Disney’s Moviebeam: A New Media Distribution Channel With Revolutionary Potential

This morning, Disney announced the launch of a particularly cool new technology entitled Moviebeam. (Incidentally, when was the last time you heard the words “Disney” and “cool new technology” used in the same sentence? It's certainly been a long time since we have.) On one hand, Moviebeam represents a very interesting and inexpensive means for media firms to develop a direct content distribution channel without having to spend billions to acquire a cable network, a la Time Warner. Secondly, assuming that Moviebeam is able to find subscribers, it has the potential to revolutionize the way we think about the distribution of film and TV entertainment, and render video rental stores like Blockbuster, video on demand (VOD) services from cable companies like Comcast and subscription rental services like Netflix obsolete.

For the last few years, there’s been a growing belief in the media industry that the future of media depends on the ability to control the distribution channel to customers. For example, part of the rationale behind AOL’s merger with TimeWarner was that AOL would be able to use the web to pump Time Warner’s music, movies and TV programming direct to consumers. Similarly, News Corporation's (e.g. Fox) forays into satellite broadcasting, and Vivendi-Universal’s ownership of Canal+ (a French cable network) largely represent the desire of media firms to control a distribution network that they can use to resell content to consumers. Not only would such a distribution network potentially increase a media firm’s ability to create value (by eliminating the middlemen of theater distribution, video rentals, or simply by creating an additional distribution channel), it would also provide media firms with a more effective means of generating revenue from their older content, by inventing a means to sell this content direct to consumers. (Generally speaking, sales of older content—e.g. backlist, catalog, syndication—offer media firms the highest margins, since the marginal costs on such sales are extremely low.) Finally, being able to own a distribution channel that permitted sales of video-on-demand might also provide a means of getting around the challenge TiVo poses to advertising revenues in the TV industry: viewers who don’t want advertising can simply purchase a subscription to their favorite shows over a VOD network, giving the revenue directly to the media firm behind the content.

However, as attractive as developing a direct content pipeline to the customer has been for media firms, it’s been insanely hard to accomplish for a number of reasons. Thanks to the limited number of Americans with broadband connections (although, in fairness, it should be noted that this number is actually starting to increase fairly rapidly), and a lack of desire to watch films and TV programming on computer screens, the Internet hasn’t lived up to its potential as a distribution mechanism. Moreover, because of regulatory rules and costs driven by scarcity and competition, acquiring a cable or satellite network for distribution has been prohibitively expensive for most media firms. Building a satellite network of one’s own to act as a distribution content—which was Fox’s solution—has proven to be exceptionally expensive. And media firms have been less than eager to partner with existing cable firms to deliver content digitally (via VOD services), in part because cable firms can use the inability of media firms to forward integrate into distribution as a position of power in negotiations, and capture most of the revenues from VOD sales for themselves.

Moviebeam is a particularly elegant solution to the challenge media firms face with developing a VOD network. It’s essentially a set-top box with a 160GB hard drive inside that receives digital content the old-fashioned way—over the airwaves. This avoids the high costs of having to build out or buy a cable or satellite network to distribute content, while creating a direct pipe to the customer. Subscribers to the service—rather than selling the box outright, Disney plans to charge consumers a monthly fee of $6.99 for the box, plus a per movie charge—can select content from all the major Hollywood studios (with the current exception of Paramount) over the Moviebeam service. The starting menu of films offers a range of recent blockbusters like Lord of the Rings: The Towers, Bringing Down the House, Die Another Day, and some older movies--about 100 movies in total, each of which are priced at $3-$4, or roughly the same price as a rental. The Moviebeam hard-drive offers interesting revenue possibilities, too, as viewers can theoretically pay slightly more to buy movies outright from and store them digitally. It’s also hypothetically possible that over time, Disney—or Moviebeam—can use the data it collects on viewing habits to determine your interests, and recommend films to you accordingly, thereby increasing sales (and selling from its backlist of titles). Finally, because the costs of adding a market to the Moviebeam service are so low—Moviebeam uses local TV stations to broadcast a signal, at a cost of approximately $250K a market—it’s conceivable that Disney could use the Moviebeam network to sell additional content like TV programming, music, or events, and effectively become a cable distribution outlet on its own.

The two biggest challenges Disney faces with Moviebeam is marketing yet another set-top box/consumer peripheral to consumers. Although the fact that Moviebeam is a set-top box that is plug-and-play is a great thing from an ease-of-use perspective, the fact that it’s a set-top box still poses a problem. For example, do you really want another box connected to the TV, after having already wired the cable box, the DVD player, the VCR, the videogame console, and the TiVo, to it? We think that Moviebeam’s pricing will go along way to ensure its popularity with consumers—a $6.99 rental is a small price to pay for the convenience of not having to worry about rental fees, and being able to order up top-caliber content from your living rooms—but Disney needs to develop creative ways to increase the attach rate of Moviebeam to TV sets. (Thinking aloud, perhaps bundling the technology inside new TVs via a revenue-sharing deal with existing consumer electronics manufacturers might be a good idea…) Secondly, continuing to ensure that viewers have access to top-quality content is absolutely critical to Moviebeam’s success. While it’s encouraging that Disney’s been able to line-up the participation of virtually every other major studio (except Paramount), they’ll need to ensure that each is properly compensated for distributing their films and not try to charge exorbitant fees to their partners, lest other studios develop Moviebeams of their own. (We think that Paramount will quickly fall into place and participate, especially if the launch of the service goes well.)

In closing, we’ll be watching Disney’s launch of Moviebeam closely: after all, it’s not every day that a firm shakes up the media business, and creates compelling new business models for media conglomerates in the process…

Some additional notes: if you’d like a detailed visual explanation of how Moviebeam actually works, there are several flash demos detailing the intricacies of the product at the Moviebeam website.

File this under tangentially related, but this is the third favorable article we’ve written about Disney in less than a month (see our take on the Disney Channel’s strategy here; or read about how impressed we are with the passion of Disney’s employees here. This sudden interest in Disney is particularly surprising (to us, at least), since we’d hardly thought about the company at all for the last few years. Is Disney suddenly becoming a hotbed of innovation and a model for media companies around the world, or what?

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Hilary Duff and the Disney Channel: The Future of Media?

It’s embarassing to admit, but we are feeling a bit too up to speed on “tween” culture at the moment, having just read a fascinating article in the most recent issue of Fortune regarding the Disney Channel’s success marketing to today’s tweens. (Now we can finally participate in that raging debate over at the Gothamist about the merits of former Disney Channel supastar Hilary “Lizzie McGuire” Duff.)

Although you’ll need to register (free) with Fortune—or have access to a fancy archiving service like Factiva—to read the article, it’s definitely worth a read if you’re interested in understanding how synergy within a media conglomerate works (another favorite topic of ours, click here for details.), or if you’re fascinated by the economics of media (as we are).

According to Fortune, the Disney Channel’s been able to achieve margins of 50% (which is phenomenally high, even for the relatively high-margin pay tv industry), and now generates approximately 50% of the operating income for Disney’s cable network division. The Disney Channel has been a robust success for two reasons. First, it’s maximized the popularity of its tween stars (the aforementioned Hilary Duff; the up-and-coming Raven) through assiduous cross-marketing (otherwise known as “synergy”). Secondly, it’s managed to keep the bargaining power of its stars—and therefore, their salaries—down by creating a system where its stars are easily replaced with younger and cheaper talent, once they become too expensive to retain (as is the case with Hilary Duff.)

The synergy aspect of the equation apparently works like this: Disney takes an obscure adolescent (Hilary Duff at age 12), and places her (or less likely, him) in a new show on the Disney Channel. In order to broaden the new show’s and star’s exposure, Disney uses its other distribution channels to stoke hype for the star—in Hilary Duff’s case, it ran repeats of Lizzie McGuire on ABC, released books via its publishing house, endless soundtracks, etc. (In the case of Lizzie McGuire, all of these different cross-promotions work because they’re up to the same high-quality [from a tween girl’s perspective] standards as the original show. In this case, the fact that Disney owns each outlet might actually be advantageous since it allows a greater degree of quality control.) This ideally allows Disney to maximize the return on its investment in a property by creating several profit centers where before there was just one (the original Disney Channel show), while at the same time hopefully lowering the costs of creating such a marketing buzz around a star via successful cross-promotion (broadening awareness).

Once the tween star’s reached the end of their contract, and hopefully their zenith, Disney effectively cashes out as quickly as it can. With Lizzie McGuire, it released the Lizzie McGuire movie in May, paying Hilary Duff a relatively low $1 million (considering her popularity, and the fact that the movie grossed upwards of $50m). It also stopped filming the Lizzie McGuire TV series—planning to milk the re-runs once Duff goes elsewhere and becomes a bigger celebrity, a la former Mousekeeteers Britney Spears and Christina Aguilera. Finally, Disney licensed a line of clothing at Kohl’s based on Lizzie McGuire, for which it has to pay Duff absolutely nothing.

Unlike other major media companies, which end up paying a fortune to retain their stars (think NBC, Friends, and the $1m per episode per Friend), the Disney Channel keeps its costs down by modeling itself on the ruthless studio system of the 1930s. It hires child stars on relatively inexpensive mid-term contracts, sees which ones become popular on its variety shows (e.g. its latest generation of mousekeeteers, the Cheetah Girls), and then grants those stars their own shows, and quickly milks them, and then lets them go once it can’t afford them. This has the effect of making each star interchangeable (lowering their negotiating power), and keeps the Disney Channel’s costs very low.

On an ethical note, it’s worthwhile to consider whether the Lizzie McGuire strategy that the Disney Channel’s effected make it the equivalent of a child-labor fueled media sweatshop, wherein it creates mega-brands at the fraction of a cost of its competitors? Fortune doesn’t bring this up in its article, but it’s an obvious question to ask. In the meantime, it should also be interesting to see how the Disney Channel’s strategy is emulated by other media firms that target different age groups. For example, could HBO—especially after having just been forced to pay James Gandolfini $20m to reprise his role in the final season of The Sopranos—adopt a similar synergy strategy, and lock its stars up to four and five year contracts, and jettison them when they become to expensive? We’d love to hear what you think…

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Not So Hot Sex and the City

It’s being widely reported in today’s papers that The Tribune Company as acquired the syndication rights to HBO’s Sex and the City. This initially sounds like a great deal: Sex and the City already boasts phenomenally high ratings on HBO, despite limited availability (HBO is only in one-third of American households), and the Tribune Co's much larger broadcast network should only increase these ratings. However, there’s a bit of a catch with the acquisition: since the Tribune Company owns broadcast stations in 26 major markets, it will have to “sanitize” its acquisition in order to make it palatable to regulators, viewers, and advertisers in those areas. The problem for the Tribune Company is that the essence of Sex and the City lies in its risqué plotlines—each episode tends to hinge on how Carrie, Miranda, Charlotte and Samantha deal with what HBO euphemistically refers to as “objectionable content”—e.g. their attitudes towards various types of sex. Most of the show’s power (particularly in the first few seasons) derived from the fact that it dealt frankly and accurately, with “taboo” topics that could only be addressed via innuendo and double-entendre on network shows like Friends or Will & Grace. In order to make Sex palatable to a mainstream audience, HBO has apparently shot “clean” versions of each episode, replacing racy dialogue with “alternative language” (meaning that Samantha won’t be left with very many lines at all), and cutting out nudity and the aforementioned “objectionable content” altogether (meaning that Samantha won’t be left with very many scenes, either). (You can read the Tribune Co’s press release, which noticeably avoids the prickly issue of editing “objectionable content,” here.)

So the big question is whether Sex will still be any good in its cleaned-up form, and whether viewers will tune in to censored episodes, when they can easily rent the saucier version on DVD? It’s our opinion that the Tribune Company is running a huge risk: Sex’s audience, which consists primarily of extremely media savvy Gen X and Gen Y women, is unlikely to respond well to any type of editing that would dilute the wit and spark of Sex and The City. (After all, who’d want to watch a show that purports to deal directly with sex, but only goes to second base?) Moreover, in other media industries, like the music business, where firms have issued “clean” versions of albums or content alongside the “unclean” or “real” version (e.g. a bleeped-out version of Eminem), sales of the edited version typically constitute about 10%-15% of sales (see this reprinted NY Times article for details.) If the same logic applies to a PG-version of Sex, which currently averages about 6m viewers an episode, the Tribune Company can expect about 600K viewers an episode. And considering the price they’re reportedly paying (between $500-$750K an episode, according to the Wall Street Journal) that sounds like a pretty steep price to pay.

Of course, it could also be argued that recent seasons of Sex—particularly the last two seasons—are much less racy in content, and that the show has essentially become more of a soap opera than a comedy of bedroom manners during this period. The relatively unsalacious nature of today's Sex and the City means that the Tribune Company would be able to preserve the content—and the viewership—of Sex's most recent episode for a mainstream consumption, and recoup their investment. It might also be true that given changing societal attitudes towards sex in general, that HBO might have to edit a lot less than expected, meaning that the show can retain its punch and allowing the Tribune Co. to earn a reasonable return on their investment. In any event, it’s going to be interesting to see how faithful the Tribune Co can be to the original series, and how viewers will react to a show that’s been altered for their protection.

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