BK: Tell me a little bit about your launch today, and the MovieBeam service. What's the new service?
CC: The essence of the MovieBeam services is that we take the best part of the video store – the movies – and put them in a box, connect them to a television in the living room, and remove the pain from the video store – out of stock videos, late fees, and scratched disks. It's a big market. Video rental is a $10 billion a year business, with over 30 million households renting 4 or more movies a month. Despite what you hear about video store alternatives, 7 out of 10 rentals still happen at the neighborhood video store. When you think about the size of the business, and talk to people who rent lots of movies, it's hard to find someone who doesn't have a video store horror story. My most recent videos tore experience was an example. I rented four movies, brought them home, they weren't what my family wanted to watch, and I ended up only watching one and returning all four.
There's a number of stories that people will tell you, mostly around out of stock. When you think about this business, the other things that is really interesting is that of that $10 billion a year, between $8 and $8.5 billion is spent on the new release movies. The rentals are heavily consolidated into a few movies, as Hollywood only puts out about 200 movies a year. In the evolution of the business, along comes NetFlix, which has a great business. There are some things they've done very well that take away the video store pain – such as trips and late fees. Certainly, their trajectory proves that there is a lot of frustration around the video store experience, still, they have their own issues. They still have disks, and they still have scratched disks. They talk about 50,000 titles on demand, but when you get home you really just have an on-demand experience of three titles. Also, there is the subscription fee—if you go away for a couple of weeks, and decide to get a movie, it suddenly cost you $17. Interestingly, they have done a very good job at repositioning the issue of out-of-stock movies. Now, what you have instead is a queue. It's really out of stock, but the fact is for the new release titles you still have a wait as long as 4 months to get those popular movies. MovieBeam really solves these problems. What we do is take the back wall of that video store, and put it into every box. Every new release, from every studio is now available instantly at a touch of a button. We ran this business for about a year in three test cities. One of the interesting things is that demand is consolidated into new releases, and peaks very quickly. There were a number of movies that our user base rented, with between 30 and 45 perecent of our users in the first few weeks of becoming available on our service.
Those movies that come to mind are Daddy Day Care, Burning Down the House, and Secondhand Lions. It's very intense demand in the first few weeks. What that would mean for a mail order DVD business or DVD store is that you might have 40 percent of your base wanting to rent a movie within the span of a couple of weeks. For a business with 4 million users via mail order, that means you've got to own 1.5 million copies of that new title, which isn't going to happen. That translates to out of stock in a retail store, and a queue via a DVD mail service.
This issue of new release availability and demand is what MovieBeam solves with datacasting. We're very efficient in solving this problem. What we've got is a set top box with a hard drive, and stored on that hard drive are the movies you see. Our broadcast is the equivalent of the employee in the video store pulling ten titles off the back shelf and putting in ten new ones. We do that digitally, and are able to deliver these movies virtually for free.
When we have a million users, or 110 million, or are delivering 520 million movies a year we are able to do this all for free and give those users instant availability to this back wall, even if they all want to rent Daddy Day Care all at once.
BK: How are the movies being transmitted to the set top box?
CC: We use a proprietary technology called datacasting. We ride on PBS stations, and are overbuilt on the television broadcast network. We have a national deal with a company called PBS National Datacasting. That's how we're able to deliver so efficiently. The equipment comes with an indoor antenna and remote control. It's all plug and play – it connect to a television just like a DVD player, you can purchase MovieBeam either online at MovieBeam.com, call us at 800-moviebeam, and also at major consumer electronics stores like Best Buy. We handle the customer experience end-to-end.
BK: So the process works the same way at retail stores, as well?
CC: Yes. We have national distribution centers and ship to end customers direct via FedEx home delivery. We also do a just-in-time content load on the receivers, and ship all of the movies pre-loaded on the hard drive. It's the same process even when buying at an electronics chain. At retail locations, customer check availability, the address where you are going to use the service, and it reports if you are inside or outside our broadcast area. Nine out of ten people in our markets are going to get coverage. Once you check availability and complete signup, in two to four business days you get a FedEx delivery of the MovieBeam system and plug it into your television.
BK: Why not just use the Internet?
CC: I think that with movies delivered over IP, there are issues that need to be solved. Issues such aslatency. Really, to address this market of 30 million frequent renter housholds, you need movies to be available instantly. Second, there's an issue of quality. DVD quality video is definitely the benchmark. If you can't do that, you've got challenges. Then, most importantly people want to watch television in their living room.
Connectivity is also an issue with IP delivery. We believe we've solved the latency, quality, and delivery issues. The other thing that is extremely hard to solve in IP is high definition. We also offer high definition. It's hard enough to delivery standard definition via IP, and high definition is 5 to 6 times larger than standard definition. IP really breaks down. The other big thing is instantly available to that back wall. To deliver the kind of service we deliver over IP, and with the US Internet based on Unicast, if you've got a million users sending more than 10 gigabytes of video data a week you're talking petabytes of data. Our calculations how that with one million users today trying to deliver what we are you'd eat up 20-25 percent of the current US Internet infrastructure's capacity. You'd either get choked or charged.
BK: What relationships do you have inked for content?
CC: We have some truly breakthrough content rights. We are the first every video-on-demand platform to offer Hollywood movies on same day as home video release. We have those rights from Disney, Touchstone, and Miramax. In addition to that, we will be the first video on demand to have licensed high definition Hollywood movies. That wil come from Disney and Warner Bros., and we have output deals with 6 of the 7 major Hollywood studios.
BK: What's the story behind the funding and launch. I know Disney had shut down the service last year – what's different today?
CC: When we started the test, it was an interesting technology. There were a number of questions we wanted to answer before we rolled it out nationally. Those questions included: could you get studio support? Could you get retail support? Would people connect another box to their television? Would the technology work? Would people rent movies? Could you capture the attention of these 30 million heavy renters of 4 or more movies a month? And more importantly would the launch trajectory look more like DVD by mail or satellite radio, or look like the Tivo product—something that's really cool but really didn't generate a launch trajectory. We found that the results were outstanding – great studio support, fantastic retail support, and that the target of those 30 million heavy renting households definitely were signing up. We had a great launch trajectory, very similar to that of satellite radio and DVD by mail. And, importantly, we were able to deploy the service and really just make sure the technology worked. With those great test results we were able to go out and bring in a blue chip syndicate of content, technology, and financial investors. Obviously Disney has invested not only additional capital but has also delivered some breakthrough content rights. The funding came from Intel and Cisco Systems, two great technology companies, and we had three Tier-1 VCs – Mayfield, Norwest, and VantagePoint venture partners. This is a really great syndicate of blue chip companies that area all really excited about our trial, and more importantly believe in our ability to success in the marketplace.
BK: What is the funding for?
CC: We are rolling out across the country today in 29 of the largest cities in United State, and the product is available now to over 40 million households.
BK: How big is the company now, in terms of employees, and are those the same employees you had during your test?
CC: We have about a hundred employees. It is a mix – for example, I have been with the project inside Disney since November 2002. We formed the new company the first week of January.
BK: Will you be expanding your staff with the new funding?
CC: That's the interesting thing about this business. We don't need hundreds of thousands of employees to deliver billions of movies. I would say we don't need to grow from a number of employees. We've got the infrastructure we need to pass over 40 million users. We have launched a national service with 100 people, and feel good about our ability to execute.