GLG News by Marty Shindler

Implications: Lots of us considered IMAX down and out in recent years as the institutional theater market (museums, etc.) began to dry up and as IMAX and others failed to provide sufficient appropriate content to the commercial theater circuits to which the Company was selling systems. Now with 3D being one of the very HOT topics in Hollywood and due to the success of two opening weekends of Beowulf in Imax 3D, the time may be right for Imax.

Analysis:  

In the 90s, Imax, faced with a dwindling market for its theater systems in what had been its core constituency, the institutional market of museums and other not for profits, began leasing its systems to commercial theater circuits. Among the first was the Loew’s Lincoln Square at what is now an AMC at Broadway and 68^th. This location, is consistently one of the top ten box office grossing locations in the US.

Unfortunately, the Company did not supply sufficient commercial content for these screens. While movies about Bears, Wolves, etc. do well in museums and science centers, they failed to attract audiences at theaters such as the one at Lincoln Square or the Edwards Spectrum here in Southern California, another very high grossing location.

The lack of content did not sit well with the exhibitors who had spent a lot of money installing expensive IMAX systems. Fortunately, IMAX came up with the DMR system to convert a 35 mm Hollywood movie to its 70 mm format.

The last couple of years have seen a growing number of Hollywood movies on IMAX screens. With the appetite in Hollywood for 3D content, Imax 3D seems like a great way to get the movies into more venues in addition to the burgeoning number of 3D screens from Dolby and current market leader Real D.

Now that AMC has made a deal with IMAX for 100 screens over the next couple of years, one must ask if Regal and Cinemark, the two commercial exhibitors that were among the first to install IMAX screens, will pump up their volume as well.

Certainly the economics have changed all around. IMAX does joint venture deals, making it easier for the circuits to sign up, and without the $40 - $50,000 film print costs, the new digital systems may be the lifesaver.

I have not seen the digital IMAX yet, but have seen the Real D and Dolby 3D systems on many occasions. I have seen around 100++ IMAX movies over the years, including many in 3D and know that it does provide a unique viewing experience. If you have not seen Beowulf in Imax 3D or digital 3D, do so and do it this week while it is still in the theaters.

Implications: DirecTV has added 21 new HD Channels to their existing tier of 31 toward a goal of 100 by year end. This is great news for their subscribers and for those who understand and appreciate the big difference that viewing in HD can make. However, the question becomes whether this will add a significant number of new subscribers and/or cause existing customers to upgrade their service to the HD or premium packages. A Best Buy study released earlier this week notes that education is still required to insure that owners of HD TVs fully understand the need to add an HD service to their existing accounts from DirecTV, Dish, their local cable companies or even the nascent video delivery services from the telcos. The study released by Best Buy this week states that only 19% of HDTV owners indicate they fully understand HD. See http://www.tradingmarkets.com/.site/news/Stock%20News/650274/ for more information on the study.

Analysis: On the surface the DirecTV announcement is great as the US moves forward in its conversion from analog to digital and, in turn, to HD service. This should place DirecTV clearly in the lead for number of HD channels available as compared to the full range of their competitors.

According to the article, “new channels include CNN HD, A&E HD, The History Channel HD and The NFL Network HD. Many of the channels will be available to current subscribers of DirecTV’s $9.95 per month HD service tier at no additional charge. Premium HD channels will be available to subscribers who have signed up for those premium service packages.”

The fact is, those tiers are already expensive and for someone buying a new and expensive HDTV who may not understand the need to add an HD service, new HD versions of existing channels may not be enough to drive subscriber count.

Even with a robust holiday sales season for new HD TVs, it remains to be seen whether the public will respond to purchasing the add-on service to get HD quality pictures from the TVs.

There are too many people who buy the new TVs, watch a standard definition (SD) show and come away impressed, as it is always a better picture than what they had previously on their old sets.

The same goes for people who watch an SD DVD on the new set and recognize that it is significantly better than what they had.

As I had pointed out in Battling it Out – Skirmishes Continuing(http://news.glgroup.com/CM/Analysis/PostDetail.aspx?pid=16219 ) major price breaks will be required for the next generation DVD players before the consumer gets on board and purchases one – either one – HD DVD or Blu Ray.

The same is true for HD service. Until the pricing is lower concurrent with the cost of new HDTVs decreasing, significant changes in subscriber count and in turn a big uptick in revenue will not be forthcoming.

Implications: While the format wars in the next generation DVD systems continue to confuse customers clearly indicating that there is not going to be an obvious winner for some time, if at all, VOD may be sneaking under the radar. This is still a very nascent business. The studios in making their content available to Time Warner Cable and their counterparts for VOD, also must face the most important implication of all, angering some of their biggest customers, namely Wal Mart that accounts for ~ 40% of total home video sales. When Target, Best Buy, Amazon and a few others are added in, the total is well in excess of 50%.   And in allowing the cable companies to experiment with a day and date release on DVD and VOD, they must be careful not to shorten that time frame from theatrical release too much or they risk angering their other very large customers, the major exhibitors. In this arena, Regal, AMC and Cinemark comprise some 16 – 17,000 of the 39,000 screens in North America.

Analysis: The rumor that packaged media is going to be dead due to the popularity digital downloads is a bit exaggerated. Will digital downloads and VOD gain traction? The answer is yes as evidenced in part by the statistics from #2 cable company Time Warner Cable that are discussed in this article.

I suspect that Comcast, the nation’s largest cable company, has similar, if not better statistics from their VOD offerings as they are considered the current king of video on demand.

Home entertainment represents by most accounts approximately 50% of the total revenue from the studios’ motion picture production programs. It is clearly the cash cow.

Approximately 62% of the total to date this year at retail is from sale of product while the balance of 38% is due to rentals.

In this article, Time Warner Cable indicates that they have had continuing success at driving their digital video customers to using the VOD offerings of new movies at $3.95 each and older movies at $1.95. The article presents many other statistics related to the number of customers using the enabling DVR and digital video technology as well as the number of their customers who own HD TVs.

The essence, though, is about VOD.

As a consulting professional who has worked in and around the movie/entertainment business for more than 25 years, I prefer to go to the theater, not just for the experience of seeing a movie in that setting, but due to the fact it is important in our business to be able to see as many movies as possible earlier than later in their release cycle. If our clients in production, post production and visual effects are involved in a particular movie, I want to be able to tell them that I have seen their hard work.

There are times, though, when the VOD is just too easy and it is much more convenient than driving to the local rental store. And it is comparable in convenience to having the DVD arrive in the mailbox from one of the online rental companies.

This year, TWC expects to generate $400 million in VOD revenue via some 1 billion streams. Some of my hard earned dollars are in that total. It is very easy and convenient to click the remote a few times and voila be able to start watching a movie on my HDTV.

The $400 million is significant in terms of its rate of growth, though that amount is but a fraction of the total of >$26 billion generated annually by the home entertainment industry. It will continue to grow in absolute terms as well as on a percentage basis.

Although I noted that the studios are careful not to anger their best customers – Wal Mart, Target, Best Buy and the like, the TWC experience so far seems to indicate that the VOD revenue does not seem to have cannibalized the sell through market which is dominated by the aforementioned companies.

Therefore, the correct assumption is that people are using VOD as a rental item – but due to the market dynamics, it is difficult to say how much of the revenue is indeed incremental and how much is coming at the expense of Blockbuster, Movie Gallery and their brick and mortar counterparts and how much it will impact NetFlix and Blockbuster’s Total Access.

The day and date release of movies and TV shows on DVD and VOD will be a continuing event as long as the evidence continues to show that there is little impact on the sell through market. Once that happens, Wal Mart and their retail counterparts will make their opinions known. One only needs to walk into a Wal Mart or Target on a Tuesday to know how much space is dedicated to new releases. And one only needs to walk into the DVD departments and near the check out lines to know the impact of library product on their sales.

Customers are shopping in those stores for other items anyway. It is very convenient for them to pick up a competitively priced DVD, new or old, as an impulse or planned purchase while they are there. Even when VOD and downloads are more prevalent, those shoppers will still be going to Wal Mart and the like and will continue to buy DVDs.

Although TWC is attempting to make the menus easy to navigate and thus make it easy for the couch potatoes to buy easily, it will take some time before VOD truly becomes mainstream. The flashing 12:00 on VCRs is a reminder of the level of technology prowess that is in the marketplace.

To become mainstream will require the studios through cable companies (and the telcos under the IPTV scenario) to continue to make product available and to continue to educate their customers on the virtue of using their digital video DVR/set top box. Growth will also come as the penetration of HD TVs increases and hopefully simultaneously, the customers rent the set top boxes and pay for HD service.

While catering to the impulse buyer, the cable companies need to work hard to keep their pricing competitive with the all you can eat plans offered by NetFlix and Blockbuster’s Total Access where the convenience factor weighs in as well.

Implications: I can hardly wait until tomorrow to find out what is the next news release in the next generation DVD format battle. The stats are nice in this nascent industry, but it is still lying with statistics, so to speak. Earlier this week, there was a story that Sony was in the lead and today this article appeared, stating that Toshiba is in the lead. This represents the latest salvo in the format war.

Analysis: It is significant that the two organizations are attempting to keep up a solid pace of announcements and they are showing where they rank in the standings.

In the end, this is all directed at the trade press which people like me read every day – and that includes each of the respective team’s competitors and of course, the studios and other professionals in the home entertainment industry.

None of this will matter if the consumer does not read the stats and, more importantly, if the consumer does not purchase a Toshiba HD DVD player or even one from the Sony led Blu Ray camp.

However, as pointed out in the GLG News item a few days ago, Battling It Out –Skirmishes Continuing, the stats are not that important as the industry has not currently achieved critical mass. Either team could hit a few doubles or triples tomorrow and drive in a few runs that will gain them the lead or cement the lead in place – if even that is determinable.

In the end, when the player prices decrease dramatically and there is a larger base of HDTVs along with a sufficient supply of content, there may be an end to the skirmishes. Stay tuned for more.

Implications: Did you read How To Lie With Statistics in college? Do you practice it in your business? Do you own a high definition TV and also subscribe to a high definition service? Do you own an hd – next generation DVD player of either format?  If not, why not? Have you watched a standard definition (sd) DVD on your HD TV? Looks good, doesn’t it?? As reported in the article, 1 million units may seem like a lot, but that only represents an approximate $20 - $30 million dollars in an industry that generates a total of over $25 billion on an annual basis. There are many hurdles to be cleared before a winner can be declared, if ever that happens. Until then, declaring Blu-Ray the leader is lying with statistics.

Analysis: It seems as though there is a different news article every day touting who has won the latest skirmish in the battle of the formats for the next generation DVD system.

While this is not a scorecard, alternating press releases from both the Blu Ray (Sony led) and the HD DVD (Toshiba led) camps, might lead one to believe that the latest battle was won by the organization putting out the most recent release. That may be true, but it is lying with statistics – stretching the truth to make a point – not necessarily a fallacy.

The announcements all have high profile organizations touting their role(s) in the roll out of the next generation DVDs. These include but are not limited to (in alpha order) Amazon, Blockbuster, Disney, DreamWorks, Fox, Paramount, Sony Pictures, Target, Wal Mart and Warner Bros.

The next generation DVD systems will not be able to gain any traction until a number of things occur. These include:

1.More HD TVs are sold. There must be a larger installed base of next generation TVs before the “winner” in the format battle will be won, if at all. There is no sense in having a next generation DVD player until you buy a new HDTV. But with the price of the TVs still high, albeit decreasing, it is still an expensive purchase, sometimes necessitating deferring the purchase of a next generation DVD player.

2.Next generation stand alone players are sold in significant numbers - so that the statistics are not relying on the Xbox 360 and the Sony Playstation 3 for next generation DVD.

3.Standard definition DVD players, the current generation, play a great picture on a new HD TV. Those players cost less than $100, often less than $50. Why would one need to spend even $300 for a next gen DVD player, let alone $1,000 for a high end player?

4.Upconvert DVD players can also be purchased for less than $100. These players increase the resolution to make a standard definition DVD look even better on a new HD TV.

5.A significant number of people have bought the new HD sets, but are not subscribing to a high definition service. If they are not interested in what is basically a small incremental cost on their cable/satellite bill, why would they spend on a next generation DVD player?

6.Next generation DVD players are very expensive, especially for those other than the very early adopters. There will not be any kind of traction toward critical mass until the prices on the players drop dramatically. This will need to start at no more than $200.

7.Content must come down in price. One only needs to review the Sunday newspaper ads for Best Buy, Wal Mart, Target and others to recognize that the prices of both new and old/library product are low. Have you seen the $4.99 table in these stores? These stores represent 45 – 50% of the market for packaged media.

In the end, a next generation DVD player and related format will make headway with the consumer. It will not happen though until the manufacturers recognize that it is time to price for the average consumer.

Implications: If there was ever a question as to whether the public is now aware that all sorts of content will be available on our mobile devices, the release of the iPhone last week has put that to rest. Over the next couple of years there will be continual and rapid growth in all manner of accessories and tools to make our use of mobile devices even more useful with add ons, software tools and other techniques to give us the anywhere any time access to what we want to see. Some of those products will succeed and a vast number will not. One product that does stand out is one announced through this article that can enable the owner to view content in 3D on their mobiles. The forthcoming wave of 3D content that is hitting the nations’ theaters will play a key role in pushing the Neovision product into the public spotlight. Randal Kleiser a noted director of Grease and other movies, is behind this product.

Analysis: There are a lot of accessories and other mobile add ons coming to the market. Most are more of the same old. The product from Neovision is not more of the same. I have seen it.

There are numerous movies coming to the global theatrical marketplace that will be produced and then distributed and exhibited in 3D. It is not obscure directors and studios that are doing this.

Indeed, Disney, Fox, Paramount, Warner Bros. and Sony are leading the way with product from James Cameron, Robert Zemeckis, Steven Spielberg, Peter Jackson, U2 and others.

Once the movies have hit the theaters, there will be a need to extend the revenue stream to home entertainment in all of its definitions from DVD, current gen and next gen, TV broadcast and cable.

To date, the viewing of 3D content has been limited. There are some expensive TV sets that can show 3D with and without glasses. Texas Instruments and their DLP technology is prevalent.

I have also seen an LG and a Phillips auto stereo monitor, but it will take time before they can be manufactured at a viable price point.

In the meantime, the product from Neovision has the capability to present a 3D image. I have seen the product and know that it was good and that with further development it will be enhanced.

Time will tell how the public accepts the myriad of products that are coming to market. The market, as always, will decide how and on what basis success is measured. The Neovision product is one to keep an eye on.

In the name of full disclosure, I have noted that I have seen the Neovision product. I was also approved recently by Mr. Kleiser as the moderator of a panel at the forthcoming DGA (Directors’ Guild) Digital Day. The theme of the day – The Future of the Future – What’s Next in Digital?

Implications: The world will eventually move to digital cinema exhibition. It is a matter of when not if and how long it will take. At issue from the start of the transition has been who is going to pay. The exhibitors do not want to spend a lot of money just to save the distributors/studios their print costs. As such, the virtual print fee concept was created whereby, in general terms, for each digital theater showing a movie digitally, the studios would contribute $750 to the digital cinema financing effort. The $750 is approximately ½ the cost of a film print. This deal is for Fox and Universal only, but the others may follow suit. If the region’s cinemas agree to work with this virtual print fee concept, then the roll out of digital cinema on that continent will grow quickly.

Analysis: There are currently some 39,000 theater screens in North America, with approximately 3,300 now digital. The three largest exhibitors have not yet made their big commitment to a massive roll out. It is anticipated that it will occur in the next year due in part to their wanting to test the Sony 4K projector.

The secondary impetus for gaining more ground in the digital cinema roll out is the forthcoming wave of 3D stereoscopic movies in production. This initial large wave will hit in 2008 with an even larger wave in 2009 with a major DreamWorks feature and one from James Cameron with others anticipated.

With some 32,000 screens in Europe, the 687 current digital screens is a small percentage. These are mainly in the UK, Germany, Belgium, France and Italy.

Clearly, an incentive is required to move the total forward. It is assumed that the deal referred to in the article will generate another 7,000 screens over the next few years. That will be a welcome addition. With that accomplished, the studios will push to generate more movies digitally and to continue the incentives to the exhibitors, not the least of which will be the compelling 3D content that can only be seen in its intended form on a digital screen.

Currently, there are 320 digital screens in Asia with 138 in Korea, 61 in Japan and 49 in China.

With the roadblock lifted in Europe, Asia distributors and exhibitors may also negotiate similar deals to push the region into the digital cinema age.

Implications: Alternative content is a great concept for idle capacity in the nation’s movie theaters and is enabled due to the transition to digital cinema. It will be a while before this concept is proven or disproven. The reasons are simple: there has not been much alternative content and the theaters, used to having product marketed for them by the major studios and independent distributors, may not be in a position to market the product in a way that can be financially rewarding to all concerned. Different kinds of programming have been produced for this market from kids programming as discussed in this article to the Metropolitan Opera. There are a number of projects on the horizon that may click with consumers, including the broadcast of sporting events to the theaters. National Amusements has been doing this for a while with Red Sox games. Chances are this content, at least at the outset, will come from the independent producers, not from the studios.

Analysis: This article discusses the business model of an Access IT acquisition, Bigger Picture. Bigger Picture has been producing kid oriented content for movie theaters to exhibit early on Saturday mornings when the theaters are relatively quiet. It is a good concept and if it works, it will pave the way for others to make similarly low budget fare for the tykes.

However, theaters will need to have more robust product if the concept is going to take off and provide solid incremental revenue beyond concessions. For example, the fact that many theaters have had success with the Metropolitan Opera live HD broadcasts bodes well for the concept. (See The Fat Lady and the Holy Grail https://news.glgroup.com/CM/Analysis/PostDetail.aspx?pid=3911).

The Met has already announced plans for a number of live HD broadcasts to theaters for the coming season. This can add significant incremental revenue from the point of view of both the Met and the theaters. And since the theaters generally have great acoustics, it is a winning situation.

Presently, there are some 4,000 digital theaters worldwide, with approximately 3,000 in North America, so it will be another couple of years before the installed base is sufficient to measure the effectiveness and viability of alternative content.

Recently, the NBA conducted tests of a 3D broadcast during an NBA finals game from San Antonio to Cleveland. Although the event was broadcast to a stadium, not a theater, it could as easily have gone to a theater setting, or multiple theaters given the near 14,000 attendees.

This concept is something that could take hold next season when it is expected that there will be approximately 1,200 3D digital theaters in North America, all awaiting the release of Robert Zemeckis’ Beowulf in November. Since there is not yet a sufficient supply of 3D theaters today, the timing may be right for NBA games and perhaps other sporting events to use the venues. And even without the 3D theaters, 2D theaters could be used as well, but they do not provide the same immersive experience.

There is also the issue of marketing. Theaters do not generally market the movies they show. That has always been the domain of the studios and independent distributors.

The challenges of marketing the product can be overcome. Time will tell whether the market is ready for the alternative content.

Implications: Blockbuster has announced that it will offer all new high definition DVDs in the Blu Ray format on an exclusive basis. Whether or not this is a blockbuster decision by Blockbuster as it relates to the Sony led format remains to be seen. And this will not necessarily spell the doom of the Toshiba led HD DVD system. Time will tell as the market decides. The reason that this may not be a fait accompli is due to the fact that it is still very early in this format war. This may be a battle won, but it is not a turning point in the war. Also, there are other major competitors to Blockbuster in terms of DVDs. What if, for example, Wal Mart, Target and Best Buy, the three market share leaders in the important sell through market, decide to carry both formats or if any one or all three offered only the HD DVD? What if Net Flix made a similar decision? Hollywood Video?

Analysis:  

Blockbuster’s decision will cause the industry to pause and for the other players along the entire pipeline to re-consider and re-evaluate their options. It is not a decisive victory for Blu Ray, momentous as it is.

This announcement has been timed no doubt for the opening of the Supply Chain Management conference being held in LA this week.

The format battle will continue for the foreseeable future. Both sides have invested inordinate sums of money in developing their formats. The timing is such that the installed base of HDTVs is still relatively small, notwithstanding the February 17, 2009 date looming with the end of analog transmission. For those that have taken the leap into the world of the HDTV, watching a standard definition DVD on the HD monitor is significantly better than what they had previously.

Having spent a couple of thousand dollars on that HD set, how many of the average consumers can realistically spend for the recently reduced price for a Toshiba HD DVD player at $399 or $299 with rebate? Sony’s players are still significantly more expensive.

Furthermore, the studios have often said that they took a lesson from the music industry in the way they approached DRM. Another lesson related to the music industry is that while iTunes and the iPod have done sensational business, this has not precluded Microsoft’s Zune and mp3 players from iRiver, Samsung, LG and others from offering competing products. Those other companies are still in the marketplace and they are not going to move out just because Apple for the time being is dominant.

While Sony Pictures controls more titles than any other studio, they are a separate profit center and it would seem that they would offer both formats, sometime in the future, if the market so dictates. If HD DVD was leading at the time Spider Man 3, the leading box office champ so far in 2007 ready for DVD, would they not release in both formats?

There cannot be a clear winner in this whole format war until the price of the players drops to at least the $250 range. That price range will get the not so well-to-do early adopters and others. Further drops in prices to the $200 range will begin to bring in some of the mass market, creating momentum.

Yes, this is a blockbuster decision by Blockbuster, but the war will wage on.

Implications: By most standards, U2 is a leader in all aspects of the entertainment business, but when major players such as James Cameron, Steven Spielberg, Peter Jackson, Robert Zemeckis, Disney, DreamWorks and others are involved in 3D stereoscopic movies, U2 is just another name on the list. U2 was at Cannes to publicize the release of their U2-3D movie which if all goes well will be released this fall. I have been following 3D very closely and will be moderating a panel entitled The Arrival of 3D - Digital 3D Platform for Feature Films and Television on June 12 at Digital Hollywood. http://www.digitalhollywood.com/LASpring07Agenda.html. 3D is one of the hottest topics in Hollywood today with all of the major players and many others attempting to gain a foothold in the medium. The company list for my panel is formidable, with Dolby, DreamWorks, Kodak, Real D, Sony and Texas Instruments represented. Some 3D product will succeed and some will not. U2 has strong possibilities.

Analysis:

3D is not new, but the way in which it is presented today with digital cinema technology brings the format to a higher plane than ever before. This is not the House of Wax or 13 Ghosts from the 50s and 60s. This is 2007 and the presentation is extraordinary.

The growth of 3D is enabled by two important factors, digital cinema technology and a supply of content.

There are now approximately 3,300 digital screens in North America, with most of those in the US. There are more than 39,000 screens in North America today, so there is a lot of room for growth and indeed the rollout to digital is in progressing.

3D is one of the major drivers of digital cinema as exhibitors and distributors alike work diligently to bring people into the theaters at a time when there is a wide range of choices for our leisure and entertainment dollar. For today, 3D is something that you can only get at the theater. While there are plans to bring 3D to the home, the technology is several years away.

The growth of both digital cinema and 3D are tied together. Companies are competing for the many aspects of the technology food chain that will drive this growth.

As for content, the second driver of digital 3D, there are a lot of movies and alternative content in production and in development in addition to the aforementioned Beowulf.

When Disney opened Meet the Robinsons in March, if you wanted to see the movie on opening weekend in Manhattan, you could only see it in 3D. It played on nearly 700 screens out of the nearly 3,500 digital screens expected at that time.

By the time U2-3D opens this fall there should be approximately 1,000 3D screens. When Robert Zemeckis’ Beowulf opens in November, it is expected that there will be 1,200 3D screens.

All of DreamWorks Animation’s movies will be in 3D starting in 2009. James Cameron is producing Avatar now in 3D. It is his first feature film since Titanic. Following Titanic, Mr. Cameron produced and directed two Imax movies in 3D.

See http://ishindler.com/articles/TSPDigitalCinemaReality05.htm for an article I published in the Digital Cinema Society Newsletter, an organization in which I am an Advisory Board Member.

For further insight, see my various GLG News offerings:

3D on the Crest of HD to the Home, Yes, You See 3 and Encountering the Third Dimension.