Posts tagged ‘Netflix’

Lawyers and TVs and Tubes, Oh My!

The business models surrounding video delivery to consumers are sure evolving rapidly, aren’t they?  And in sometimes surprising ways.

Time Warner Cable (TWC) has been sued by Viacom (VIA) over an iPad app it recently released.  The app allows TWC subscribers to watch live TV on their iPads within their own home, effectively turning the iPad into a TV.  It streams channels wirelessly to the iPad, typically from a router attached to the subscribers’ internet cable modem.

Cablevision (CVC) has released a similar app, although because it streams directly from the cable box (plus wireless adapter add-on), this one does not require cable subscribers also to be internet customers.

Broadcasters such as Viacom are claiming that TWC and Cablevision have “no iPad video streaming rights.”  Time Warner Cable, for its part, insists it can send TV to any device in the home.

Meanwhile, ESPN (DIS) has taken another tack, releasing their own app that lets properly identified subscribers from Time Warner Cable, Verizon (VZ), or Bright House, to stream its live content to an iPad from any location.  This is an example of the “TV Anywhere” initiative envisioned by the likes of TWC and Comcast (CMCSA) among many others.

And on another front, startup company Zediva is being sued by all 6 major movie studios over its service that “rents” DVDs to consumers and then streams them over the internet.  Each customer has exclusive use of a DVD disc and a DVD player.  Again, the studios are claiming copyright infringement, calling Zediva’s business model a “gimmick”.  All Zediva is really doing is putting a DVD into a player, pressing play, and then sending the customer the output signal directly.  They just happen to be using the internet instead of a wire.

[Next, I imagine, it will be illegal for me to stand outside my neighbor’s house and watch a DVD on his TV through the window.]

Logically, Zediva and the cable providers seem to be on reasonably solid ground.  Legally, who knows?

Regardless, the notion that this has anything to do with distribution or copyrights is beside the point.  What’s really being fought over is the ability to make money in new ways by using the Internet.  Or as the late Senator Ted Stevens of Alaska laughingly called it, “a series of Tubes.”   Time Warner Cable’s app does in fact use IP to move video around, though it is exclusively on its own cables.  And while Zediva uses the open internet, there is precedent in the form of virtual circuits to think of that transmission channel as being private and dedicated.

In a way, these links are functionally no different than wires.  Perhaps Senator Stevens was more right than his detractors thought.  Companies are using the internet just as if it was a series of private pipes, or tubes.  So why wouldn’t these distributors have the right to send video this way?

Because it interferes with the content owners and networks from getting two things they dearly want:  (1) unfettered control over using the internet to sell content directly to consumers, and (2) ownership of customer information for marketing (read: monetization) purposes.

Every movie Zediva rents and shows is one that a studio can’t derive its own rental income from.  When people watch Mad Men or Survivor from the dining room on an iPad, that’s one more episode that can’t be monetized through iTunes or Netflix (NFLX), or viewed on ad-supported Hulu.

What’s worse, when an iPad,  smartphone, or netbook is used to view video streamed through a cable or satellite provider, the content sellers have no information about the end user.  If they could sell or rent directly, they’d gain valuable demographic and other information that could be used for marketing purposes or monetized via ad networks.

They know that content is not king; the customer is king.  Networks and studios would love to be able to eliminate the middle man if they could.  And they don’t want to be beholden to Apple (AAPL), the way music publishers are now and magazine publishers are quickly becoming.

To own the customer is to be prepared for the day when consumers “cut the cord” on cable.  And when they use tablets and smartphones instead of a TV.

In 1993, Nicholas Negroponte (the founder of MIT’s Media Lab) made a prediction that became known as the “Negroponte Flip.”  He said, in essence, that what was wired would become wireless, and vice-versa.  When you consider that our phones are becoming wireless, and over-the-air TV is increasingly via cable or fiber, Negroponte seems to have nailed it.  We have a similar flip occurring with centralized mainframe computing moving to distributed (PCs) and then back to centralized (the “Cloud”).

Could it be that just as we’ve reached the point where most TVs are flat, and no longer have tubes, we are moving to a time  when the “tubes” are what’s important, and video is no longer watched on TVs?

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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April 17, 2011 at 8:24 am Leave a comment

Location, Location, Location

Location, location, location.  That’s the mantra of what drives value in the real estate industry.  However, the modern version might well be, “Location, just less of it.”

Today, Barnes & Noble (NYSE: BKS) announced it is putting itself on the block, looking for a buyer as it struggles to survive in a world of digital books.

[Frankly, I’m not so sure it’s digital books that are causing the problem so much as online purchases.  Certainly, digital books are growing wildly, but off of a very small base–according to Publisher’s Weekly, they amount to only about 1% of the market.  So maybe not a short-term catastrophe, though it’s certainly a future threat.]

Either way, the problem with Barnes & Noble is real estate.   One of the key ratios by which they are measured is return on assets–and with their large number of expensive stores, the fewer pricey books they sell, the more the operating metrics plummet.   It’s almost like reverse leverage.

For years now, booksellers have sought other means to drive traffic into their retail outlets, peddling music and videos, opening in-store cafes, offering reading areas, etc.  All to generate a higher return on their store  “assets”.

I have this strange feeling of deja vu.

Blockbuster (BLOKA.PK) now trades on the Pink Sheets  for exactly the same reason.  They too were fixated on driving traffic to their stores.  They too operated under the assumption that their true competitive advantage was their locations, and they had to keep earning a return on those assets.  This caused them to make some rather odd decisions, such as enticing people to drive to their stores just to fill up a media player with movies to take home.  Meanwhile, Netflix ate their lunch shipping discs (and now simply bits) directly to customers.

Similarly, Amazon (and others) killed Toys R Us, who had a similar problem with too much real estate and the accompanying high overhead.  Why drive your car to the crowded store (along with acquisitive children badgering you for every bright and shiny thing they see) when you could have Christmas delivered to your door?  And cheaper too.

It’s really a shame, as I still enjoy browsing in bookstores. Checking up on favorite writers to see if they have something new.  Finding an unfamiliar author to take a chance on.  But there’s no question they are struggling.

Probably some private equity firm will buy Barnes & Noble, and turn it around, as was the case with Toys R Us.  Perhaps even Blockbuster will survive.  Stranger things have happened.  However, one thing is for sure:

There will be a lot fewer locations.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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August 4, 2010 at 8:47 am 36 comments

Rim Shot

Here’s an object lesson in how stocks with thin trading volume can get hammered.

Monday, Rimage Corporation (RIMG) reduced 2nd quarter guidance, citing the economic slowdown. Revenue expectations dropped from $24-26M to a new target of $20-22M. Earnings projections plummeted, to 9 to 12 cents per share, from previous guidance of 22-27 cents. Analysts estimates were–predictably–within the previous guidance ranges.

Rimage (pronounced like the French, i.e. “rim-AHZH”) makes high-capacity disc publishing systems that replicate CDs and DVDs as well as customize discs and print/apply labels. It also does a high-margin business selling blank discs and labels.

If you’ve ever ordered a custom-mix CD from Wal Mart, it was printed on one of Rimage’s units.

While Rimage sells its publishing systems into the media industry for music, movie, and software storage, it does a substantial amount of business with large enterprises that create custom discs for product promotion or employee training purposes. It also sells to data-intensive industries needing quick, simple records storage. In particular, the medical industry is one of Rimage’s most important end markets.

I never wrote on Rimage as an analyst, but I do keep it on my radar screen, as its business model not only ties into Digital Media but also fits a theme I’d developed on creating value at the edge of markets (in this case, disc replication). However its trading volume, averaging about 77M shares daily, is less than 1% of the float.

This makes for a very illiquid stock, especially one that until Monday was at a market cap of $170M. Which is the biggest reason it’s covered by only 2 analysts.

As you might expect, Monday the stock dropped a hefty 22%. I’m convinced a good piece of that was due to a lack of buyers for an undercovered, thinly traded name. But many pundits will claim a major reason is that Rimage’s business model is dead. After all, we’re in the iPod generation, discs are passe. With high speed broadband everywhere, and ubiquitous media players, nobody needs plastic anymore.

Bzzzt! Wrong answer.

Sure, any company that reduces guidance so much, particularly one that’s so thinly traded, is going to get a serious haircut on its stock price. And I do believe that eventually, all data storage will be on drives, and delivery will be via broadband. But the key word is eventually.

Recall Amara’s Law (often erroneously attributed to forecaster Paul Saffo): “We tend to overestimate the short-term impact of technological change and underestimate its long-term impact.” As much as we think broadband has already taken over, we forget that not everyone has fiber to the home, nor have they all junked their CDs for a portable mp3 player. The iPod has not reached 100% penetration. Netflix still expects to be renting DVDs for some time. Hell, 20% of Americans have never even sent an email. Not to mention the fact that there are numerous other applications for discs besides personal entertainment media.

These transitions always take longer than we think. Expect discs of some type to be with us for at least another 10 years.

Even at less than half its recent earnings growth rate (8% vs. a 2-year CAGR of 17.4%), Rimage has a PEG ratio hovering around 1.0, based on trailing twelve month earnings. And with a solid cash flow (price-to-FCF ratio is about 7), it’s likely to be able to milk that disc market for some time to come. Perhaps not a value play, but certainly not overvalued either.

Just watch that trading volume and liquidity. Yes, an upside surprise can really rock a thinly traded name like Rimage. But risk management is the name of the game, and you don’t want to be the last one out of the exits if the bottom falls out.

Disclosure: I hold no position in any of the stocks mentioned here.

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June 11, 2008 at 5:53 pm Leave a comment

Ass Backwards, Again

Blockbuster (BBI) has outdone itself now. It just announced a trial of in-store kiosks that will allow consumers to download movies directly into a portable media player (PMP) to take with them. For now, only the Archos player will be supported.

Let me get this straight.

Blockbuster wants you to hop in your car and drive to one of their outlets. Using soon-to-be-five-dollar gasoline. Just so you have the privilege of downloading a movie onto a portable player.

They do seem to have this whole thing ass backwards, don’t they?

Hello! Ever hear of the Internet? Why in the world isn’t this a download to your PC and then a transfer to the PMP? (Yeah, I know, the answer is the studios and their oh-so-customer-friendly Digital Rights Management fixation.) Blockbuster’s insistence on driving consumers to their increasingly useless stores has clearly reached new heights.

Meanwhile, Netflix (NFLX)–while noting its ultimate future is in downloads–predicts that its DVD mailing business won’t PEAK for 5 to 10 years. That tells me the smart money is on DVDs (either standard or Blu-ray) to last some time. I agree.

It’s not that downloads aren’t the preferred solution–personally, I can’t wait–but that universal adoption is a long way off. Why?

  1. The studios’ love affair with DRM, artificially reducing the availability of video fare and making it difficult to transfer media to other devices
  2. Still no inexpensive, simple solution in sight for getting video from the PC or Internet to your TV.

Here’s an idea: If you insist on making people drive somewhere, at least let them leave with a disc. Use Qflix technology from Sonic Solutions (SNIC) to print a fully licensed DVD out of the kiosk instead. That’s portability and ease-of-use in a single package. As I’ve noted before, this would allow Blockbuster to reduce/eliminate inventory, and get more Hollywood back catalog titles into customers’ hands.

[Sonic holds the key technology patents on download-to-burn, which has been approved by the DVD Copy Control Association (DVD-CCA). This allows discs to be burned with CSS encryption, pleasing the studios and making such copies legal commercial DVDs.]

Sonic was working with MovieLink, prior to its purchase by Blockbuster, to push this tech into the end user market. While disc burners for consumers probably won’t go mainstream anytime soon, Sonic is in trials with kiosk makers. It’s a nice transitional solution until discs are truly dead. Why Blockbuster has made no use of this technology is a puzzle.

But then so is everything else it does these days.

Disclosure: I hold no position in any of the stocks mentioned here.

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May 29, 2008 at 12:55 pm 1 comment

Blockbuster: Driving Off A Cliff?

The Hollywood Reporter had a story last week that Blockbuster (NYSE: BBI) will soon announce a movie rental set-top box. Everyone who has written about it has noted it will compete against–among others–Apple TV (NASDAQ: AAPL).

That’s true, if you can call “eating dust” a competition.

To the extent such dedicated set-top boxes ever catch on (and I have doubts), Apple TV is Lightning McQueen to Blockbuster’s Mater. Apple is in the hardware business, you can bet it’s in this race to win. Frankly I doubt it even cares that much about the movie revenue. But those rentals are Blockbuster’s raison d’etre.

Blockbuster still seems like a deer caught in the headlights, and has been playing follow the leader with Netflix (NASDAQ: NFLX) for some time. This recent development simply copies the deal Netflix announced with LG Electronics awhile back. While I wouldn’t go so far to say it is doomed (yet), Blockbuster needs a serious strategy tune-up.

First it has to rid itself of the retail store “boot”. For too long Blockbuster has focused on driving traffic to its locations, which it naturally feels obligated to earn money on. But this is the digital age, and despite trying desperately to leverage them, Blockbuster’s locations aren’t the assets it thinks they are. Instead of trying to earn a return on real estate, Blockbuster should have been shedding stores. I understand the real estate market was pretty good last year, probably a great time to divest. Oops.

This is the same mistake Toys-R-Us made, dipping its toes into the on-line pool but afraid to jump in until it was too late.

Blockbuster does have some options left. The purchase of Movielink gives it a leg up in on-line delivery. Going to market with its own STB is a mistake, however. First, it’s not at all clear there would be much demand for the box; just look at Vudu. Second, Blockbuster doesn’t exactly present a compelling co-branding opportunity for CE manufacturers. And depending on the arrangement, the costs associated with such a move could easily outweigh any additional revenue generated.

Far better to package Blockbuster-to-the-TV as a service. True, Apple and TiVo (NASDAQ: TIVO) aren’t likely to sign on. But it could partner with multiple CE manufacturers who can build home media transfer capabilities into their DVD or Blu-ray players, using technology from the likes of DivX (NASDAQ: DIVX) or Macrovision (NASDAQ: MVSN).

These solutions (perhaps not so coincidentally called “Connected” by both firms) are licensed to CE manufacturers, vendor neutral, and built-in at the chip level. Movielink gets films to the PC, and “Connected” easily gets them to the DVD or STB, without requiring an additional box. In fact, DivX has a good relationship with LG already–wouldn’t surprise me to see Netflix go with DivX Connected on an LG box instead of with a branded version.

This makes even more sense when you consider the other advantage Movielink brings to Blockbuster: a partnership with Sonic Solutions (NASDAQ: SNIC). Sonic’s Qflix is the only legal way to burn a studio DVD remotely, which allows Blockbuster to say goodbye to much of its costly inventory. It will soon be feasible to download movies to PCs and then burn them at home. (The disc is dead, long live the disc.)

Blockbuster still has a chance in this race, but it had better get out of first gear. Fast.

Disclosure: I don’t hold positions in any the stocks mentioned in this article.

April 12, 2008 at 8:03 pm 2 comments

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