Rentals Dominating RoxioNow-based Video Download Services, Sonic Says

Rentals accounted for 90 percent of Q3 transactions on RoxioNow-based video download services, but purchases will grab an increasing share as the number of devices featuring the technology grows, CEO David Habiger of Sonic Solutions, which offers the services, said on a conference call.

LG Electronics, Toshiba and others have added Best Buy’s CinemaNow, powered by Sonic, to their Internet-capable TVs and Blu-ray players. And Best Buy is expected to feature CinemaNow in its private label Integra products. Best Buy bought the rights to the CinemaNow brand from Sonic this year. The rentals-to-sales ratio has dropped since Q3 to 80-20 and will continue to narrow as Best Buy, Blockbuster On Demand, TiVo and others that have deployed the service increasingly promote it, Habiger said. Best Buy initially offered rebates to some customers and has been installing kiosks in some stores.

The business will shift to purchases from rentals as more “CE devices that allow for transactions” enter the market,” Habiger said. The type of transaction also will vary by customer, with some offering monthly subscriptions while others feature pay-per-download, Sonic officials said.

A “whole set of store fronts” featuring the RoxioNow platform will debut in the “coming months,” Habiger said. Among those that signed pacts with Sonic is Sears Holdings, which is expected to launch a store in Q1. Entone recently introduced a service in the U.S., and Media Markt added one in Germany. Shipments of RoxioNow-equipped products hit 6.5 million units in Q3 and remain on target to increase to 20 million units by year-end and 30 million in June 2011 (CED Aug 6 p2).

The attach rate for consumers activating RoxioNow services has been running about 6.5 percent. RoxioNow-based services have benefited from being positioned alongside Netflix on some Internet-capable devices, with Netflix proving to be a “driver of attach rates,” Habiger said. Sonic’s RoxioNow-related revenue rose to $2.8 million in Q3. Sonic’s Q3 premium content revenue, which includes sales professional services and tools, rose to $5.3 million from $3.7 million.

Playing into RoxioNow will be development work Sonic is doing with Neustar on the UltraViolet Digital Rights Locker. Neustar is combining its digital rights management with Sonic’s cloud-based technology. Their system, backed by the Digital Entertainment Content Ecosystem, is designed to allow a user to keep content and device information online and access it seamlessly across products supporting the UltraViolet standard, which is expected to be available in 2011. UltraViolet has the support of a broad range of companies from Comcast and Fox to Microsoft and Sony. Missing from the group are Disney and Apple.

"The more that you have sites out there, the more the locker becomes important because consumers aren’t going to tie themselves to one of 50 ways to get content,” Habiger told us. “It’s very much aligned with the notion that there isn’t going to be a single winner for retail presence."

Meanwhile, newly acquired DivX posted Q3 net income of $1.9 million on sales of $20.8 million, although none of it made it to Sonic’s Q3 balance sheet, since the purchase closed Oct. 7. Sonic, which has made DivX a separate division, has kept many of the company’s customers, including Samsung and Google, which accounted for 14 percent and 10 percent of DivX’s revenue in the first half of 2010. Sonic is encoding DivX films and releasing them on the RoxioNow platform, Habiger said. DivX also launched 140-channel DivX TV via firmware upgrades to two LG Electronics’ Blu-ray players and expects to add CE vendors by CES, Habiger said. DivX HD also is shipping with Samsung’s Galaxy S smartphone, along with Hisense, Konka and Skyworth LCD TVs.

Sonic incurred $948,000 in Q3 expenses related to the $374 million DivX purchase, including $600,000 in legal fees. Since announcing the deal earlier this year, Sonic has recorded $2.6 million costs tied to the acquisition.

Sonic’s Q3 net loss grew to $2.6 million from $206,000 a year earlier, mainly from DivX-related costs. Revenue slid to $25.3 million from $26 million, as sales of its Roxio consumer products dropped to $19.8 million from $23.3 million. Roxio consumer products operating income declined to $3 million from $7.8 million a year earlier. Premium content’s operating loss narrowed to $874,000 from $2.96 million. The downturn in consumer product sales, which include Roxio Creator software and MyDVD, was tied to a $2.1 million decline in sales through Sonic’s online store and retailers, Sonic said. Bundling revenue tied to PCs also decreased and Sonic posted higher end of life reserves for Creator. Sales to distributor Navarre accounted for 23 percent of Q3 revenue, flat with a year earlier. Those to Digital River declined to 18 percent from 23 percent. Revenue from Dell and Hewlett-Packard represented 9 percent and 7 percent of sales, down from 16 percent and 10 percent.