Investing in the 21st Century
The Future of Movie Distribution
February 11, 2007
The popularity of legal movie downloading and online DVD rental services is creating a new paradigm in the movie distribution arena. Which players will succeed in the highly competitive environment?
The movie distribution ecosystem is undergoing rapid upheaval as downloading movies in high-resolution over the internet becomes increasingly popular. File-sharing networks have long facilitated illegal movie downloads, but many consumers prefer an altruistic approach. This is evident by the huge popularity of Apple (AAPL) iTunes for legal MP3 downloads at 99 cents a song. The shift to online movie downloads is causing many companies to compete in a crowded market.
Netflix (NFLX) has long been the leader in online DVD rentals with its innovative service that allows consumers to pick DVD’s online and receive them in their mailbox. Founded in 1998, the company now boasts over 6.3 million subscribers. Plans start as low as $4.99 a month, with more popular plans in the $11.99 and $17.99 price points.
The success of Netflix’s business model has disrupted Blockbuster (BBI) and Movie Gallery (MOVI) brick-and-mortar retail stores. Movie Gallery is the parent of Hollywood Video, and has seen its stock price drop from over $30 to $4 in a year and a half. The popularity of paying steep prices for short rentals has been waning, and Movie Gallery’s decline reflects changing consumer tastes.
Blockbuster has also been trending lower amid the shift in demand, but has recently found a path to turn its fortunes around. In November 2006, Blockbuster launched a “Total Access” program which combines a replica of Netflix’s business model with its neighborhood presence. For virtually the same monthly fee, subscribers can get twice the movie rentals since the program allows you to return mailed movies to stores and pick out free in-store rentals.
Blockbuster now has 2.2 million subscribers and is gaining on Netflix. Spending on promotional marketing is always high in the business, but Blockbuster is taking it to the next level with an aggressive campaign that included sponsoring the Superbowl halftime show. Blockbuster’s enhanced program is gaining traction in the market, and the beaten-up stock should benefit. Shares are up 17% in 2007 so far, and will continue to appreciate as the program catches on with consumers. Both companies trade at about $1.5 billion market values.
In order to maintain its lead in the changing marketplace, Netflix released a “Watch Now” service last month that streams a limited number of videos online. Online distribution is gaining popularity as high-speed internet connections make it possible to quickly download movies and television shows. Large high-resolution monitors are making it feasible to watch movies in DVD quality at your desk. Many large companies have similar offerings, including Apple iTunes, Amazon (AMZN) Unbox, and Wal-Mart (WMT).
The crowded environment includes many smaller niche players trying to get a piece of the pie. With so many different options for consumers, there is no clear front-runner. Pricing among the various programs is also very similar with about $1.99 charged for a TV episode, and about $14.99 for movies. Apple’s iTunes service will be able to leverage its success in music to video. The Apple TV device also shows promise for bridging the gap between the computer and television.
Additionally, third generation video consoles now offer high definition downloads directly onto game machines. The Microsoft (MSFT) Xbox 360 and Sony (SNE) PlayStation 3 offer rentals that you can download and watch on your television. This will likely only make a dent within the gaming community, as other consumers are unlikely to purchase expensive consoles for video downloading.
The competitive environment facing movie distribution outfits make innovation and brand-recognition essential to being a viable player in the market. Apple should reap the rewards initially due to its familiarity, but an innovative approach to circulating movies to users could knock Apple from atop its perch. The digital entertainment arena doesn’t have a powerhouse like YouTube yet, and companies that cater to changing consumer tastes will ultimately succeed in the market for movie distribution.
del.icio.us
At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.
Subscribe to feed