The thinking is that if the movie isn’t available to rent, then we’ll buy it, either in physical format or though some form of electronic sell through. Windowing also encourages retailers to support key titles, which is a point not to be dismissed lightly.

The argument is whether scarcity, and by extension windowing, matters to consumers in today’s movie retail environment. NPD’s research shows that over 90 percent of renters would not consider acquiring a new release movie any other way. For them a window will have little effect. On the other hand, if it does move a few consumers to actually purchase the movie, that is a win for the industry — a 2 or 3 percent lift in unit sales at higher margins makes an important contribution.

The challenge is that the extended window will likely help only a select number of titles, and extending the window may actually hurt some fringe releases. Consumers will simply rent them later on, or maybe not at all.

An even bigger issue is the concept of scarcity itself: With rising DVR ownership and increasing lower margin VOD options the reasons for “appointment” viewing of movies are diminishing. If the desirable “Triple-A” title isn’t available for rental, are consumers simply being encouraged instead to watch time-shifted TV content or episodes of “Breaking Bad” on Netflix Watch Instantly?

It is terribly important that the core value of the home video structure be preserved, because that revenue flows directly back to the studios and we, as viewers, should get more compelling movies. The question is whether this longer window between release and rental availability will have the desired result.

Perhaps the most interesting component, though, is a “Disc-to-Digital” conversion capability that will allow owners to convert their DVD collection to digital files. There are some conversion capability questions that will likely be answered at CES, such as why only DVD is supported while Blu-ray is not? How does the new line co-exist with the UltraViolet initiative, which is supported by many studios? And will the digital files work with all devices, including Apple iOS?

Stay tuned for those answers.

The problem with DVD, and physical media in general, is that the content owner rarely has opportunities to bond with the customer. The DVD gets shipped from the replicator to the warehouse, and then it gets sold through a retailer. Walmart, Amazon and Best Buy have the relationship with the ultimate customer — Warner Brothers or Disney do not.

“Disc to Digital” apparently requires customers to authenticate their DVDs prior to creating the digital file. Samsung reports that DVD owners will have the option of upgrading to an HD file; however, I’m skeptical that very many consumers will do so, since DVD quality is good enough, especially for most movies in people’s collections and for the mobile devices they will play the digital files. The opportunity for the studios is to insist on access to names and e-mails of disc owners as part of the scheme to unlock the digital rights management (DRM) . . . with permission of course.

Once “Disc to Digital” becomes mainstream it could help re-ignite home video sales. Warner Brothers has released six Batman movies since 1989, and say I register and authenticate four of the movies in the series. Warner can offer me the missing titles, either on disc or as a digital file. Plus they can promote the upcoming “Dark Knight Rises,” which is slated for Summer 2012 release. The studios can exploit my weakness for Superbad and Austin Powers the same way Netflix or Amazon now serve up my movie and TV recommendations.

There are many open questions, however, such as how long it will take for “Disc to Digital” to become mainstream in BD devices? By that time video on demand (VOD) could be so well developed that nobody will be interested in converting their dusty DVDs. Will we have replaced the movies we really want with Blu-ray and UltraViolet powered Digital Copy? Who knows? But if I’m a content owner today, any opportunity to reconnect with my customers is an opportunity worth exploiting.

Qwikster, the stand-alone DVD/Blu-ray rent-by-mail business has now officially been relegated to those lists of “Top 10 Business Mistakes.” In fairness to Netflix, Qwikster actually made some sense. Wall Street would eventually show its dislike for entertainment businesses with a physical component (see Blockbuster). As their ongoing global expansion continues, Netflix is poised to become a streaming video company. Our expanding use of connected devices will inevitably usher in a new age of acquiring and watching movies and TV shows, so when Netflix separated physical discs from digital rentals, they appeared to position themselves for the future.

The problem is that future is still a few years away. American consumers continue to watch a lot of movies on DVD and Blu-ray. By separating their physical and digital businesses, Netflix strayed from its foundation — a deep catalog of movie titles, accompanied by today’s hits, supported by a seamless interface, and promptly delivered to your home. And all this on a format that is used by the majority of Americans. According to NPD’s latest “Entertainment Trends in America” update, 75 percent of U.S. consumers watched a movie on a DVD or Blu-ray in the past three months, compared to 22 percent who rented using video-on-demand (VOD), 21 percent streamed via subscription, and only 4 percent who rented a temporary download.

There’s nothing wrong with a company striking new ground, of course, but the trick is timing. In the weeks following Netflix’s announcements, NPD’s VideoWatch tracking service revealed significant declines in subscriber ratings of their overall experience and value scores. In other words, customers were angry. In NPD’s ongoing tracking of music and home video, we’ve seen a direct relationship between those customer scores and market share trends.

Netflix works because there was that one-stop shop with a unified website. If you couldn’t get Hitchcock’s Rear Window on a stream, it went into your DVD queue and you watched something else. Separating the services not only diminished the consumer experience, it may have put the streaming business at risk. Lacking a deep catalog, as well as current titles, Watch Instantly as a stand-alone service was at peril of being perceived as a direct competitor to Hulu or on-demand television channels. Even YouTube is a major challenge on small screen devices. Unifying the physical and digital markets provides the best customer experience and differentiates Netflix from its competitors. Happy customers will migrate to their streaming offering when digital video becomes mainstream and as multi-screen watching evolves. Don’t let the price increase bother you, either: Though some people are complaining, Netflix customers in general spend a lot more than average on movies — even for physical discs, and TV VOD.

I’ll offer these three predictions: First no more announcements from “The Netflix Team” for a while; second, a reversal of falling customer satisfaction scores, and finally a return to expanding domestic subscriber growth.

No doubt DISH Network is thinking about customer acquisition. While that’s a worthy objective, the prospect of Blockbuster redux is more exciting. At some future date this service will be rolled out to the rest of the country, and it will be the late ‘80s all over again for the other “Big Blue.” So will we see market dominance from the folks who brought you VHS? When you stop giggling, consider this: There’s barely a person alive in the U.S. who has not been to a Blockbuster store or watched one of their rentals. At their peak just a few years ago, half of the disc rentals in the US came from Blockbuster.

In August 2008, an estimate from NPD’s “Entertainment Trends in America” report projected there were more than 50 million Blockbuster renters — and that was at a time when Netflix was beginning to offer major competition. Fifty million — that’s twice as many Netflix subscribers. That is a lot of brand power, and it’s equity that has not been lost. Contrary to many analyst’s reports, people didn’t hate Blockbuster — although our local stores were getting a bit long in the tooth. The convenience argument isn’t exactly right, either; we stopped at Blockbuster on the way to McDonalds, on shopping trips, and wherever we scooted around town. Is Redbox convenient? Sure. Is Netflix convenient? You bet. But many people defected to Netflix because of their deep catalog, in addition to the convenience of “by-mail.” Blockbuster was late to adjust pricing, and to address late fees, and to invest in the stores. But it wasn’t Yugo cars, or WebTV or BP or Enron.

Despite the plethora of emerging movie options, Blockbuster can be a winner. There’s the company’s brand equity: when their icon appears on your connected device, you know who they are, there’s no cost to build awareness, which is going to get expensive as connected devices get more crowded. My bet is consumers will pick one or two core rental options, so Blockbuster now has an opportunity to compete for that choice.

Blockbuster’s $10 price is competitive and equal to a couple of VOD movie purchases. There’s also a free option to get DVDs and Blu-ray discs, and people like discs. In fact 75 percent of us watched a movie on a disc in the past three months, according to NPD. Unpopular as that may be to the technofascists, it’s true. There’s still just no better way than Blu-ray if you want to watch movies like Avatar or the newly released Star Wars set. We have disc players in our cars, for our kids. Those cars can stop into a Blockbuster store to exchange discs. They’ll have 4,000 movies to stream at launch, and the studios will be happy to see some competition in the subscription business. DISH Network customers can also now get a bundle with extra premium channels. You can manage your queue with your DISH Network remote control, so there’s no need for a laptop or an iPad on the coffee table. Right now you can stream to your TV or computer — but no iPads yet. Only 6 percent of Netflix streaming is to tablets or phones, so that’s not a big miss, and it will likely be corrected in the near future.

It can be difficult to build a new brand in digital entertainment, and so far there haven’t been any second chances. Blockbuster is getting a second chance to do what they should have done a long time ago.

If you haven’t heard, Spotify is a music service imported from Europe that was recently licensed by all of the major labels for the US. It’s what we call “on-demand,” because you can build playlists from an extensive library and listen as you please, as opposed to “adaptive radio” (e.g., Pandora) which interprets what you like and serves up similar music.

As in other bubbles, there has been massive promotion of Spotify by bloggers and pundits. Brand partners and individuals are circulating premium log-ins, like Nationwide wrote mortgages, though you can get a basic one by going to the Spotify site. The log-on gets you a six-month trial of the ad-supported version. It’s $5 per month for an unlimited subscription that does away with the ads, and $10 for a premium that permits use on a multitude of devices.

Recently there has been a spate of predictions for Spotify: “It will be the application for the masses,” an “iTunes killer,” and “a piracy cure”. Others foresee that Spotify will usher in a new age of music discovery and cure other various ills of the music industry.”

Not so fast, you irrational exuberators!

To be very clear, I’m not a hater. I was privileged to try the British version of Spotify, and I immediately became an instant fan. I quickly built playlists of my favorite artists from entire albums. The interface is also stunning. The online ads were not overly intrusive; they mostly warned Brits to wear helmets, while motorcycling. The audio ads were infrequent and not bothersome, either. But like MGs of the 1980s, something happened on the trip to America. And it wasn’t good.

My prediction is that Spotify will be a success, but not the game changer others are trumpeting:

• Study after study point out resistance to paying for subscriptions, including premium upgrades that offer usage on multiple devices. The vast majority of trial subscribers will fall away when the restrictions kick in or it’s time to ante up.

• After six months free users will be limited to listening to a song five times. I predict the sixth hearing is as likely to be on YouTube or Vevo as it is Spotify.

• Unlike the mild (subdued) UK motoring ads, the banner ads flicker at me in a weird and disruptive way. Many urge me to “click here” to try this or that artist, which is a great discovery tool, but I can’t wait to minimize the page and not watch at all.

• The timing of the audio ads is misplaced. I was in the middle of an album, when an audio ad cut in between tracks. Are you kidding me? A work of art shredded by an ad for soda pop!

• Is Spotify truly for the masses? Many listeners are lazy. Despite the wonderful Spotify interface many will opt out of building playlists and instead choose another listening option, like Pandora or Slacker. And most just want to listen to music. The connections to social networking options simply aren’t as valuable as designers of these services believe.

• The streaming quality is suspect — at least on my home and office networks. It wasn’t uncommon for songs to skip like a vinyl record left out in the sun.

• Plus there’s a company in Cupertino with a fruit for a logo that won’t sit idly by as others make a nest on their devices.

The good news is there are a variety of excellent music services that cater especially to the hard-core fan: MOG, Rdio, Rhapsody, and now Spotify. Whether they will become services for the masses that generate profits is another question altogether.

Thank you for saying what we all have been thinking. When the “art” sucks (your words apparently), we stay away. Though you were referring to 3D Movies, your comments echoed something NPD’s entertainment research has shown for more than a decade: Despite all the distractions in the entertainment business, ultimately it is content that will determine success or failure.

Digital Media Wire reported that you were remarkably candid on that point in comments made during an appearance at Fortune’s Brainstorm Tech Conference in Aspen, Colorado. “Let me have a show of hands of people that would say the last seven or eight months of movies is the worst lineup of movies you’ve experienced in the last five years of your life,” Katzenberg asked the audience. When many hands were raised, he nodded, “They suck. It’s unbelievable how bad movies have been … right now, today, it’s a particularly dreary moment.”

When movie attendance began to dip, conventional wisdom blamed the economy, Netflix, home theater, Apple, and the Tea Party; however, NPD’s research showed that consumers simply did not see enough good movies that were worth paying for. This isn’t new learning; in fact we’ve known it for years.

When DVD and Blu-ray sales slipped sharply in the first quarter of 2011 the same pundits blamed the economy, Netflix, Apple and . . . well, you get the idea. They proclaimed the end of physical media and the supremacy of the digital age. That age will come eventually, but today many more people buy DVDs than watch Netflix streaming.

Last year consumers went for “Twilight,” “Blind Side,” “Up,” “The Hangover,” and other discs. But titles released in early 2011 – like “Dinner for Schmucks,” “Switch,” “Tourist” and even the vaunted “Black Swan” — didn’t have the box office or retail draw of the 2010 line-up. In fact, the Digital Entertainment Group (DEG) reported a 16 percent drop in box-office receipts for titles that entered the home entertainment window in the first half of 2011. Now, I’m not a movie critic, but NPD’s research again reported that consumers did not see enough good DVDs and Blu-rays they felt were worth owning and collecting. The truth is that won’t just be a physical media problem. Consumers won’t pay for weak titles through video on-demand. They’ll exhaust saved programs on their DVR or watch “Mad Men” on Netflix. (Thanks Netflix).

And after years of claiming that the CD was dead and that teens wouldn’t pay for music, CD sales to the teen demographic rose 17 percent last year. Despite file sharing, YouTube, Apple (again), and all the other bogeymen that have plagued music the past decade, teens actually walked into stores and bought CDs from Taylor Swift, Justin Bieber, Eminem, Adele, and Rihanna. When we asked why, they said they wanted the “whole package”; the album, the bonus features, the lyrics, — even the box it comes in. Yes, they also went online and bought a ton of single downloads from Katy Perry.

So, Mr. Katzenberg, thank you for echoing our sentiments. Content is king. And despite all of the other distractions, if you want consumers to come to theatres, buy Blu-rays or CDs, purchase digital albums or movies, or get more games, please improve that content.

And Jeff, if you need some of the research for your next speech — call me. We’ll do lunch.

Regards,

Russ

Which got me thinking about the teens.

No, not those teens, rather the time between now and 2020. We’ve seen forecasts about 3D TV adoption, content in the clouds, touch, and super high speed broadband. Here are a few musings readers can save for a few years, until the next decade dawns. They’re mostly about music, but a few insights are also relevant for books, games, or movies.

1) Paid is the new free. The trend toward free or “freemium” will come to an unhappy end. Someone a lot smarter than I am will figure out the right platform for delivering content, especially music, to a mass market — and find a way to monetize its distribution. The experiments with unpaid (or “b”ad-supported) distribution will come to an end only when content creators and owners, and the people they support (managers, producers, even caterers) realize there isn’t a future to be found there. It’s unclear whether the solution will involve blanket licenses, subscription models or hardware and service bundles, but pay we will. Except of course for the few incorrigibles who will continue to trade illegally — but that’s another story.

2) Digital rights management (DRM) lives! “Music doesn’t want to be free”? (Whoever wrote that makes a living writing about music and not creating or selling it). Protecting content from massive sharing somehow became passé in recent years. Consumers have a reasonable expectation of fair use for their content, and creators have a reasonable expectation that copyright will be respected. Movies and games are protected;, so why not music? In the coming years new DRM schemes will be created that will allow us the flexibility to use content where we want to, whenever we want to, and on all the devices we own. It will be the content-owner’s option to unlock the DRM and permit massive distribution.

3) The Kings — After the passing of Michael Jackson pundits claimed there will never be another “King.” They are wrong. From Jolson to Sinatra, Elvis to The Beatles, there’s always a king. The savior is out there somewhere. We’re way overdue for something new; a captivating artist and genre that will seize our imaginations with both talent and celebrity.

And if the first two predictions come true, there will be enough of an industry to nurture, promote and compensate “The King”.

When I saw the hole in the end cap, my reaction was “great, people are buying music,” but that initial thought quickly gave way to pain. Here was some of the most valuable real estate in the store, an end cap, with a gaping empty space. One important point of an end cap is to stimulate impulse purchasing, so an out-of-stock entirely defeats the purpose.

How, with today’s sophisticated inventory systems, could a store ever be out of stock on a chart-topping title? Why does it matter? We know that 25 percent of CD buyers who can’t find what they want don’t buy anything- anywhere. And it’s not just music. Nearly two out of three Blu-ray Discs are bought as “destination” purchases; out-of-stocks will send your shoppers elsewhere, and I’d suspect the same is true for gamers looking for the hottest releases. At a time when retailers are desperate to attract and retain shoppers, adequate stock of the top titles seems like a reasonably easy way to help the cause.

“In department stores these days, Eileen Fisher clothes ‘get marked down before they even have a chance to sell,’ she told me recently. Perhaps it no longer makes sense to give Saks, Bloomingdales and other department stores so much control over the brand, she posited. She has asked her staff to consider a new model: renting department-store space in order to control prices and inventory.”

What if music sellers, video distributors, and game publishers could rent their shelf space from retailers? The question may, of course, be moot. After all, it’s hard to imagine all of the sellers cooperating on leased space. It’s equally difficult to imagine separate kiosks for EMI, Sony, Universal, MGM, and Nintendo, not too mention the various independent labels. But imagine if “Mother Entertainment” could really own that space, and manage the assortment, the pricing, the presentation. Could we slow or even reverse the decline of CDs and DVDs, hasten the adoption of Blu-ray, and optimize games sales? Perhaps there’s an expanded role for kiosks, ala the very successful Redbox model.

The WSJ article also discusses “scalpel pricing,” in which a company slashes prices on slow sellers, while maintaining a premium price for the top sellers. Brilliant! I don’t understand the deep discounting of new releases, which supposedly drives impulse purchasing. It seems to me that Green Day fans who want the group’s latest CD would gladly pay a few extra bucks to get it during its initial week of release. I’m an unapologetic fan of premium pricing for new releases, and of compelling discounts on catalog titles or promotional bundles geared toward increasing register ring.

Over time, the aging process for packaged entertainment will be accelerated by cutbacks from many retailers; in the form of less space, less appealing floor positions, and less funding and effort exerted on product presentation.

And that’s not a great place to be. After all despite the digital revolution, brick-and-mortar retail stores are still a primary place for product discovery, so the de-emphasis on space and merchandising simply accelerates the product’s death spiral, as less selection and less promotion translates to fewer reasons to shop the section.

Ultimately a lot of the solutions distributors are using to survive the transition from physical to digital rely on a significant amount of retailer cooperation. You can’t blame retailers for maximizing the value of every square foot of selling space. Perhaps the entertainment industry needs to take back control of their physical distribution while forging new models for the digital age.

According to NPD’s consumer music tracking studies, Apple users are, for the most, part oblivious to the DRM, because most can burn media files enough times for use in their home or car CD player, plus the tracks work seamlessly on Apple’s iPods, which remain the top-selling media player brand in the U.S. In essence, for Apple users DRM means “Doesn’t Really Matter.” Better sound quality is a bonus, though — and while it’s difficult to distinguish on a portable player, it’s certainly noticeable on home stereos and other devices.

Pricing, though, is always a controversial area for consumers. Apple was ingenious in using flat 99-cent pricing to introduce iTunes in 2003, because digital music was relatively new and there was no chance of consumer confusion. The $.99 per track was a fair price when compared to equivalent per-song costs on CDs and at $9.99 iTunes albums cost less than the average CD. Although most song tracks will still be priced at 99 cents, iTunes’ new variable pricing model also offers songs for $1.29 and 69 cents. The latest tracks from popular artists will tend to cost more, and older catalog titles will often cost less.

There are lingering worries that switching to variable pricing might cause consumers to migrate from iTunes, in favor of AmazonMP3, or perhaps they will stop purchasing paid digital music altogether. I predict that Apple will, at least in the near term, hold on to its customer base and possibly even increase revenue from song downloads.

Thanks to the primacy of the iPod, iTunes continues to boast an overwhelming share of digital music sales. Customers are pleased with the Apple ecosystem — and $1.29 is not an outrageous price to pay for a must-have song track, especially when you can offset that premium cost by downloading other songs by the same artist or within the same genre for less.

Apple has still more aces up their sleeves. Most music that consumers load on their iPods doesn’t come from iTunes; it comes from their own music collections — from borrowed or purchased CDs, and for some from peer-to-peer (P2P) file sharing sites. What’s important is that the overwhelming software choice for managing all of that content is iTunes. Regardless of whether a consumer has ever actually purchased a music download, most digital music consumers still likely manage their music libraries using iTunes. And very few will switch to something else, because iTunes works very well as a music management tool.

The genius behind Apple isn’t just its iTunes Music Store, or its selection of TV shows, or the ubiquitous iPod — It’s the iTunes Gift Card. Over 40 percent of recent digital music purchases have been with gift cards, and the vast majority of gift-card purchases link to iTunes. It’s not uncommon to see nearly two-thirds of teen iTunes purchases source to a gift card. And, let’s face it, many consumers look at the face value of the gift card, rather than the cost of each song they’re purchasing. These cards are more common than CDs these days, and they are a powerful customer loyalty tool.

My bet is that Apple will hold onto its customers and any early grumbling about prices will be short-lived. Too many aspects of the iTunes/iPod digital music model are bullet proof, at least for the time being. The trend we’ll be watching is whether the new tracks at a premium price coupled with ‘bargain” catalog will have the desired effect of improving the overall spend of digital music buyers.