Race For Online Video Speeds Up

written by Harry - Leave a reply

4/26/2011 Online Video? My how they once scoffed. But recent growth figures and acquisitions have got certain cable and satellite companies curious, perhaps even concerned.

Earlier this month, chief executive of Dish Network, Charlie Ergen, went to auction and picked up the now bankrupt, once-uber video giant, Blockbuster Video for $320 million. It was a purchase that drew both raised eye brows and sniggers from industry commentators and competitors alike.

Blockbuster was once the be all and end all in home entertainment. For 25 years it dominated the VHS and DVD rental market in the US but recently the bricks-and-mortar company ran into trouble after facing a new breed of competitor. In September 2010 it filed for Chapter 11 bankruptcy with debts of over $1.4 billion. While in their dying stages they made a bid to adapt to the new playing field, alas it was too late – the game had changed.

While Blockbuster was dying a slow and expensive death, the new kid on the block, Netflix, was knocking it out of the park. The Californian-based company yesterday announced first quarter earnings totalling $60 million, a significant growth on the $32.3 million in made same time last year. Not only that, the company said that it added 3.3 million subscribers in the United States alone during the same time period. Reed Hastings, the company’s chief executive stated, “It took us four years to get to 3.3 million subscribers. Now we did it in one quarter”.

At the close of the first quarter, Netflix claimed to have 22.8 million subscribers, the same number of American cable giant, Comcast. The fact that more consumers are turning to online video is market validation in itself. Two years ago, Netflix had 10 million customers subscribed to it’s DVD-by-mail service, it adds a video streaming service and subscribers more than double.

So why did Dish Network buy Blockbuster? On the face of it, it looks like a complete dog. $1 billion of its assets are tied up in property that people no longer visit. Ergen, however, sees promise.

Shortly before kicking the bucket, Blockbuster Video invested heavily in R&D to build a streaming technology that could help them compete with Netflix. By the time it got to market, however, they were haemorrhaging money left, right and centre and it was too late to save them. It is that technology, owned distribution licences with 20th Century Fox, Lionsgate, MGM, Sony Pictures and Universal and the Blockbuster brand name, that Charlie Ergen is hedging his bets on.

For a number of years, Dish Network, and their sister-company, EchoStar, have been quietly building up a sizeable business portfolio. In 2007, they spent $380 million on Sling Media – a video application for the Iphone and Smart phone devices. In 2008, Dish bought $700 million in mobile Internet airwaves at an FCC auction. Earlier this year, they spent $1 billion buying DBSD, a firm with satellite spectrum that can be used for mobile broadband Internet access. Echostar bought Move Networks, a video streaming company and has plans to buy Hughes Communications, a satellite firm with spectrum that can also be used for high-speed Internet networks. See where this is going?

Ergen and his team will almost certainly bring back Blockbuster reborn. They are going to take on Netflix with an armoury of complementary business lines that they hope will give them the competitive edge. Former Blockbuster, chief executive, John Antioco, suggests that it is a move his old company could not manage under it’s previous structure.

Antioco claims that the company was once held back by it’s former parent company Viacom’s shareholders and management. Viacom stalled on Blockbuster’s online delivery strategy because it was, at the time, making more money from theatres, DVD sales and licensing fees with cable companies. While they were listening to each other, Netflix were listening to the consumers.

“I firmly believe that if our online strategy had not been essentially abandoned, Blockbuster Online would have 10 million subscribers today and we’d be rivalling Netflix for the leadership position in the Internet downloading business”, stated Antioco.

Leave a Reply