Given that the Blockbuster on demand service is only available in the US, we’re not sure that the deal just announced between Motorola and Blockbuster to put access to films on phones, will ever be something that consumers can actually buy into.
The announcement was suitable vague and really is just a straightforward statement that an application, the one which looks after delivering progressive download movies to consumer electronics devices, will be ported to select Motorola phones. No service pricing or delivery date for the application was given.
You may ask if people really want to watch movies on a phone. And the answer would be a resounding ‘yes’ from around the world, as long as you can stop the film when you get to work and begin watching it again in your lunch hour, rather than sit glued to mobile screen for 110 minutes (average film length). But a better question is ‘What cellular operator would want you to watch a film over their network,’ and that’s a different question, one that recent decisions by AT&T and Verizon over what is and what is not allowed on their network, would suggest the answer is a firm ‘No.’
However it might not be. The idea of one person tying up 3G or HSDPA streaming minutes for the duration of a movie might worry the US cellular giants, but we understand that this system will use a progressive download, so that the film is delivered as fast as the network can do the job, which should be way less than its streaming time, and so should not tie up the network any worse than existing video applications.
And while Blockbuster is up against the incredibly successful Netflix in the US, it may get far better results, both with its films service and with the Motorola phones, if it ports the service outside of the US. This however will require getting overseas film rights sorted out which may take a long time.
Remember the film licenses of Blockbuster come from its ownership of Movielink, the Studio’s defunct online movie service. Back in January Movielink and CinemaNow were effectively mashed together when the new CinemaNow owner cut a deal with Blockbuster and said they would update the services, to keep up with similar systems from Amazon, Netflix and iTunes, mostly by adding new business models and more and more devices which can receive the services. They would also run on a common hardware and software platform.
The idea is to build an ecosystem which will include PCs, portable media players, Blu-ray Disc players, personal video recorders (PVRs), set-top boxes, mobile phones and web-connected television sets, an eco-system to rival the one which Netflix is building.
Through the agreement select Motorola phones will feature what is importantly described as an ‘exclusive’ Blockbuster OnDemand application, providing on-the-go download access to Blockbuster’s digital library of thousands of current Blockbuster OnDemand movies.
But putting the application on the phone is one thing, getting an operator to allow it to be used on its network is another. It might get clearance if it leads to much higher data revenues for the network owner, but then consumers might not be too happy paying those network charges. It could also just drive the uptake of flat rate data plans. But films will definitely compete with operator video offerings, which also drive ARPU, so this is not a done deal.
What we expect it to end up as, is an application where the film is downloaded in a format that will only play on the phone, but over wi-fi either to the phone or to a PC for sideloading to the phone.
We know from talking to Sonic that its technology is gradually underpinning the Blockbuster service, and that it offers a number of neat system improvements. It can hold films in more than a dozen formats and download the appropriate resolution file with the right DRM keys and right encoding system, for each device. It can even stream films. But so far the US Hollywood studios have not given it leave to download a film to one device and play it on another, although we know they were working on that. This is the inevitable way to go, and Sonic was working with intermediation between Microsoft, Widevine and OMA DRM systems to make all this possible.
Currently the existing Blockbuster business model is where a consumer gets a 30-day storage period for a rental after download and must watch it within 24 hours of first clicking “play.” That might work on a film downloaded to a PC, but a longer 72 hour window would be preferable for someone who is watching it in 15 minute snippets on a phone.
Other things that the application is likely to be able to do is search films on the handset and set them up for play on other devices or for a download to purchase, as well as schedule movies for mail delivery or reserve titles for in-store and vending machine pick-up, and it might be worth inclusion just for these features.
Meanwhile Blockbuster’s quarterly numbers looked healthier despite second quarter revenues falling from $1.3 billion to $1.02 billion. But operating expenses fell to $562.5 million from $675.0 million which meant that operating losses were just $1.5 million, compared to $19.8 million a year ago and net loss was just $39.7 million compared to $44.7 million. Blockbuster had a $30.9 million negative impact from foreign exchange and has now completed its refinancing and amended credit facility.
Blockbuster has $99.0 million in cash plus $123.9 million in restricted cash, which is collateral for letters of credit. Cash provided by operating activities during the quarter was $114.2 million, compared to the $63.4 million of cash used up in operating activities in the second quarter of 2008.
“As the capital markets improve we hope to extend our debt maturities and reduce our cost of capital in an effort to accelerate our growth initiatives and return to profitability,” stated Tom Casey, Executive Vice President and Chief Financial Officer of Blockbuster Inc.