We all know what’s going on in the declining entertainment business, and today’s Financial Times does a nice job in telling it straight.  In no uncertain terms, if Hollywood can’t figure out digital and address the decline in home entertainment, Hollywood will stop making movies.  With big film concepts being shelved because they’re too expensive, we’re beginning to see the slowdown in new releases. It terms of digital dreams like UltraViolet saving the day, the FT had this to say:

Yet for all of the enthusiasm, Ultraviolet increasingly looks like a last throw of the dice for an industry desperate to preserve its retail business model. It is clear why Hollywood wants to keep selling movies: the profit margin on a DVD sale is more than 65 per cent – close to double the margin on a rental. Selling an electronic format is even more profitable because there are no manufacturing costs and minimal distribution costs.

But consumer behaviour has changed radically in the five years since DVD sales reached their peak, making it difficult to predict demand for a cloud-based rights locker. After all, consumers hardly lack choice when it comes to streaming movies or online TV programming.

The FT correctly sniffs out that UltraViolet’s positioning of selling $14 digital movies to consumers isn’t quite right.  With more and more options to rent and acquire content, UltraViolet runs the risk of being vDOA – Very Dull on Arrival.

The Hollywood Reporter talks about how retailers are bracing for a holiday season that doesn’t look so bright.  Retailers may afterall turn to digital to help ease their pain.  Hollywood Reporter, however, points out a glaring pimple on the face of the industry’s transition to digital: like it or not, there may be TWO major digital offerings this Holiday.  Disney’s All-Access with its Keychest digital locker competing with UltraViolet will supposedly be available soon (which is a bold statement to say that either will be ready).  By the way, All-Access content won’t work in the UltraViolet digital locker and vice versa.

Execs deny they want to start a format war, but let’s get serious for a moment.  There are two ecosystems that don’t play the other’s content.  No format war? That doesn’t quite smell right to me.

Keep your eyes, ears and nose peeled for more critical news of UltraViolet.  You’ll catch a whiff of something not right as well.

UltraViolet: Who's Really Getting Burned?

In light of UltraViolet’s recent flurry of announcements about it being “ready,” let’s take a moment to revisit the truthiness of it coming to life…

As entertainment continues to gasp for air and content owners watch their revenues plummet, the industry continues to achieve nothing. Think of the Coppertone Girl if she didn’t do anything about the sun’s harmful ultraviolet rays. She’d end up burnt.

Call me a Fool, but I’d like to expose why UltraViolet is hazardous to the health of both the entertainment industry and the consumer. If it continues on its current course then, in the future, I won’t get to watch my movies the way I want to.

The industry appears to be trying to move to a “watch wherever” model. That’s a good thing because that would allow me to get my content on any of my devices like my TV, PS3, i-Pad, mobile phone, etc.

It’s a great theory, but the way things are going this initiative seems destined to fail.

Are the studios waffling?

The studio-centric UltraViolet was started three years ago when the market was different and they felt that a digital standard was required to continue selling content in a world where disc sales were crumbling.

Time has marched on and I now understand the studios are waffling, beginning to disown the very usage model that allows you to “include up to six people you define as your household” and “access all of your shows and movies from any of up to 12 registered UltraViolet devices.”  (Don’t shoot the messenger.  This is straight from uvvu.com).  They are getting cold feet with this fundamental premise because they feel the model is overly generous and too big of a departure from the current model.  They also are concerned that the members of an account would misuse their rights by sharing content too liberally among members and devices in their account.  You tell me what that really means…

To this day, the business costs of how UltraViolet works is ambiguous.  Commitment to the business model is a long way off.  Who pays for marketing? The studios spent millions promoting Blu-ray; why aren’t they ponying up to market UltraViolet?

Warner Brother’s seems to be confirming this waffling.  Its President announced a “Digital Everywhere App” that allows consumers to manage their video content the way they can with music and photos.  Warner expects the App to connect consumers with and enable other retailers like Amazon, Netflix and Apple.

Wait a minute: we know for a fact that Apple will continue on its own course and never join UltraViolet, and Amazon will refuse to sign up because it is busy with its own cloud services plan. Netflix doesn’t even sell or rent movies so to them a digital locker is irrelevant.  Warner’s ruse of playing nice with retailers that will never launch UltraViolet services is just more waffle.

Could I please have some extra syrup, as this is all a little hard to swallow?

The Sun rises in the West?

Device makers will have to create new devices in order to support UltraViolet.  Since this engineering takes people, time and money, they only add functionality if they think it will help to sell more devices.    It’s too risky to start production with changing and ill-defined specifications. It’s not surprising they are standing on the sidelines and waiting before they invest R&D resources until it is a safe bet.

They are tiring of studio waffling.  With each waffle, device makers push back their ability to deliver UltraViolet-ready devices by a minimum of nine months due to production lead times. For devices to hit stores for the 2011 holiday season, they would have needed to start production in February.  That didn’t happen.

Device makers are unclear on the benefits.  They know it will cost more to build the devices, and they know that no one appears to be stepping up to pay for marketing. The upside was selling more devices supporting an open standard, but now they are not so sure.

They were excited at the prospect of a beautiful sunrise with UltraViolet, but it turns out that they are tired of waiting in the dark only to find the forecast is mostly cloudy (with a chance of meatballs).

Are retailers’ heads in the cloud?

Contrary to what others think, I believe that people learn about new stuff by going to stores.  At the moment, these retailers SELL the vast majority of disc-based content.  As I look at UltraViolet, there doesn’t seem to be many disc retailers involved.  Think of the number of visits that Amazon, Wal-Mart and Target have coming through to learn about and buy products.  Where are the other retailers?  Where will consumers go to learn about UltraViolet without retailers?

The concept of interoperability requires multiple retailers in each territory to launch simultaneously.  Recent estimates would see a top DVD retailer paying $10M in fees alone in the first year to operate an UltraViolet service.  The costs seem high, but retailers will get involved if they understand the benefits.  So far, these benefits are obscured and preventing retailers from committing.

I might be wrong, but maybe consumers don’t need stores or online sites to learn about new products.  Some device makers like Samsung with their TV apps, Microsoft with Xbox and Nokia with their handsets, are positioning to go direct to consumers.  Even Warner Brothers is demonstrating that maybe selling their wares directly to consumers is the future.  I have a foolish idea: maybe they can pick up the nearly 1,000 Blockbuster stores that Dish is dumping in order to reach consumers…

The disincentives are clear.  UltraViolet is expecting retailers to expose themselves and use their resources for the marketing and promotion of the UltraViolet brand.  UltraViolet will provide marketing materials (they will throw some bones like messaging and logos) that retailers will have to license. Other than that, they are on their own to market and promote the UltraViolet experience.  Retailers should not, will not, and do not reach into their own pockets to market other company’s brands.

I got an email message last week from the Digital Entertainment Content Ecosystem trumpeting the release of the “finalized” version 1.0 DECE/UltraViolet specs.

Under normal circumstances, I would take the time to read the specs and summarize and comment on them here — as I have done with Marlin, Coral, XrML, DMP IDP, hNews, the RIAA watermark payload spec, and various others over the years. But I can’t do that, because DECE is demanding that anyone who wants to download the specs sign a nondisclosure agreement – which they say is non-negotiable.

Releasing a purported digital media standard under NDA (let alone a non-negotiable one) is unheard-of nowadays. Every recent consortium or standards body in this field makes its specs publicly available; at the outside, they require filling out a form with contact information.

If DECE wants to attract positive early press in the run-up to its planned summer launch, this is exactly the wrong the way to start. It’s hard not to draw a conclusion that DECE is using secrecy of the spec to bolster its security scheme; and if that’s the case, security experts will draw the conclusion that it can’t be much of a security scheme. Even the secrecy of crypto algorithms went out of fashion several years ago, dismissed by experts as “security by obscurity.”

Others will immediately assume that this is a sign of yet another paranoid Hollywood cabal and write it off. DECE has not exactly been lavishly forthcoming with information over the past couple of years anyway. Ars Technica had even used largely positive language in describing DECE, but I wouldn’t expect such relative goodwill to continue.

Billions and billions of customers served

While apps didn’t hit the 13 billion mark in the article I wrote in October (they did hit 10 billion in January ’11 so frankly, that’s close enough), some equally staggering stats have come out about Apps.

• An estimated 4.5 billion apps sold in 2010, generating $6.8 billion in revenue
• An estimated 15 billion apps sold in 2011, generating $19.7 billion in revenue
• An estimated 21.6 billion apps sold in 2013, generating $29.5 billion in revenue
• Of the nearly 400,000 apps live in May 2011, 62% are paid

While the numbers originally estimated in this October article were off, I believe the argument still stands.  Do you?

Here’s the original article:

I saw  on Gizmodo that 6.3 billion Apps from Apple’s App Store have been downloaded in just over 2 years. It took 5 years for music downloads from iTunes to reach this level.  This works out to be around 17 million apps downloaded each and everyday.

At this rate, the number of downloaded apps is estimated to reach 13 billion by the end of this year, the same as the number of songs downloaded from iTunes by the end of the year.  The fact that apps are reaching this big number at twice the speed of music downloads is pretty remarkable.

As a result, I’m beginning to buy Chris Andersen’s article in Wired Magazine where he argues the Web is Dead. My brutal oversimplification of his argument is that the days of active surfing and engagement with the Internet where a user seeks out information is rapidly coming to an end.
As more and more people are migrating from the desktop browser experience to a mobile phone – from desk to pocket; more and more people are opting to select applications that do all the work for them.

The mobile medium simply isn’t conducive to yesterday’s typing, browsing and clicking on a big display at our desks.  With the rich assortment of thoughtfully designed apps available users are doing what comes naturally and following the path of least resistance.

So what does this mean for digital entertainment?

Look at the dozens of music apps that have sprung up on your mobile in your pocket to create resistance-free music experiences.

Take Pandora, Spotify, Last.fm, Y! Music, MOG, Rdio and others and you’ll see the music experience is different than just turning the radio on.
Just type in a song and relevant playlists are streamed to you – there is no need to download or pay for another song again.  While established artists like Lady Gaga are creating apps (LINK) to distribute gossip and new music, other musicians are marketing their stuff as “wrapping” in other interactive music-making apps like RjDj.

Needless to say, the music business is being challenged to create new models that must leverage apps.

In the video space, the battleground is the living room.  Embedded services in the form of Widgets are showing up in the new Internet-enabled TVs. Manufacturers like Samsung, Vizio, Sony, LG and others are leveraging either proprietary or Yahoo! Widget platforms to vie for your attention in the living room.

Netflix, surprise surprise, appears to be leading in the video app space.  However, a space that is ripe with opportunity seems to be in your pocket (that sounds unnecessarily gross – but you get the point).

Besides its TV and Internet enabled devices, Netflix’s Watch Instantly addition to the mobile app space allows viewers to stream from their queue (list of films) to enabled mobile devices.  They also just snuck on to the new Apple TV. Additionally, Apple TV’s Airplay will be interesting when in debuts in November bringing new ways to move video around the home.

Final thoughts

All of this activity points to the importance that the digital media business (namely studios and labels) create content apps that can bring content to wherever you may be, including both your living room and your pockets.

No matter where you are, it had better be as easy as clicking on an app icon and immediately delivering engaging and up to date content experiences.

Don’t you think?

That was the theme of this year’s World Copyright Summit that happened this past week in Brussels.  Indeed, I am the Fool cannot claim familiarity within these circles, but I can’t contain myself from poking fun at one of the speakers.  Victoria A. Espinel, who reports to President Obama as the US Copyright Czar, made a speech that addressed the question: “Can cloud-based entertainment services help eradicate digital piracy?”  It’s a very provocative question indeed.  But, her follow up interview lacked any inspirational punch.

Keeping in mind I’m jaded and would like to disregard the “Respect” part of the Summit, I pretend below to join the interview with the NY Times and the US Copyright Czar:

NY Times: Do you see cloud services as primarily being legal alternatives to illegal file-sharing networks, or do they present other problems of copyright?

Czar: I hear it asserted that the cloud is going to cause huge increases in piracy; I’ve also heard that the cloud will be the savior. My own view is that the cloud is neutral. It’s not inherently predisposed to be legal or illegal….But you can build a cloud-based service that’s illegal, and you can build a cloud-based service that is legal.

Fool (to Czar): Who talks like that? That’s really not an answer in my book.

Fool (to NY Times) That’s a stupid question.  I don’t think cloud services will impact piracy one single bit. Piracy is never going to go away because people like free stuff that gives them value.  The cloud services are merely places to hold your stuff and then easily access it from your many devices.

NY Times. Are there particular concerns about copyright or privacy that come up in regard to cloud computing?

Czar: Generally it seems to me that the issues coming up are variations of issues that have already come up with the advent of the Internet. The cloud can intensify or accelerate the pace at which we as a government need to address those issues, and which the marketplace needs to address those issues.

Fool (to Czar): Shouldn’t they call you Czarina? Or is a Czar also like a Queen?  Anyways, you use lots of words but actually communicate zip.

Fool (to NY Times):  That’s a mildly better question.  I am an optimist sometimes, and actually see opportunity where others see concerns.  For example, cloud services like iCloud help labels recover some of the dough they’ve lost over the years.  By providing amnesty to pirates, they may just use cloud services to store their stuff and pay annual fees to keep it there.  These fees will be split up with the majority going to the labels.  So finally, labels now can recuperate a tiny bit of what they’ve lost to piracy.

NY Times: As you said, so much of the infringement happens beyond U.S. borders. How are you able to deal with foreign jurisdictions, and what kind of success have we been having in pursuing criminal activity in other countries?

Czar: It’s a big challenge. I would note three things. First, we in United States have a good and strong legal system, although we do think we can make improvements, and we sent recommendations to Congress for improvements….Second, even in countries where there are strong legal systems we need to have better and increased law enforcement by those countries.  The last thing is that we need to protect our own citizens as much as we can.

Fool (to Czar):  Nice structured response, but I kind of stopped listening when you said “I would note…”

Fool (NY Times):  That’s a really good question and damned if I know the answer to either.  Short of having an Internet United Nations that sets and enforces laws, there will always be rogue nations who have more important things to think about (like clean water, corruption or how to secure the next Olympics bid).  With regards to your question about the success in pursuing criminal activity, I’d say close to zero.  Seize one website and a mirror immediately pops up.

Fool from NY Times:  What day is it today?

Pretend Czar:  Today is before tomorrow and after yesterday. I would note that it isn’t really today everywhere because right now is tomorrow as well as yesterday in other places.

Fool (to Czar): What are you talking about?

Fool (to NY Times): It’s Thursday, all day.

Best Buy announced their plans to abandon their direct relationship with entertainment and has begun taking actions such as closing its entertainment distribution center in Indiana.  The spin doctors at Best Buy have done a nice job in downplaying this story, because the implications are huge.

What it means

Best Buy is handing over their entertainment business to a third-party provider that will essentially sublease the space in Best Buy stores. Sure, you can still buy CDs, DVDs and BDs.  But, a company called Anderson Merchandisers will run the CD/DVD/BD categories.

BIG news

Here’s why:

• Best Buy was the only traditional US retailer that was involved in UltraViolet.   Now that Best Buy has ditched entertainment, I see no reason why they would maintain membership.  What’s the point of signing up for membership fees, operational costs and the list of issues that I have spoken of here?  Ultraviolet will lose the only US retailer that has a store presence to explain to customers what UltraViolet is all about.  That will be a big blow.
• Anderson Merchandisers….They do the same thing for Wal-Mart stores!  Isn’t that rich.  So now Best Buy has not only left the business, but they have given it away to their mortal enemy.
• With Best Buy out of the picture, the studios and labels have one less player in the mix to cut deals and use as leverage in negotiations with other companies.  I’d hate to be in a sales role for a studio or label.  Just think of the terms that Anderson/Wal-Mart will be able to extract.  That makes my shoulders tense up just thinking about it.
• Napster and CinemaNow have an uncertain future. These are fairly recent additions and represent Best Buy’s efforts to do something in the digital space.  With Best Buy leaving entertainment, I’m not sure why they would continue running these businesses.
• Job loss at headquarters.  In addition to the 301 jobs lost at the distribution center, many people will be impacted at HQ.  I bet the total number of people is close to 400. Ouch.  To date, some high profile entertainment leadership has left, and I am sure more are considering.

Trouble ahead

I am very surprised that nobody has talked about the implications.  Best Buy’s move demonstrates that entertainment retailers continue to struggle, while savvy companies downplay the seriousness of it all.  But let the entertainment industry beware: there is no foreseeable calm in these troubled waters.

UltraViolet: Who's Really Getting Burned?

As entertainment continues to gasp for air and content owners watch their revenues plummet, the industry continues to achieve nothing. Think of the Coppertone Girl if she didn’t do anything about the sun’s harmful ultraviolet rays. She’d end up burnt.

Call me a Fool, but I’d like to expose why UltraViolet is hazardous to the health of both the entertainment industry and the consumer. If it continues on its current course then, in the future, I won’t get to watch my movies the way I want to.

The industry appears to be trying to move to a “watch wherever” model. That’s a good thing because that would allow me to get my content on any of my devices like my TV, PS3, i-Pad, mobile phone, etc.

It’s a great theory, but the way things are going this initiative seems destined to fail.

Are the studios waffling?

The studio-centric UltraViolet was started three years ago when the market was different and they felt that a digital standard was required to continue selling content in a world where disc sales were crumbling.

Time has marched on and I now understand the studios are waffling, beginning to disown the very usage model that allows you to “include up to six people you define as your household” and “access all of your shows and movies from any of up to 12 registered UltraViolet devices.”  (Don’t shoot the messenger.  This is straight from uvvu.com).  They are getting cold feet with this fundamental premise because they feel the model is overly generous and too big of a departure from the current model.  They also are concerned that the members of an account would misuse their rights by sharing content too liberally among members and devices in their account.  You tell me what that really means…

To this day, the business costs of how UltraViolet works is ambiguous.  Commitment to the business model is a long way off.  Who pays for marketing? The studios spent millions promoting Blu-ray; why aren’t they ponying up to market UltraViolet?

Warner Brother’s seems to be confirming this waffling.  Its President announced a “Digital Everywhere App” that allows consumers to manage their video content the way they can with music and photos.  Warner expects the App to connect consumers with and enable other retailers like Amazon, Netflix and Apple.

Wait a minute: we know for a fact that Apple will continue on its own course and never join UltraViolet, and Amazon will refuse to sign up because it is busy with its own cloud services plan. Netflix doesn’t even sell or rent movies so to them a digital locker is irrelevant.  Warner’s ruse of playing nice with retailers that will never launch UltraViolet services is just more waffle.

Could I please have some extra syrup, as this is all a little hard to swallow?

The Sun rises in the West?

Device makers will have to create new devices in order to support UltraViolet.  Since this engineering takes people, time and money, they only add functionality if they think it will help to sell more devices.    It’s too risky to start production with changing and ill-defined specifications. It’s not surprising they are standing on the sidelines and waiting before they invest R&D resources until it is a safe bet.

They are tiring of studio waffling.  With each waffle, device makers push back their ability to deliver UltraViolet-ready devices by a minimum of nine months due to production lead times. For devices to hit stores for the 2011 holiday season, they would have needed to start production in February.  That didn’t happen.

Device makers are unclear on the benefits.  They know it will cost more to build the devices, and they know that no one appears to be stepping up to pay for marketing. The upside was selling more devices supporting an open standard, but now they are not so sure.

They were excited at the prospect of a beautiful sunrise with UltraViolet, but it turns out that they are tired of waiting in the dark only to find the forecast is mostly cloudy (with a chance of meatballs).

Are retailers’ heads in the cloud?

Contrary to what others think, I believe that people learn about new stuff by going to stores.  At the moment, these retailers SELL the vast majority of disc-based content.  As I look at UltraViolet, there doesn’t seem to be many disc retailers involved.  Think of the number of visits that Amazon, Wal-Mart and Target have coming through to learn about and buy products.  Where are the other retailers?  Where will consumers go to learn about UltraViolet without retailers?

The concept of interoperability requires multiple retailers in each territory to launch simultaneously.  Recent estimates would see a top DVD retailer paying $10M in fees alone in the first year to operate an UltraViolet service.  The costs seem high, but retailers will get involved if they understand the benefits.  So far, these benefits are obscured and preventing retailers from committing.

I might be wrong, but maybe consumers don’t need stores or online sites to learn about new products.  Some device makers like Samsung with their TV apps, Microsoft with Xbox and Nokia with their handsets, are positioning to go direct to consumers.  Even Warner Brothers is demonstrating that maybe selling their wares directly to consumers is the future.  I have a foolish idea: maybe they can pick up the nearly 1,000 Blockbuster stores that Dish is dumping in order to reach consumers…

The disincentives are clear.  UltraViolet is expecting retailers to expose themselves and use their resources for the marketing and promotion of the UltraViolet brand.  UltraViolet will provide marketing materials (they will throw some bones like messaging and logos) that retailers will have to license. Other than that, they are on their own to market and promote the UltraViolet experience.  Retailers should not, will not, and do not reach into their own pockets to market other company’s brands.

Below is only the beginning of a very long infographic that illustrates a timeline and history of Apps.  In the complete version, you’ll learn that:

• An estimated 4.5 billion apps sold in 2010, generating $6.8 billion in revenue
• An estimated 15 billion apps sold in 2011, generating $19.7 billion in revenue
• An estimated 21.6 billion apps sold in 2013, generating $29.5 billion in revenue
• Of the nearly 400,000 apps live in May 2011, 62% are paid

While Android apps continue to grow, I fear that they will be catching up for a long time to come.

UltraViolet: Who's Really Getting Burned?

As entertainment continues to gasp for air and content owners watch their revenues plummet, the industry continues to achieve nothing. Think of the Coppertone Girl if she didn’t do anything about the sun’s harmful ultraviolet rays. She’d end up burnt.

Call me a Fool, but I’d like to expose why UltraViolet is hazardous to the health of both the entertainment industry and the consumer. If it continues on its current course then, in the future, I won’t get to watch my movies the way I want to.

The industry appears to be trying to move to a “watch wherever” model. That’s a good thing because that would allow me to get my content on any of my devices like my TV, PS3, i-Pad, mobile phone, etc.

It’s a great theory, but the way things are going this initiative seems destined to fail.

Are the studios waffling?

The studio-centric UltraViolet was started three years ago when the market was different and they felt that a digital standard was required to continue selling content in a world where disc sales were crumbling.

Time has marched on and I now understand the studios are waffling, beginning to disown the very usage model that allows you to “include up to six people you define as your household” and “access all of your shows and movies from any of up to 12 registered UltraViolet devices.”  (Don’t shoot the messenger.  This is straight from uvvu.com).  They are getting cold feet with this fundamental premise because they feel the model is overly generous and too big of a departure from the current model.  They also are concerned that the members of an account would misuse their rights by sharing content too liberally among members and devices in their account.  You tell me what that really means…

To this day, the business costs of how UltraViolet works is ambiguous.  Commitment to the business model is a long way off.  Who pays for marketing? The studios spent millions promoting Blu-ray; why aren’t they ponying up to market UltraViolet?

Warner Brother’s seems to be confirming this waffling.  Its President announced a “Digital Everywhere App” that allows consumers to manage their video content the way they can with music and photos.  Warner expects the App to connect consumers with and enable other retailers like Amazon, Netflix and Apple.

Wait a minute: we know for a fact that Apple will continue on its own course and never join UltraViolet, and Amazon will refuse to sign up because it is busy with its own cloud services plan. Netflix doesn’t even sell or rent movies so to them a digital locker is irrelevant.  Warner’s ruse of playing nice with retailers that will never launch UltraViolet services is just more waffle.

Could I please have some extra syrup, as this is all a little hard to swallow?

The Sun rises in the West?

Device makers will have to create new devices in order to support UltraViolet.  Since this engineering takes people, time and money, they only add functionality if they think it will help to sell more devices.    It’s too risky to start production with changing and ill-defined specifications. It’s not surprising they are standing on the sidelines and waiting before they invest R&D resources until it is a safe bet.

They are tiring of studio waffling.  With each waffle, device makers push back their ability to deliver UltraViolet-ready devices by a minimum of nine months due to production lead times. For devices to hit stores for the 2011 holiday season, they would have needed to start production in February.  That didn’t happen.

Device makers are unclear on the benefits.  They know it will cost more to build the devices, and they know that no one appears to be stepping up to pay for marketing. The upside was selling more devices supporting an open standard, but now they are not so sure.

They were excited at the prospect of a beautiful sunrise with UltraViolet, but it turns out that they are tired of waiting in the dark only to find the forecast is mostly cloudy (with a chance of meatballs).

Are retailers’ heads in the cloud?

Contrary to what others think, I believe that people learn about new stuff by going to stores.  At the moment, these retailers SELL the vast majority of disc-based content.  As I look at UltraViolet, there doesn’t seem to be many disc retailers involved.  Think of the number of visits that Amazon, Wal-Mart and Target have coming through to learn about and buy products.  Where are the other retailers?  Where will consumers go to learn about UltraViolet without retailers?

The concept of interoperability requires multiple retailers in each territory to launch simultaneously.  Recent estimates would see a top DVD retailer paying $10M in fees alone in the first year to operate an UltraViolet service.  The costs seem high, but retailers will get involved if they understand the benefits.  So far, these benefits are obscured and preventing retailers from committing.

I might be wrong, but maybe consumers don’t need stores or online sites to learn about new products.  Some device makers like Samsung with their TV apps, Microsoft with Xbox and Nokia with their handsets, are positioning to go direct to consumers.  Even Warner Brothers is demonstrating that maybe selling their wares directly to consumers is the future.  I have a foolish idea: maybe they can pick up the nearly 1,000 Blockbuster stores that Dish is dumping in order to reach consumers…

The disincentives are clear.  UltraViolet is expecting retailers to expose themselves and use their resources for the marketing and promotion of the UltraViolet brand.  UltraViolet will provide marketing materials (they will throw some bones like messaging and logos) that retailers will have to license. Other than that, they are on their own to market and promote the UltraViolet experience.  Retailers should not, will not, and do not reach into their own pockets to market other company’s brands.

Sales of discs are NOT being replaced by digital

As physical sales began declining, many in the business began to assume (and hope) that the declines would be offset by digital sales.  However, the transition to digital from physical is nothing short of a catastrophe.  Total revenue from the sales and rental of content (physical and digital) has been declining over the last several years, and nothing seems to be working to reverse this trend.   The industry is in free fall.

We got here because content owners chose to hang on to the old model and get fat and lazy rather than nurture the development of an inevitable new digital model.  That attentive and amazed terrier somehow turned into a territorial pit bull that didn’t want to switch to a more lean and nutritious bowl of food in the name of health.   Here’s what happened.

Content protection

Content owners began emphasizing how to protect their content as it changed from digital on a disc to digital in the computer.  The music business stood by in paralyzed disbelief as fans turned to crime and stole entire music collections.  In the movie world, studio execs focused on preventing illegal file sharing and created complicated content protection that had the unintended consequence of making it nearly impossible for customers to enjoy content across a variety of devices.

What was great about the DVD – the convenience of using it in any DVD player – was completely undone in the digital world.  What a pain it would be if you had to buy three different DVDs to play in your computer, on your phone, or on your TV!  With the difficulty of watching movies across devices, consumers have checked out and don’t really care about digital.  The irony of all this content protection is that it hasn’t done a thing to stop illegal file share.   Not to mention the content owners have allowed a near Apple-monopoly.

Backwards economics

The next big issue concerns the economics that motivate retailers to sell products to its consumers.   In the DVD world, studios pay to manufacture a DVD – the plastic disc, the case, the paper on which the artwork is printed – and then ship off the package to the retailer.  The retailer pays a wholesale price to the studio and then in turn sells the DVD to its customer with hopefully a bit of extra margin to make some money.  Easy, right?  In the digital world, something happened that I really don’t understand.

Digital files have manufacturing and distribution costs associated with them.  But for some reason, content owners began pushing these costs onto retailers.  As a result, retail margins to sell digital goods took a hit.  When retailer margins take a hit for no good reason, retailers lose interest in selling a product.  Consequently, retailers haven’t readily adopted digital.  There is simply no motivation to help a customer transition to digital.

So, here we are.  The industry suffers as DVDs and Blu-rays sales continue to decline and customers opt for a cheap and easy subscription or rental offer (think Netflix, Amazon, Vudu).  The last standing retailers don’t know what to do with the dying entertainment category.  As smaller retailers go out of business, the big ones are looking at other more profitable things to sell their customers and fill the space in their stores.

The prognosis for the now fat and lazy Nipper is not looking good.  He needs to get up, move around, and start thinking of doing something different.  Otherwise, he’ll become another obesity statistic.