Sonic Solutions is ready for digital movies to heat up
SANTA CLARA, Calif. -- Sonic Solutions CEO Dave Habiger believes his big gamble is about to catch fire.
Sonic snic makes popular CD- and DVD-burning software Roxio Creator, which dominates its market. But Habiger believes that business is a tiny flicker of a flame, compared with what he sees as the company's big future: providing software for electronic delivery of movies to digital devices and selling and renting the movies online via its Roxio CinemaNow service.
"We have spent the last four years with the bulk of our resources going into this new format," he says. "And it's finally coming to fruition."
Sonic also makes professional tools for Hollywood to produce DVD and Blu-ray discs. As the company prepared for a transition from DVD to Blu-ray, it ended up concluding that the business as we know it of renting and selling DVDs — think Netflix, Blockbuster, the corner video store — is poised for an exit. Habiger believes the time has finally come for movies to be delivered via the Internet to a slew of devices including TVs, cellphones and ultraportable computers known as netbooks.
"The notion that right now, there's some plastic pellets ... that are being shipped to a plant in Taiwan, and they're going to be melted and pressed into a disc, and a movie will be put on that, and that disc will be shipped back to the U.S. ... that model doesn't make sense anymore," he says.
For decades, Hollywood has salivated at the notion of saving on manufacturing and distribution costs by going directly to the consumer with video on demand (VOD), but it's been a slow process. Originally, the thought was that cable and satellite systems would build robust systems that would rival any video store.
While many operators have stronger video-on-demand selections today, most don't come near the offerings of online stores such as Netflix, Amazon or Apple, which are pushing their on-demand ambitions with sales of set-top boxes that consumers plug into a TV.
'Connected' Blu-ray players
Sonic is playing both sides of the field. It has partnered with Taiwan electronics giant LG on a new type of "connected" Blu-ray player. You can watch high-definition Blu-ray movies on disc, but if you connect to the Internet, you can also view Internet-delivered movies from Roxio CinemaNow (at $3.99 a pop) or Netflix. You can access YouTube videos as well.
LG introduced two models in May, rival Samsung has two, and many more are expected by the end of the year, along with TVs that can receive preloaded Internet channels, such as CinemaNow — or Blockbuster's online channel, which is run by CinemaNow.
"Come the holidays, consumers will have a hard time finding a consumer electronics (device) that doesn't have a connection," says Habiger.
Sonic also is working diligently to sell Hollywood on its CineVision software, which prepares movies for online sales. Many studios now team with Sonic to offer a "digital copy" of a movie on DVD and Blu-ray releases. (When you buy one of the discs, you get a digital edition that's actually stored at the CinemaNow site.)
The company has invested $250 million over the past three years — mostly profits from Roxio software sales — preparing for the shift. It bought CinemaNow in November for $3 million.
Sonic lost $4.3 million on revenue of $120 million in 2008. The most recent quarter broke even, Habiger says. It lost just $80,000 on revenue of $25 million.
Big growth to come
Analyst Carl Howe of the Yankee Group says the transition to the connected living room is "very early now," but he sees tremendous growth. There will be 3 million connected Blu-ray players from LG and Samsung in U.S. homes by the end of the year, he says, growing to 8 million next year.
Web-connected TVs are a bigger market. There will be 6 million in place by the end of the year, growing to 11.7 million in 2010, and 50 million by 2013, Yankee projects.
But to make the dreams of Sonic, Netflix, Amazon and the others a reality, two big obstacles must be overcome: network speed and technology issues. Consumers need fast home networks to stream movies and even faster connections to see them in high-def. And setup must be simple, which it isn't today.
In the new connected living room, Habiger says, TVs with built-in Wi-Fi present the biggest potential market.
All told, the new delivery methods will be a much bigger business than Roxio's flagship Creator software, which has shipped about 350 million copies to date, he says, and represents about 60% of Sonic's revenue.
A new version of Creator released last week offers tools to copy DVDs and video files faster and create DVD compilations of multiple videos. Habiger says Roxio will continue to grow: "More and more video is being produced all the time and needs to be archived."
But if he can get 1% of the yearly $50 billion DVD sales and rental business in online movie sales, "We go from a $100 million- to a billion-dollar company."