STB or not, Blockbuster is quickly losing relevancy, analyst says

A set-top box (STB) for streaming video from the Internet is Blockbuster’s latest rumored plans to ensure relevancy in an Internet-dominated world, but it might not make a dent in the long run, according to Insight Research President Robert Rosenberg. The movie giant, once the beacon of success for convient access to new releases, has been struggling to retain its foothold in an increasingly saturated video market. Today’s Hollywood Report account of Blockbuster’s move to develop an STB for streaming films directly to the TV represents the challenge that traditional movie distributors are currently grappling with as the Internet becomes the delivery mechanism of choice.

“Blockbuster is essentially going to the Internet to try to keep its business model alive by using the Internet as a mechanism to distribute its movies,” Rosenberg said. “Over time, the model that Blockbuster and Netflix and at one point Wal-Mart were all trying, where they aggregate content, seems really less compelling.”

According to Insight Research’s latest report on streaming video, the wave of the future for telecom is one dominated by the Internet. The report, an extension of research done four years ago, concludes that the PSTN and wireless will not advance in parallel with the Internet; rather they will become access points to get to the Internet. Considering this, Rosenberg said the movie studios’ point of view will become: If everyone is going to Netflix or Blockbuster to get the latest run movie from the Internet, then why not cut out the middleman? In the next four to five years, it is his vision that movie studios will rely solely on search engines like Google to bring the movie directly to the consumer to view as they please – essentially making Blockbuster obsolete.

“The nature of the access device is becoming increasingly blurred just like boundaries between industries are becoming blurred because of the digitization of content,” Rosenberg said. “The mechanism to get to that content is being blurred, so the lock that the cable industry might have had on its consumer is less and less secure over time.”

Of course, fear of piracy and unauthorized use is a significant concern of movie studios and a potential roadblock to offering their content direct to consumers. In the content-sharing deals that most have with movie distributors like Apple TV, however, they are losing a significant portion of their revenue to the distributor. Ultimately, the Web has conditioned consumers to expect services at any time, and this includes the widest possible array of audio and visual content on demand. Going forward, Rosenberg expects movie studios to capitalize on this without the intermediary channel of a partner.

“The future is about openness and open systems,” Rosenberg said. “What we’ve witnessed in a number of modalities in the system since the mid-90s is that there is a tendency towards openness and a tendency towards rapid application development in the Internet environment. So, while it is always somewhat anarchic, it overwhelms whatever walled garden is attempted by proprietary solutions.”

A proprietary solution from Blockbuster has been in the works for some time now. In July of 2000, Enron’s network provider subsidiary, Enron Broadband Services, partnered with Blockbuster in a 20-year exclusive deal to sell video titles on demand over its national broadband network. When Enron infamously went up in the flames of fraud, the joint venture never materialized. Now, more than seven years and the entrance of many startups later, Blockbuster appears ready to take on broadband video devices like Apple TV, Vudu and possibly even Netflix, through a device being created with LG Electronics.

The device Blockbuster is envisioning would be a standalone STB, building off Blockbuster’s 2007 acquisition of online film service MovieLink. The service allows consumers to watch any of 6,000 licensed films from major studios on their PCs. The Blockbuster STB would provide the link to move the content from the PC to the TV. Blockbuster has not yet revealed other details, such as if it would partner with a consumer electronics company or pave the way itself.

If Blockbuster does deliver on its STB, Rosenberg said, it is not a given that it will be significantly differentiated. As every video streaming company looks to exploit content, the deals they form with production studios may be more important. While he can’t imagine Blockbuster surpassing Apple TV in its sleek and sexy user interface, customer service and price may be the likely levels of differentiation.

Blockbuster will also have to overcome the hardware hurdle – consumers might not be willing to introduce another STB to their home, especially if they can watch a direct-from-the-studio model, as Rosenberg predicts. With the new model of streaming video, he said, any type of DVR, VCR, DVD-style STBs will become as antiquated as eight-tracks. And with regards to concern that Blockbuster will cannibalize its existing brick-and-mortar presence, Rosenberg is confident this is happening anyway as the Internet continues its succession in the streaming movie world.

“There is a $94 billion US entertainment media industry,” Rosenberg pointed out. “Out of that $94 billion, roughly $4 billion right now is being delivered online via streams. That includes the actual content, audio, video, Internet downloads, as well as advertising. Somewhere between $3.5 and $4 billion – so a very small percentage, but it is the wave of the future. No one wants to get in their car and go to a brick-and-mortar if you can sit at home and be a slug. It is gradual, but looking at it over the next five years, we’re predicting about a 30% compound annual growth in that streaming content-derived revenue. Do you think the brick and mortars are doing 30% growth year over year? No. Not even close.”