Start-Up Seeks Niche Amid Film Goliaths

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This is 2001, and there are no lavish launch parties, foosball tables squatting in pricey San Francisco office space, phonebook-sized employee rosters or high-flying salaries.

In the new Internet reality, here's all you need to run a streaming video-on-demand movie site: A couple of 28-year-old guys, a bank of servers a place to call home. A house in Hollywood, to be specific.

That's the strategy behind MovieFlix.com, an outfit whose two-man employee roster has not changed since it was founded in 1998. The site offers about 2,200 full-length streaming media movies in 30 categories — everything from the vintage Roy Rogers-Dale Evans Western Apache Rose
to the modern raunch of Erotic Survivor.

It also offers an example of post-Internet bust minimalism: CEO and cofounder Opher Mizrahi and partner Robert Moskovits run the entire operation, encoding all of the video themselves at their headquarters in a Hollywood house before sending it off to servers hosted at a Qwest Communications International Inc. data center.

These post-Internet-crash Davids won't have it easy in an online video distribution field filling up with Goliaths. But MovieFlix already counts about 400,000 registered users, racking up between 1,000 and 1,500 new members daily for its free service.

In August, the duo unveiled MovieFlix Plus, a monthly subscription service that offers unlimited viewing for $4.95 per month and averages 50 to 60 new members per day. In total, the site serves close to 1 million streams per month.

"The beauty of the Internet — which is what a lot of these other dot-coms failed to utilize — is that you should have these servers and computers do most of your work," Mizrahi said. "And you don't need dozens or hundreds of employees to basically run a Web site. You set up your servers correctly from day one, you do a lot of things in-house and you keep things at a normal pace, and you can survive."

To date, MovieFlix has relied on content-syndication deals with other portal sites — including America Online, Yahoo! Inc. and NBCi — for its revenue. But Mizrahi said that will change.

"Syndication basically started toward the end of the heyday of the dot-com mania. I mean, we were getting calls left and right from every Web site out there — portal, ISP, you name it," he said. "With the collapse of the dot-com economy in recent times, we've been getting a lot less calls for syndication service.

"We still have a lot of our core customers who have been with us for over a year now, and we continue to feed off that. However, that market is essentially drying up."

That's why MovieFlix Plus was created. Mizrahi expects to have about 6,000 paying customers by the end of the year. Within the next six months, he predicted, the subscription service will generate the bulk of the company's revenue.

He hopes the company will be in the black some time early 2002 — without any venture-capital support.

"We've had an opportunity to take venture financing; we've actually spoken to a couple," Mizrahi noted. "And it is kind of fortunate that we didn't go that route, because having taken venture money, we would not be around today.

"We'd be just like every other company that received our million first round, $5 to $10 million second round, hired 500 employees, burned through all of that money in a year or less and with the economic downturn and the whole dot-com boom basically spiraling out of control downward, we just basically wouldn't have had enough money to survive."

Not that survival is guaranteed without big-money funding. Such a small operation faces big challenges and even bigger potential competitors.

STUDIO VENTURES BLOOM

With recent news of the Goliath Web distribution pacts— including a five-way deal between Sony Pictures, Warner Bros. Pictures, Metro-Goldwyn-Mayer Inc., Paramount Pictures and Universal Studios, as well as a joint venture between News Corp. and The Walt Disney Co. — one might think MovieFlix's streaming-only operation would find itself out in the cold.

But Mizrahi argues otherwise — he said the alliances don't prevent the studios from making other Internet-distribution deals. He believes MovieFlix service could become a good test for a viable streaming-video movie-distribution strategy.

"We like to call it a proof of concept," Mizrahi said. "Basically, we would like to show to the studios, to the investment community — to anyone out there, really — that there is actually a market out there for subscription; that there are a number of people out there that are willing to pay a monthly fee to watch full-length feature films delivered through an IP network."

But he acknowledges that MovieFlix hasn't negotiated directly with the major studios, so "it's still very early to say that anything can be forged between us."

MovieFlix will have to get in line with others who are seeking that content. There will likely be no shortage of video content aggregators seeking to beef up their libraries, and the studios are firmly in control of the floodgates, said Jupiter Research Inc. digital TV analyst Lydia Loizides.

Though studios are interested in cutting out the middleman and creating their own distribution services for newer movie releases, they may be willing to make deals to release older titles that have run their distribution course, Loizides said.

But she cautioned about paring down the available movie pool to less-than-fresh titles, and even those deals are possible only "if the studios decide they want to play ball, and if they can get their hands on anything that isn't already either exclusively tied or owned. Most of the libraries are owned."

Even if MovieFlix does pull down additional distribution deals, there's still the question of whether users will really watch the streaming video. Full-length movies may be MovieFlix's focus, but the users still aren't tuning in for a 120-minute film, according to the company's statistics. The average viewing time for a broadband user is 40 to 60 minutes, while narrowband users spend only five to 10 minutes on a flick.

Mizrahi said that doesn't mean viewers aren't watching any of the content from start to finish. But it does mean some are punching out after a few minutes, while others stop and start viewing.

Aside from building up its film base, MovieFlix also is expanding beyond its exclusive RealNetworks Inc.'s RealPlayer streaming-media format to include Microsoft Corp.'s Windows Media Player format.

At the time it started in 1998, RealNetworks offered what Mizrahi considered the best video player and distribution, so the company decided to go exclusively with the Real format. But the company is now talking to Microsoft and plans to add support for Windows Media within the next six months.

"It is a big undertaking and expense to encode in two separate formats," he acknowledged.

Overall, Mizrahi wants to grow MovieFlix at what he calls "an organic rate." Key to that will be an increase in the number of broadband users beyond what is now a small market.

"We are not the flashy dot-com of yesteryear that would throw these big parties, hire hundreds of employees to sit around and do nothing and basically drain the company's assets and resources," Mizrahi said. "We'd like to keep things relatively small and grow at a natural pace that fits the broadband economy.

"As soon as there is a critical mass of broadband users out there, we can afford to grow at a faster pace. But there is no reason to offer every format available on our Web site. There is no reason to hire hundreds of employees when the actual market out there is relatively small."

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