So after two rounds of negotiations, since June 2006, Blockbuster has finally landed the prize of Movielink, perhaps the lamest online film service on the planet, in a price that was universally touted as around $50 million, but not released now the deal is done, so perhaps was far less.
Overnight Blockbuster thinks it can compete with rival Netflix, which has been eating its lunch of late in online DVD rental, in the new area of online films. Netflix built its own system for online DVD rental adding around 1,000 films and various TV shows when it launched back in January this year after over three years of development.
It was in 2004 that Netflix CEO Reed Hastings first talked about its film download service, which went on beta in July 2005, but was then launched purely as a free service, in order to drive down churn in its online DVD rentals, rather than give it a serious shot at changing its business model.
It is our bet that Blockbuster will do the same, and aim the 3,000 plus film Movielink service as a churn buster for its own online DVD rental service, or for members of its bricks and mortar retail DVD rental services.
Netflix now claims that it takes a little as 30 seconds before customers can begin watching an online movie using its system and that selection has grown to a library of 2,000 titles, and will grow the service until 5,000 titles are available by the end of the year.
Different subscriber plans allow a different number of free films to be watched with its low end $4.99 plan allowing just 5 hours of movies a month and the $17.99 plan offering 18 hours of online viewing
The entire idea is that Netflix will drive down churn by customers not wishing to give up the free online films. Virtually ALL of the online DVD rental companies are obsessed by churn reduction, with Netflix churn last quarter at 4.2% per quarter (16.8% per annum). We understand that this number is even higher in Europe, where the online DVD leader is LoveFilm, which also runs an online film service free for its customers, purely for churn reduction. Blockbuster does not issue an overall churn figure in its results, but its revenues, made up mostly by retail DVD rentals with a growing portion in online DVD rentals, is actually falling, while these other rivals have rising revenue.
But after Netflix having had 5 million online movie viewings in the past quarter, its churn has just risen to 4.6% per quarter, rather than fallen, and it was forced to react to this by cutting its most popular monthly plans by another $1, putting margin pressure once more on Blockbuster. Actually 5 million online viewings is just one per customer for Netflix, so it’s hardly surprising that it hasn’t reduced churn, it would need to be closer to 20 million. One reason for this is that Netflix hardly advertises the availability of free online viewings, and another is that so much video is available online now free of charge, much of it advertising supported. During 2006 some 25 or so paid online film services were launched, and none of them, with the possible exception of iTunes, have been a success, although this is hard to be certain of, since none of them have released any figures.
The rivalry between Blockbuster and Netflix was bound to take in online video rental as they have competed aggressively since Blockbuster was released from the main Viacom company to plow its own furrow. It had been used as a cash cow under Viacom and prevented from following the lead set by Netflix of posting DVDs to customer after an online order, rather than using retail stores. One it began pursuing Netflix on its own, the rivalry has triggered constant price wars, and a legal action from Netflix trying to defend its business model from copying.
The point is that after failing to come to terms with Movielink’s major studio owners last June and then again in March, Blockbuster was as desperate to acquire an online service as the studios were to get rid of the failing Movielink. But in order to make it effective against Netflix, Blockbuster must almost certainly give the service away to existing rental customers, a move unlikely to dent the existing Movielink revenues, which although they have never been declared, are understood to be quite low. It is thought to do around $20 million in revenues, after spending some $150 million in start up cash.
One thing that may have changed Blockbuster’s attitude to Movielink was perhaps the arrival of a new CEO, James Keyes, ex 7-11 boss, who will have wanted to ensure that his new charge could trade blows on an equal footing with Netflix, but really the Movielink service isn’t exactly a head to head fight.
Netflix is a streamed service, while Movielink is both streamed and until now offered a download to own element. Movielink was initially set up by Paramount, Sony, Universal, Warner Brothers and MGM, whereas the Netflix service is its own, however both have access to a wider variety of content than just the top studios, usually released when films are in the pay per view window.
We have said in the past that Movielink was the worst kind of online film service, featuring ancient DRM, no overseas distribution rights and it has been tied into service contracts that make it difficult to move the service on. Films were offered downloaded to a hard drive where they could stay for up to 30 days. Once they started playing, the viewer had 24 hours before they self deleted.
The previous aborted negotiations with Blockbuster were understood to have fallen foul over new conditions the studios wanted to saddle the service with which would limit its business models. There is no way of telling if this has now changed until Blockbuster advises on just how Movielink will be integrated into its offerings.
However the statement said that Blockbuster would offer consumers content via PCs, portable devices, television-connected home networks and approved set-top boxes. Currently it is only on PCs and Akimbo set tops that the service is available, although there has been some rumors that the Sony PlayStation Portable would shortly be offering Movielink films too. The Akimbo version of Movielink is also now resold by AT&T under its Homezone TV service.
Blockbuster had been an investor in Movielink rival CinemaNow, and must have considered making a bid for that at some stage, but it recently had new VC investors that broadened its investors base beyond the original Lionsgate studio.