Summary – Flixster discussion 6/27/11
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Flixster (recently acquired by Warner Bros), potentially launching Ultraviolet retail
services by August, 2011, has asked SPHE to license product at time of launch
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Though UV is a critical priority for SPE, the Flixster service design, launch timing and
ownership each present potential risks
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Current recommendation is to engage in discussions with WB regarding the service, but
not license to it unless our concerns are adequately addressed
Privileged and Confidential
For Discussion Purposes
page 0
Flixster was recently acquired by Warner Bros, as part of its “Digital
Hub” strategy – Stated goal to “accelerate uptake of Ultraviolet”
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Currently Flixster has between 10-20mm monthly unique visitors, with a focus on
information and social discussion of theatrical titles (eg – Rotten Tomatoes), from prerelease through home entertainment window
– Links to iTunes for content transactions
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WB intends to make Flixster the core of its Digital Hub strategy, with the stated goal of
Flixster becoming the go-to brand for information and consumer sharing related to all
forms of Hollywood content
– Content purchases (UV) and rentals, powered by Roxio (Sonic Solutions’ white label service)
– Single place within which to track your content interests
• Ultraviolet for ownership
• Netflix queue and other rental titles
• Titles that you are interested in, but may or may not own
– Single place within which to convert your existing DVD collection to digital rights
– Launched on Facebook, and integrated into the Facebook user experience
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Expected launch date with Ultraviolet content is August, 2011, in advance of other UV
retailers
– WB’s stated belief is that a launch of UV on Flixster will accelerate other retailers’ times to
market with UV product (need to validate this in market…)
– SPHE’s current expectation is for UV retailers to be in the market in the
November/December timeframe, though this timing is pending confirmed retailer support
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page 1
A more likely rationale for Flixster purchase might be to create an over
the top service as a hedge for TW against potential cable cord cutting
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Contrary to accelerating UVs time to market, Time Warner is actually holding onto a number of
inhibitors to a successful UV launch
– HBO holdback on locker rights for WB, Fox and Universal continues (rumored to be in negotiation)
– WB withholding licensing HD content online today
– WB reportedly not in the market yet to other retailers with defined, attractive UV terms
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In fact, WB has also reportedly communicated to Apple that it may consider relaxing the HBO
holdback only for UV retailers. A potential plus for UV, but
– Beyond this, HBO would be within its rights to only relax its holdback for Flixster, and not other
retailers, or perhaps delay resolving the HBO issue for other, non-owned, UV services
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An early Flixster launch on Facebook would have a strong advantage as a consumer service
– Social network effects (a la Zynga) that drive and lock consumers to Flixster as their default content
source, creating switching barriers to later services launching on Facebook
– Library conversion switching barriers (a la CDs ripped to Apple iPod)
– A strong consumer proposition founded on all forms of content consumption, whether owned or not
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Result of the above, even on only 3 studios’ content, could make Flixster the dominate consumer
service for over the top Hollywood video consumption, which could be far more valuable to Time
Warner shareholders than an acceleration of the launch of UV
– Strategy analogous to HBO’s launch on then emerging cable systems in the 70’s, with subsequent
Warner merger in 1989 (Jeff Bewkes was HBO CFO from 86-91 )
– Great story for Time Warner to Wall St analysts, especially if cord cutting accelerates
Privileged and Confidential
For Discussion Purposes
page 2
Whatever the real goal today, Flixster as described likely represents a
threat to SPE home entertainment economics longer term
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Benefits from accelerated UV time to market are slight, especially if retailers are launching within 3 to
6 months of Flixster anyway
– Potential retailer backlash may work against acceleration objective, or even be felt in physical channel
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Risks exist as designed, as Flixster will tend to devalue content ownership and raise other economic
risks if successful
– Risk to value of ownership, as no distinction between owned content and content that was rented or
simply viewed. UV locker becomes a subset of larger Flixster locker
– Reduced importance of buying content to be able to create collections, from simple user interface from
which to add un-owned content to profile by adding box art and title name
– Risk of monopolist in transactional landscape on UV content, especially so to the extent that HBO
continues to withhold locker rights from other potential UV retailers
– Reduced value of SPE’s DVD conversion programs to other, better-scaled retailers
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Further, Flixster ownership by a competing studio raises further challenges
– Disadvantage to non-WB titles sold within Flixster, as WB controls the user interface and content
algorithms
– Potential disadvantage to SPE titles longer term, due to non-preferred access to Flixster consumer
information
– Challenges directly addressing service attributes, as WB suggests SPHE license to Roxio, not Flixster
Privileged and Confidential
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page 3
A comparison of HBO, Netflix and Flixster suggests a better alignment of
economic interests with studios at times of HBO and Netflix launches
HBO
Netflix
Flixster
Launch content
Subset of studios
Subset of studios
Subset of studios
Platform
Cable
Internet
Internet/Facebook
Value proposition
Commercial-free
movies, before
network TV
Discs delivered to
home
Subscription before
PayTV window
Hollywood content at users’
control
Personalization
Content (as licensed
from studios directly)
contribution to service
value
All
All
Portion unclear
(also netflix queue, box art,
other files on computer…)
Revenue model to
service
Cable carriage fees,
collected from
consumers
Direct consumer
fees
Unclear – Ads? Consumer
information?
Transactional retailers always
must capture value elsewhere
(eg- devices, foot traffic)
Revenue model to
studios
License fee for content
License fees and
payments/transaction
Transactional proceeds for
content sales and rentals
Risk exists if/when WB determines that the value of EST UV transactions
(negative margin on new releases tor e-tailers today) to Flixster does not
provide an adequate return on its acquisition investment
Warner Bros’ asks, Potential SPE responses
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Warner Bros’ asks
– License SPE content to Roxio (unaffiliated w/WB), for Flixster to market as front end to consumer
– License DVD conversion program to Roxio, to drive adoption of Flixster
– Encourage marketplace adoption/support of Flixster as able
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Why is SPE critical to Warner Bros?
– Other studios, except perhaps Fox, are unlikely launch partners
• Disney going slow on Ultraviolet (also competitive to Apple)
• Paramount not recently active in UV
• Universal parent involved in UV, but Comcast likely would not like WB out first
• Fox in UV – historically has not been pushing for fast launch though may be changing
– WB only needs 1 studio to drag Universal in as well (DOJ consent decree)
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Recommended SPE position: Continue discussions and then decide on license
– Limit Flixster’s use of unlicensed content to protect transactional value from service
– Steer Flixster to a delayed, simultaneous launch with other retailers
– Steer Flixster to emphasize HD content at launch to all devices, to open HD availability generally
– Through license, force HBO to give up its holdback on all retailers, or at least on Sony services
– Consider appropriate MG
– Consider demanding equity (50%) as part of our involvement, however…
• Equity may not be as attractive if service characteristics devaluing content are resolved
• Universal may not be dragged
in if SPE has equity (consider option to acquire later?)
Privileged and Confidential
For Discussion Purposes
page 5
Notes
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Flixter can get access to SPE movies even if we do not join flixster, unless we withhold LASP license which I thought we
were not going to do.
Paramount has been active in UV from a standards perspective and commercially active in the UK
Flixsters ability to sign up millions of UV users is a huge benefit UV
UV is open, and there are no barriers for retailers to enter the market after flixster
WB believes that launching on Flixster will accelerate retailers to market
WB is withholding HD for Hardware root of trust – unrelated to issues discussed
Thomas told me they are going out with term sheet shortly
It is possible that launching flixster will accelerate studio negotiations with HBO
Not sure I agree with Lock scenario. UV is open Any third party service gets access to all consumer UV information to
build services
If retailers are really 3 months away, I do not think Flixster with change that
UV will always be a subset of a larger locker
Not aware of HBO/SPE holdback issues except recently licensed S.W.A.T
MG? Really
Privileged and Confidential
For Discussion Purposes
page 6