A chat with NetFlix CEO Reed Hastings, after the Grokster decision

I've been working on a piece the last couple days that will run in the San Jose Mercury News soon, which asks the question of how the motion picture industry (and the music and TV industries, too) will respond to the Supreme Court's unanimous ruling this week in the case of MGM vs Grokster.

Will it be more lawsuits, or more creativity in the way the entertainment industry presents its products on the Web?

Hilary Rosen, the former chief of the RIAA, seems to indicate that the answer to that question is quite important to the future of established entertainment companies:

"The euphoria of this decision does not and should not change the need for the entertainment industry to push forward and embrace these new distribution systems." (from her blog on the Huffington Post)

"The entertainment industry has no choice right now but to speed up its licensing activity and risk-taking... Sure there are some promising things happening, but they are not being embraced nearly fast enough. (again, from the Huffington Post)

But in a phone conversation this week, NetFlix CEO Reed Hastings pointed out that there's a problem: consumers want entertainment content to be free or nearly free, and available on exactly their terms and schedule. (For instance, they want a download of the new release 'War of the Worlds' to be available the same day it opens in theatres.) "Consumers naturally want everything, and they want it cheaply," he said. "There's a tension between what consumers want, and what media companies want."

"There's a reason that books come out in hardcover first and paperback afterward," Hastings continued. "It is to maximize profit." For the same reason, movie studios put new releases into theaters first, then four months later (on average), onto DVD.

Hastings believes that the Supreme Court decision will help the entertainment industry put file-sharing sites out of business, which will "tamp down piracy until it is a very marginal phenomenon," eliminating it from "mainstream behavior."

NetFlix eventually plans to shift its business to offering movies as a download, rather than shipping them as DVDs through the U.S. Mail. Hastings said that back in 2001 when I spoke with him, but since then, nothing has launched, even though the company devotes 1 or 2 percent of its annual revenue to R&D in that area.

"We haven't felt the need to compete with [sites like Movielink and] CinemaNow," Hastings said, because the studios' "content restrictions are so severe." (Pricing is too high, and the selection of films being offered for licensing is too narrow.) "We're at 3 million susbcribers now. The question we ask is how do we get to five, ten, or twenty million. That gives us a tremendous asset in being the leading company in downloading. The technology is just not that hard."

Finally, I've found it fascinating that NetFlix has begun playing a role in distributing movies that weren't able to get traditional distribution. (One example Hastings cited was "Nice Guys Sleep Alone". NetFlix bought 1000 copies of the film on DVD after it failed to snag a traditional distributor at the US Comedy Arts Festival, and it got such positive reviews among NetFlix members that HBO eventually picked it up.) Hastings says that "we're not trying to be a studio. We think that doesn't help the artist. It's much better for us to help a filmmaker get a deal with a small studio so their rights can get maximixed over several channels."

But NetFlix has two assets that studios don't have:

1. A long-term relationship and open communication channel with its subscribers
2. A wonderfully rich trove of information about the kinds of movies its subscribers enjoy

Those two assets would enable NetFlix to do some really interesting stuff in the future, in terms of matching its subscribers with independently movies and niche video content. In five years, a filmmaker may not need a theatrical release at all to be a success...

Disney, Dolby, and "Chicken Little"

Disney wants 100 theaters to be able to show a 3-D version of its forthcoming animated flick "Chicken Little," out this November.

So Industrial Light and Magic and Real D are converting the movie into 3-D so it can be shown using digital cinema servers from Dolby Laboratories. Those servers will be installed in 100 theaters around the country.

No word on whether the 100 theaters will keep the digital rig (I doubt it - this sounds like a demo) or who's providing the projectors.

Here's the original press release and here's the Reuters story.

Google video going live

Who has video that doesn't currently have a home on the Web?

Lots of people.

Google wants to provide a comfy home for that video, and an easy way to access it (whether it's paid or free). They're using an open source video player called VLC, which plays video content inside the browser. And they're launching today.

They're gonna be a major player. Here's John Battelle's commentary.

Update: and an AP article. Google's stock surged past $300 today.

Ty Burr asks: Are the movies dying?

So many great observations and ideas in this piece from Sunday's Boston Globe, by movie critic Ty Burr. Among them:

- "When my wife and daughters and I head to the multiplex to see the latest Pixar or `Fever Pitch' or what you will, the experience is often about everything but the movie. It's about costly tickets, snacks priced at three times the market rate so the theater owner can cover his `nut,' 20 minutes of aggressively loud commercials and coming attractions, followed by a print unspooling with a big green gouge in it while two morons in the row behind us talk about somebody named Denise."

- "...Why should we put up with it when the home-viewing experience can be as good, if not superior? Why shell out $40 for sticky floors when you can buy the DVD for $20 and watch it on your plasma TV with Dolby 5.1 surround sound? Or punch it up on-demand for $4.95 and pause whenever you need to run to the kitchen? The medium has evolved, as mediums do, in the direction of ease and efficiency. If there's still a reason to go to a movie theater -- call it communal dreaming -- exhibitors are chipping away at it to make their weekly payroll."

- If theaters install digital projectors that are linked to the Internet, wanna-be auteurs could rent the room for premieres of their own masterpieces, made with digital video cameras and Apple's iMovie. Fill it with friends and family. Try to build buzz that'd support a second showing to an audience that doesn't know you as the gal in the next cubicle.

- Or simply invite your friends to a showing of your favorite cult classic, downloaded from a vast studio archive. (In both examples, the theater is very much in competition with the home theater set-up that Burr describes above.)

Burr's conclusion is that the decline in movie-going could be approaching a tipping point, where "theatrical exhibition is suddenly no longer economically viable, and movie houses start blinking out. Entertainment formats and mass mediums can and do go extinct; the big screen could yet go the way of vaudeville, the art form it killed off."

Financing the roll-out

Christie Digital Systems, which makes digital projectors, and Access IT, which provides software and services to manage those projectors, want to get 2500 digital projectors into theaters over the next two years. Cost per theater: about $100K.

The news here is that Christie and Access IT have set up a subsidiary, Christie/AIX, to cover the cost of rolling out all those digital projectors and related gear and recoup it by charging 'virtual print fees.'

"That means movie studios would repay the debt each time a movie is displayed on the digital projectors," according to the piece in Investor's Business Daily.

A bit more detail in this Reuters article, which says that:

For theater owners, the cost of the 10-year contract would be roughly equal to installation and maintenance for a current film projector, and for studios the "virtual print" expense for a digital movie would be about the same as a film print, the companies said.

"The design is to make this essentially cost neutral" for theater owners and studios, said Bud Mayo, chief executive of Access Integrated Technologies.

Fees from installation and maintenance contracts and from the virtual prints would give Christie/AIX a return on its investment, Mayo said.

I wonder: if this `virtual print fee' is even slightly higher for the studios than circulating an actual print, does that create a disincentive for them to go digital? And for theater owners, we're still talking about a cost of installing and maintaining a new projector (even if that's stretched over 10 years) - when many of them may consider the current projectors they own to be just fine.

The overarching question here is, we know the quality is better. Piracy may actually decline. But what's going to drive the shift to digital distribution and exhibition? My suspicion is it will have to be a stream of content - a series of films, or perhaps live events - that is available only digitally, only in theaters.

'Why Movie Fans are Staying Home'

The San Jose Mercury News publishes a front page piece very similar to the New York Times piece a few weeks back, with a very similar headline, too. (The Times' headline was "With Popcorn, DVD's and TiVo, Moviegoers Are Staying Home.")

The piece, by Bruce Newman, has a great opener:

What Joey Puntanilla remembers best about seeing ``Star Wars'' with his 6-year-old son this month is the way the sound thundered every time something blew up on screen. ``The room was shaking during all the battle scenes,'' he recalls. ``My son was loving it.''

Unfortunately for the multiplexes -- where Puntanilla, his son and his fiancee used to go to the movies almost every weekend -- the family was at home in South San Jose, watching a DVD of the original ``Star Wars'' on their new $13,000 home theater system just purchased at Best Buy.

The next paragraph references an Associated Press-AOL poll, released this month, which found that 73 percent of adults prefer to watch movies at home. Only 22 percent said they'd rather be in a theater.

Full survey results are here.

Glickman gets it

The NY Times runs a story on the Saturday business front headlined, "Keeping Moviegoers Away from the Dark Side," illustrated with a picture of Darth's mask glowering on a computer screen.

The piece makes a couple points, none of them that surprising:

- Faster Internet connections make it easier to download movies illegally
- Many people are still consuming pirated first-run movies like "Revenge of the Sith," because they can't be acquired legally
- "Already, people are watching more films at home than in theaters..." and DVDs "routinely generate more than twice the revenue of box-office ticket sales for a movie."
- MPAA chief Dan Glickman doesn't wear cowboy boots like former head Jack Valenti

It also includes some stats from a market research firm called BigChampagne, which tracks file-sharing activity on the Net.

BigC says that the number of feature films posted on file-sharing sites has more than doubled in the last year, to 44 million in May. That's a number I wonder about. It sounds quite high, and I'm sure they don't eliminate duplicates. Even then, it sounds high.

Times journo Steve Lohr saves the best quote for the end - the one that convinces me that Dan Glickman really gets the shift that needs to happen.

Glickman says, "It's not enough just to sue. The industry has to develop hassle-free, reasonable-cost ways to offer movies over the Internet." Right on.

But... the missing term in Glickman's quote is "first-run." Offering archival movies is great, but it won't put a dent in illegal file-sharing; of the ten most downloaded films (a list compiled by our pals at BigChampagne), about half are still in theatres.

(And even if Glickman gets that, it's not clear yet how much influence he has with the studios - though it's safe to say, less than Valenti, at this point.)

DreamWorks movies on Game Boy devices

This summer, DreamWorks will release "Shrek," "Shrek 2" and "Shark Tale" as cartridges for Game Boy and Nintendo handhelds - the first films to be distributed on those devices. They'll retail for about $20.

Video Business Online has the story.

Key quote: "Through this new platform, kids can now access the great Shrek movies and Shark Tale wherever they go," said DreamWorks worldwide home entertainment head Kelley Avery. "This is all part of our commitment to find compelling partnerships and expand our audience reach."

This seems like a no-brainer - put movies on a new medium, and see if people buy them. It's not hard to imagine a kid whose already owns a "Shrek 2" DVD for viewing in the family minivan also buying (or begging for) a "Shrek 2" cartridge for his Game Boy.

Google Goes Hollywood (?)

Lots of unnamed sources in this story, headlined Google Readying Web-Only Video Search. So who knows about their cred...

But it sounds as though Google may be in the midst of creating what I think of as a content marketplace - a trove of video offered up for sale. (This as opposed to the established Google search model, of simply pointing to video that sits on other sites.)

"Google is talking to several top-tier content providers, including Hollywood movie studios, to gain agreements for aggregating their video and selling premium or pay-per-view access," Stefanie Olsen writes.

But later, she adds a caveat, writing, "For studios such as Sony Pictures, working with Google Video could be tricky. Studios must get permission from actors and various guilds to show clips of films for promotional purposes. Even then, the amount of material shown is restricted. It would likely be a long time before Google could secure searchable content from major film studios, but several sources have said that the company's executives have approached the film studios to seek approvals."

I think we'll be seeing shows produced for television, and indie videos, long before we see full-length theatrical features on Google.

Lilliputian video viewers

No one will ever want to watch movies on the sort of tiny portable devices that were on display recently at the Computex show in Taiwan...or will they? I think Hollywood will be surprised.

"They look almost like toys, but they really do play full motion video." Priced somewhere around $120 - $150 at retail.

The Return of 3-D

The Boston Globe's Ty Burr asks:

"Are 3-D Movies a Relic, or the Next Big Thing?"

The piece provides a great historical overview of 3-D, with a nod to the misstaken beliefs about why it tanked in the 1950s:

"By the early 1950s, with the new medium of television holding audiences hostage in their living rooms, Hollywood needed it badly. The release of the 1952 jungle adventure `Bwana Devil' was the box-office kick the format was looking for, and 3-D was quickly added to wide-screen cinematography, Technicolor, and stereo sound as Things You Can't Get at Home.

"The studios responded with 3-D films on all levels of the spectrum, from A-list projects such as '`House of Wax` and `Kiss Me Kate' to Three Stooges shorts and cheapo sci-fi like the infamous `Robot Monster.' But the boom was over almost as quickly as it had begun, and not, as has become accepted wisdom, because the movies were bad. Rather, the presentation was bad: The two-strip system resulted in crisp 3-D imagery in Hollywood screening rooms, but in most small-town theaters the projectors quickly fell out of synch, resulting in visual cacophony."

Now, 3-D is back - partly to try to prod studios and theater owners to upgrade to digital projection, which is capable of showing high-quality three dimensional films.

Juicy thoughts from noted VC Roger McNamee

Roger McNamee isn't only a well-regarded Silicon Valley venture capitalist, rock guitarist, and author, but he now runs a private equity firm, Elevation Partners, that invests in media and entertainment properties. (Bono of U2 is a partner in Elevation, as is former Apple Computer CFO Fred Anderson.)

McNamee has been thinking a lot about how people want to experience television and movies - versus how TV and film execs want to deliver the stuff.

Here are some great bullet points from one of his blog entries titled "Video on the Internet":

"- Television and movie executives appear to view the internet as a `delivery window' to be controlled in a manner similar to theatrical release, pay-per-view, and DVD.  This belief has much in common with the one that caused music industry executives to ignore peer-to-peer file sharing until it was too late.

"- Consumers are enjoying video over the internet today - mostly small-format video (e.g., music, news, humor) and animation (e.g., JibJab) - and they are developing viewing habits that potentially threaten the hegemony that Hollywood has long enjoyed relative to video content.

"- I am convinced that the television and movie industries will exert far less control over the internet than they would like, and believe that their interests are best served by actively enabling their vision right now, rather than sitting back and waiting for a silver bullet of digital rights management."

Another rock hurled at the window

So on June 17th, the Independent Film Channel is taking over the Waverly Theatre in the West Village, a three-screen complex that will soon be dubbed the IFC Center.

IFC doesn't just operate a cable channel, of course. It also produces movies ("Boys Don't Cry" and "Monsoon Wedding," among them). Now it'll be an exhibitor, too. And as one, they plan to start hurling rocks at the traditional release windows. A new movie might play the IFC Center, and be followed quickly by a DVD and a cable video-on-demand version. Key paragraph from today's Hollywood Reporter story:

"What everyone knows, but few want to admit on record, is that day-and-date delivery of movies through every platform -- with different pricing -- is inevitable. As Landmark Theatres marketing chief Ray Price puts it, `This is the year that the walls of Jericho could come tumbling down.'"

The IFC Center will, along with what's happening at Landmark Theatres, be an important bit of trumpet-blowing. (My big question: will the Sundance Channel's chain of theaters, now being assembled, follow suit? I'd say the odds are good.)

The IFC Center will also serve a similar purpose as does the giant Hershey's candy store in Times Square - burnish the brand, and build buzz among the NYC media elite. (It may also be handy around Oscar time for those special screenings for Academy members, too.)

And the advisory board ain't bad, either: it includes Kevin Smith, Steven Soderbergh, Richard Linklater, John Sayles, and Errol Morris, among others.

First flick to play the IFC Center: "Me and You and Everyone We Know," which I unfortunately missed at Sundance this year - and which just won four big awards at Cannes.

Mark Cuban analyzes the dip in box office revenues...

... and figures it's the result of too few choices of new films to see.

"[O]n any given night, for whatever category you feel like putting yourself into for that night, you only have 3 or 4 major movies, and unless you live in NY or LA, only 6 or so limited release movies to choose from. Is that enough to always have something that the full range of movie going public wants to see?"

He's right there. But wrong, I think, when he says that most people really still feel a powerful drive to go out to the movies.

"Going to the theater is something that will never be replicated at home," Cuban writes.

But a lot of people prefer the home viewing environment, where they choose their fellow audience members, talking is allowed, the food is better and cheaper, and movies can be put on pause.

He quotes a Jack Valenti speech to theater owners: "What you offer consumers is an epic viewing experience and an alluring social adventure they cannot duplicate in their homes – stadium seating, huge screens ripe with luminance, the sensuality of digital sound, unknown but enthusiastic companions of a single night – all responding to the skills of cinema artists who can make you laugh or cry or hold you in suspense. Even if families in the future are equipped with the latest home-theater magic, it’s just not the same as the emotional alchemy in a theater.”

Um, how many of you have experienced that emotional alchemy recently? For me, the "unknown but enthusiastic companions" Valenti refers to are typically toddlers kicking the back of my seat, or teenagers talking on their cell phones through the previews.

Theater owners will have to work to create the kind of unique environment that truly can't be duplicated in the home. Imax 3-D for instance. Or the kinds of seat-rumbling experiences, laced with lasers and smoke and in-theater odors, that are created at Universal and Disney theme parks.

Cuban's whole post, though, is closer to the bull's-eye than anything else I've read recently on digital distribution and exhibition. As usual.

Video blogging on set

I may be slow on the uptake here, but did you know that Bryan Singer, director of "Superman Returns" (out in 2006), has been producing a video blog from the set in Australia?

The videos are short but really sweet.

Three quick thoughts:

- It's an unusual choice to give fans a behind-the-scenes look at a movie they haven't seen yet. In some ways, it feels like telling the audience how a trick is done before they watch the magic show. But I suspect this video blog will do more good than harm, building anticipation among hard-core Superman and comix fans for the ressurection of the movie franchise.

- Some of the segments are wonderfully interactive. In installment #12, you can watch the FX guys building a motion base in a warehouse, and then vote on what you think it'll be used for (Smallville bus? Lex Luthor's yacht? Zod's command cruiser?)

- I sure won't be surprised if much of this footage winds up on the eventual DVD as an extra.

A kiosk test by Blockbuster?

More news about kiosks that might let you download videos from a library...this time, inside Blockbuster stores.

Key quote: "The proposed system will enable consumers to pick a film and download it onto a memory stick or card, meaning it can then be viewed on a portable mobile device or laptop."

No sources are quoted in the piece, or even obliquely referred to. Which always makes me dubious...