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Old 02-25-2012, 03:38 PM
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Default NYT- Web Deals Cheer Hollywood, Despite Drop in Moviegoers

Web Deals Cheer Hollywood, Despite Drop in Moviegoers

Adam Newman, left, and Mark Lieber watch a video. Streaming services from Verizon, Redbox and Amazon are in the works.

Published: February 24, 2012

LOS ANGELES — Movie attendance hit a 16-year low in 2011. Star wattage continues to dim. DVD sales keep plunging. Almost none of the films being honored at Sunday’s Academy Awards have struck a mainstream nerve.

Yet Hollywood has a noticeable spring in its step. After all, it’s not the music business.

Instead of Hollywood suffering its own Napster moment — the kind of digital death trap that decimated music labels first through the illegal downloading of files and then by a migration to legal downloads almost solely through iTunes — several deals announced this month have it feeling more in control.

While studios still consider piracy a huge problem and feel stymied by Silicon Valley (and Washington politics), they nevertheless control their content. And now the Web is coming to them.

Google is developing a home entertainment device and several media companies have announced plans for new online streaming services. Taken together, the moves mean no supplier will have a monopoly over the distribution of films and television on the Internet. With more buyers comes leverage, and higher prices for content.

“The mood has shifted from, ‘Oh, my God, our business models are broken and we’re going to be cannibalized’ to something resembling euphoria,” said Peter Guber, a former chairman of Columbia Pictures who is now chief executive of the Mandalay Entertainment Group, which has interests in movies, TV and sports. “Studios see a robust, accelerating online market.”

Serious Web-based buyers for movies and television shows are popping up all over. Netflix, the DVD-by-mail and streaming service, was already aggressively pursuing Hollywood content and making sizable payments for it. This month, in a clear challenge to Netflix, Verizon and Redbox said they would team up on a service to stream studio films on the Internet. Days later, Amazon completed a deal to buy episodes of Viacom-owned programs, including “Jersey Shore” and “SpongeBob SquarePants,” as it prepares to introduce a stand-alone streaming service that also will compete with Netflix.

Hollywood also anticipates that YouTube and Google will soon expand their movie and television service beyond rentals to include sales. Steadily ramping up their offerings are Walmart’s Vudu, Best Buy’s CinemaNow, Apple’s iTunes and Hulu. And that is just in North America. The competition for online movie and television rights is also heating up in places like Brazil, where NetMovies Entertainment has a deal to stream material owned by the Walt Disney Company.

The money is not yet big enough to make up for lost DVD revenue, but it is substantial. Barton Crocket, an analyst at Lazard Capital Markets, estimates that Netflix spent $937 million for streaming rights in 2011 and will pay $1.8 billion in 2012, as deals activate for CW shows like “90210” and DreamWorks Animation movies and TV shows.

On Tuesday, Netflix struck a deal for certain films from the Weinstein Company, including “The Artist,” the best picture front-runner at the Oscars. The CW deal, signed last year and estimated to be worth $1 billion in and of itself, runs four years. DreamWorks is getting an estimated $30 million a movie over an unspecified number of years. Last month, Disney agreed to provide streaming content to Comcast as part of a 10-year deal that will bring billions of dollars in revenue to Disney.

Studios worked meticulously to get to this point, holding content back, or at least doling it out very carefully. They made restrictive deals for library material, for instance, and tried to avoid exclusive arrangements that would damp competitive bidding. They also have had bandwidth on their side: the music industry was speedily overtaken by the Web in large part because songs are small enough to trade on limited bandwidth.

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“We’re still in the learning process, but it’s looking very exciting,” said Ken Werner, president of domestic distribution at Warner Brothers Television. “The digital marketplace is evolving in a way that is very good for us.”

Hollywood has a history of embracing the shiny thing right in front of it, forgetting about long-term sustainability, and some analysts (and a few smart studio executives) worry about the industry’s ability to keep up this momentum.

Do these prices represent a bubble? Will Netflix throw another pie in its own face, as it did last year when it lost 800,000 subscribers after a hasty price increase? Will movie streaming hurt other parts of the entertainment business, by speeding the demise of the DVD, for example, or by denting the ratings for regular TV?

These are difficult questions for studios, said Roy A. Salter, a founder of the Salter Group, a financial and strategic advisory firm with an entertainment focus.

Mr. Salter equates the current boom to the 1980s and ’90s, when TV networks around the world started gobbling up movie rights. That proved to be a bubble as some buyers, confronting slower-than-expected growth, could not make their licensing payments.

“Many people in Hollywood mistook an increase in licensing fees as a new norm and started forecasting future revenues off of that bubble,” Mr. Salter said, adding that current excitement over streaming may be “irresponsible thinking” in the long term.

There are other caveats. One big one involves the movie side of Hollywood, which is less able to capitalize on the streaming of new releases because of the way its contracts are drawn with premium channels like HBO and Showtime; these channels essentially get to put contractual handcuffs on movies during their pay-TV runs — no streaming on rival services. Movie executives are trying to sort it out, but this contractual thicket is complex.

But it is easy to see why Hollywood, seemingly on the wrong side of every business trend of late, is perking up at the online streaming boom. Just a year ago, Netflix was the only company of size paying big upfront money for streaming content, and it was becoming so powerful that studios worried they were following their music counterparts down an iTunes path.

“One buyer is your biggest nightmare,” Mr. Guber said. “They can hear the rattle of your begging cup a mile away.”

So studios are patting themselves on the back for maintaining control, seeing developments as vindication of their strategy.
It is confidence that could disappear in an instant — change is coming so fast that the pendulum could quickly swing back away from content’s corner — but Mr. Guber predicts it is only going to get better for studios.

“Nobody’s going to a Web site to see zeroes and ones,” Mr. Guber said, referring to computer coding. “But they will go for oohs and aahs, and the tech companies know it.”
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