gay agenda and just simply let them be there.

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