OPINION: Movie downloads 101
By Paul Sweeting -- Video Business, 10/26/2007
OCT. 26 | The five studios behind Movielink sank $148 million and change into the download venture over six years before selling it to Blockbuster earlier this year for a kind word and a handshake. Call it the price of an education.
Paul Sweeting is editor of Content Agenda
The $148 million represents the accumulated net losses incurred by Movielink between August 2001—when the five studio partners formed a joint venture to take over Sony’s Moviefly service (rechristened Movielink)—and June 2007, when the partners sold the company to Blockbuster for $6.6 million (really $4.5 million after subtracting the $2.1 million in cash Movielink had on its balance sheet at the time of the sale).
The data are contained in an Oct. 24 Securities and Exchange Commission filing by Blockbuster Inc. that discloses the financial and business history of its new subsidiary.
It’s apparent from the data that Movielink, from the start, was intended essentially as a learning experience for the studios.
The original operating agreement among the partners called for capitalizing the joint venture through what amounted to a sinking fund.
Each studio was obligated to contribute capital in equal amounts up to an aggregate total of $150 million. Anything beyond that would require a new agreement.
Sony Pictures provided initial capital of about $23 million, mostly in the form of software and technology developed for Moviefly.
Movielink could then make capital calls on the partners each fiscal quarter to fund its operations, with the amounts counting toward the $150 million.
Each of the five studios—Sony, Warner Bros., MGM, Paramount and Universal—set up a single-purpose subsidiary to oversee its interest in the venture, presumably so that the funds used to capitalize Movielink could be kept off their main balance sheets.
Capital calls in 2005 and 2006 totaled $25.8 million and $23.8 million, respectively. No capital calls were made in the first six months of 2007, presumably because the partners had already decided to sell, rather than sink any more capital into the venture.
Essentially, the partners set a cap on how much they were prepared to lose on the venture, then operated the company until the accumulated losses reached the cap. Then they unloaded it.
THE ESSENTIALLY education nature of the venture is apparent in Movielink’s cash flow statements. In 2006, the last full year of operation, Movielink had revenue of only $4.0 million, of which it paid $2.6 million, or roughly 65%, to content owners in the form of royalties.
At the same time, however, it spent more than $15 million—more than three times revenue—on infrastructure development, marketing and research. The ratios were similar in 2005.
Clearly, at least by 2005, Movielink had become more a laboratory experiment than a for-profit company.
The numbers also shed light on earlier reports that Movielink had turned down previous offers from Blockbuster of $70 million and $50 million beginning in 2006.
Even $50 million would have been 12.5 times 2006 revenue, a very rich valuation at a time when the company was on its way to posting a $22 million net loss for the year.
If those reports were correct, and Movielink partners did turn down those offers, you can add that to the price of their degree.
SO WHAT DID the studios learn from their experience? Presumably they learned something about how the pricing and marketing strategies motivate consumers to buy downloads. And they now have direct knowledge of the true technology and operating costs of a download service, all useful things to know.
But it’s also clear that a pure play movie download service is a tough way to make a buck, at least given current technology and release windows. True, the joint-venture structure of Movielink probably made it harder to grow the business than under single ownership. But $4 million in annual revenue after sinking $150 million in capital is a pretty poor ROI by any measure.
Whether the studios can put their expensive education to some productive use remains to be seen.
Paul Sweeting is editor of Content Agenda. Get more of Sweeting's analysis here.
