Movie studios, desperate to return their home entertainment divisions to growth, are scrambling to shape the post-DVD era.
Until very recently, most Hollywood heavyweights were loath to speak too openly about the promise of digital entertainment — the downloading and streaming of movies and television shows on computers, Internet-enabled televisions and mobile devices. Nobody wanted to anger retail partners like Wal-Mart or do anything that might slow the DVD gravy train.
But business currents have shifted. While DVD and Blu-ray will remain a huge profit center for years to come, studio executives are finally confronting an uncomfortable reality: little silver discs — for reasons of convenience, price and consumer burnout — may never recover their sales power. To grow, studios need to figure out digital distribution.
Disney announced last week that it had developed a system to track digital ownership, so people won’t have to buy the same movie or television show multiple times for different devices. But that’s just the latest, most likely not the last, approach.
“I expect these guys to try many different ways to figure out an endgame to digital entertainment,” said Doug Creutz, a media analyst at Cowen and Company. “In the meantime, you will find a lot of false starts.”
Everyone is trying to solve one problem: consumers, the industry believes, will be reluctant to open their wallets for digital movies and TV shows until they get more portability and can watch the same content on several devices. Studios want to make consumers collect digital entertainment the way they would DVDs or books.
In the third quarter, studios’ home entertainment divisions generated about $4 billion, down 3.2 percent from a year ago, according to the Digital Entertainment Group, a trade consortium. But digital distribution contributed just $420 million, an increase of 18 percent.
Standing in the way are technology hurdles — how to let consumers play a video on various devices without letting them share it with 10,000 close friends on a pirate site — and the reluctance of studios to cooperate too closely with rivals for reasons of antitrust scrutiny and sheer competitiveness.
The Walt Disney Company in the coming weeks will introduce its new system for tracking digital ownership, which it calls Keychest. It would allow consumers to buy permanent access to digital entertainment — a specific film, for instance — that then could be watched on computers, cellphones and cable on-demand services. Analysts speculate that Apple will be a partner.
A mother could start streaming “Toy Story” on a laptop for her kids, continue the film on an iPhone at a restaurant and finish it at home with a video-on-demand cable service.
Details remain sketchy — and it is still anyone’s guess when consumers might see it — but Keychest has two other promising features, Disney says. The system would work with various digital formats, so competing companies could maintain disparate business plans.
And piracy, at least conceptually, would be less of a worry. The technology rests on cloud computing, in which huge troves of data are stored on remote servers so users have access from anywhere. Movies would be streamed from the cloud and never downloaded, making them harder to pirate.
“We have a better mousetrap and have a higher chance of getting companies to participate than do other schemes out there,” said Bob Chapek, president of home entertainment at Walt Disney Studios.
A consortium of movie studios (basically everyone but Disney) have joined with companies like Comcast and Intel to pursue a different strategy. Their initiative, called the Digital Entertainment Content Ecosystem, or DECE, involves coming up with a common set of standards and formats.
“We can start to develop a digital service where it’s better than free because it offers consumers more convenience and choice,” said Mitch Singer, chief technology officer of Sony Pictures Entertainment, which is leading the DECE effort. “We can reduce the cost of digital delivery, enabling more services to flourish,” he said.
Mr. Singer said it was unfair to position Keychest and DECE against each other. “We are all going in the same direction,” he said. “We’re trying to give consumers more choice and greater ease of use when it comes to buying digital entertainment.”
Other ideas are floating out there, too. Jeffrey L. Bewkes, the chief executive of Time Warner, is promoting something called TV Everywhere, to offer consumers a vast array of television online and on devices — provided they are paying cable-TV customers. Add in digital entertainment competition from companies like Apple, Amazon, Netflix and upstarts like Mspot, a mobile media provider that streams rented movies to smartphones.
As always, the pressure to be first is considerable. “The last thing studios want is a third party coming up with a solution, because that party would take a big chunk of the revenue with them,” said Mr. Creutz, the Cowan analyst. Indeed, movie executives blanch when they recall the way that Apple came to dictate pricing to the music business with its iTunes Store.
The movement of video, whether it is movies or television shows, to the Internet and mobile devices is increasingly hanging over the share prices of media companies, analysts say. The worry is that the economics could be overturned, just as it has for newspapers and music.
“Investors are concerned about media companies’ continued ability to monetize their films in the home video window,” wrote Michael C. Morris, a UBS analyst, in a recent research note. “DVD purchases are increasingly being replaced by new delivery methods.”
Consumers have adopted digital video more readily than studios have. Ripped DVDs and illegal downloads are not only playable on computers, TVs and smartphones without the hiccups of streaming but also can be passed along to a friend, like the tapes and discs of yore. This works for viewers, but not for Hollywood, which earns no extra revenue and has no control.
Studios have a spotty track record when it comes to lassoing new technology. A few years ago, when video on demand was just getting started, Disney and several partners weighed in with Moviebeam, a service through which films were sent wirelessly to homes via set-top boxes. It was widely considered a huge failure — the connections were fickle and people wanted more control over the movies available — and Disney ultimately left the business.
“Studios are always interested in going direct, and then they see that it’s really hard,” said Reed Hastings, the founder and chief executive of Netflix.
A variety of factors have influenced Hollywood’s new aggression on the digital front. This year, Wal-Mart and other big-box retailers started cutting the amount of shelf space they devote to DVDs, and some other retail partners, like Circuit City, have gone out of business. So movie studios now worry less about angering them by pulling digital levers.
Studios are also paying attention to predictions about an increased adoption of video-friendly electronics by consumers.
“With significant growth expected in the penetration of Internet-connected TVs and consoles in the fourth quarter of this year, demand for digital movie consumption suddenly looks very promising,” said Thomas Lesinski, president of Paramount Digital Entertainment.
But the slumping DVD business is by far the biggest motivator. Consumers have been buying fewer DVDs, partly because their family rooms are now cluttered with discs they rarely watch and partly because the recession drove them to lower-priced rental and digital options — or to forgo home video entirely.
In the first six months of 2009, revenue from disc sales declined 13.5 percent, to $5.4 billion, according to Mr. Morris’s evaluation of Digital Entertainment Group data. A $200 million uptick in Blu-ray sales partly offset a $1 billion decline in DVD sales. Over all, home video revenue declined just 4 percent, helped by a spike in rental revenue.
That bleak picture has studios now openly discussing what they have known privately for a long time: DVDs will continue to play a role, but it may be a supporting one to digital.
“DVD is going to remain very viable, but you’ve also got a strong base of interest in digital consumption,” Mr. Chapek of Disney said. “I see a peaceful coexistence.”