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The Self-Destructing DVD
Disney and Flexplay are teaming up to produce DVDs that become unreadable two days after being opened. The "self-destructing" technology is simple yet the implications are complicated. It's not just the movie studios and the rental specialists that might profit or have to shift gears to stay profitable if the new format is a success. Rick Munarriz explains why he believes that it's a technology that won't just fade away.
By Rick Aristotle Munarriz (TMF Edible)
May 19, 2003
48 Hours on DVD isn't just another potential title in your DVD viewing library. If Disney (NYSE: DIS) and Flexplay Technologies have their way, it may also be a new way of life.
Come August, Disney will begin testing the new EZ-D format based on Flexplay's "self-destructing" technology. It's ingenious, really. Once the EZ-D is removed from the packaging, its exposure to oxygen interacts with the coating on the disc to make it inoperable roughly two days later.
The DVD with a limited shelf-life isn't new. Circuit City (NYSE: CC) tried to roll out its timed DivX disc format and failed. However, DivX never had a prayer as it required equipped players tapped into a phone line to monitor its usage. The Flexplay system, which uses materials from General Electric's (NYSE: GE) GE Plastics division, can play on any system. Nature is the cop as the EZ-Ds that come out red and ready to play begin to fade to an unreadable black as the hours drag.
So, is this yet another case study for the elephant's graveyard or will it take off like Dumbo?
I'm inclined to bank on the latter.
Who wins?
DVDs are cheap. You are finding them in everything from cereal boxes to bonus freebies tacked on to pre-recorded music CDs to help ward off MP3 piracy by motivating the initial purchase. They are also light and compact, igniting the Netflix (Nasdaq: NFLX) model, which has found a captive audience of more than a million paying subscribers while chains like Blockbuster (NYSE: BBI) and Hollywood Entertainment (Nasdaq: HLYW) have profited from the shift away from the bulky VHS tapes and towards the sleek and content-rich DVD format.
Does this mean that the success of EZ-Ds will spell an end to the DVD rental specialists? Not really. Netflix is on an entirely different level of service, banking on its breadth of titles, free home-delivered convenience, and unlimited holding periods to win over its established base of users. Blockbuster and Hollywood will face a more direct threat, until one realizes that they are also the ideal clearinghouses to stock EZ-Ds in bulk if the format takes off. That would spare patrons the worst half of the travel time: the rushed trip back to the store to return the rentals.
For Disney, it will give its struggling Disney Stores a fresh product to drive even more incremental sales. More importantly, for the company's recent wave of substandard animated sequels and direct-to-video rush jobs, paying $4-$5 for a two-day taste may be more lucrative than titles that wouldn't sell much at all otherwise. And, yes, what's to stop Disney from setting up a policy where you can return a blackened EZ-D and get its original purchase price back as a discount on the purchase of the actual working DVD of the same title?
Did someone say McDonald's?
Yet the real mother lode here for Disney, Flexplay, and even GE lies in one of Disney's most prominent partners. We're talking about a struggling company with more than 31,000 distribution outlets under its belt. We're talking about a fast-food chain that is geared for drive-thru convenience in most of those locations and would relish the opportunity to tack on a quick low-ticket purchase to any passing transaction.
Yes, McDonald's (NYSE: MCD). One of my most far-fetched suggestions in last year's 10 Tips To Save McDonald's involved the DVD rental of the latest Disney home market releases. The EZ-D strips away many of the cumbersome obstacles of collecting information and collateral to make sure a rental is returned. The companies already have a cross-promotional pact in place. This would give McDonald's a hipper product than its own animated McDonald's videos to lure new customers. To the spendthrift, this will revolutionize the concept of a dinner and a movie as a cheap date.
Will environmentalists cringe at the notion of a stack of disposable discs piling high in a landfill? Perhaps, but while the EZ-Ds are not reusable they are recyclable. Besides, is that image any worse to an eco-minded thinker than a yuppie in his gassed-up SUV making a second trip to the video store to return the movie?
If so, will someone please make sure that Michael Bolton, Britney Spears, and the Backstreet Boys hold off on any new CD releases until we figure out the best way to get rid of their previous ones?
The first batch of EZ-D titles won't be Disney's animated classics. That's actually a good call since those releases tend to lend themselves to perpetual viewing by kids who have no problem watching The Lion King or Toy Story dozens of times. It will be Disney's live action flicks like The Recruit, Frida, Signs, and The Hot Chick that get served up as trial balloons over the summer.
Fade to black
As an investor whose gut instinct is telling him that the EZ-D will be huge, it's a shame to find out that Flexplay is not publicly traded. Other private companies such as Spectro Systems have come up with different coating technologies. The SpectroDisc process starts when the DVD is first played, and it eventually wears away to an unplayable state in a hue of blue.
Is the DVD industry about to see black and blue? I think so. It seems unfathomable now, but just wait until Domino's or Papa John's (Nasdaq: PZZA) starts delivering limited-play DVDs with your next pizza or that downtown vending machine starts spitting out EZ-Ds. Music CDs? Software? That's a bit more unlikely for various reasons, though disc-based video games might make some sense as trial demos or rental substitutes.
There's a bright, brave new world out there for the movie industry. Ironically, yet oh-so-lucratively, it's about to fade to black.
