Chapter 9

THE DVD AUTHORING & PRODUCTION BUSINESS

This chapter will offer insight into how companies work together to bring DVD titles to market, what services and products should be offered by DVD production and authoring companies, how these products should be priced and sold, and what it takes to set up and run a profitable DVD production and authoring company. Publishing a DVD title typically involves several different companies, including a content owner or studio, one or more DVD authoring facilities, a DVD replication facility, a DVD title distributor, and a number of DVD retailers. To stay in business, each of these companies needs to make a profit on each DVD title in which they are involved. Figure 9.1 shows the various relationships involved in bringing a DVD title to market.

Who Are the Players?

As you can see from Figure 9.1, there are several different types of companies involved in bringing a DVD title to market. Each company is responsible for a different aspect of the DVD authoring, production, replication, distribution, and sales process.

Authoring Tool Vendors

Authoring tool vendors develop the hardware and software tools required to produce a DVD title. DVD authoring tools on the market today fall into four general categories.

Figure 9.1  The DVD Food Chain

Professional Authoring Tools Used to develop Hollywood entertainment titles and highly interactive or complex titles.

Corporate Authoring Tools Used to develop entertainment or corporate titles with a moderate amount of interactivity and complexity.

Consumer Authoring Tools Used to develop low-end corporate titles with little or not interactivity or complexity, and to allow consumers to transfer their home movies onto DVD.

Ancillary Tools Used to provide optional and add-on features to a DVD title, including Dolby Digital or DTS audio, web connectivity, subtitles, etc.

Content Owners

A common misperception in the DVD industry is that the only content owners publishing on DVD are major motion picture studios. While DVD titles from major motion picture studios account for more than 90 percent of the total number of DVD discs sold, the total number of studio titles released is only about 3,500 titles. With over 8,000 titles released to date, you can see that studios only account for about 45 percent of the total titles released. Thus, many other content owners are involved in DVD than just studios. Content owners publishing products on DVD include:

•   major motion picture studios releasing films and television programs on DVD;

•   corporations releasing sales, marketing, presentation, education, and training programs on DVD;

•   federal, state, and local governments releasing public information, training, and education programs on DVD;

•   universities and educators releasing K–12, secondary, and consumer education and training programs on DVD; and

•   consumers publishing home movies on DVD.

DVD Authoring Service Bureaus

Historically, the acquisition cost of the hardware and software required to create a DVD title has been quite high, so authoring service bureaus have created most of the DVD titles released to date. These companies have the required equipment and skilled staff to create a finished DVD program from a disparate set of video, audio, text, and graphics media elements. Generally, a DVD authoring service bureau will generate the DLT tape that goes to the replication facility. There are a number of different types of DVD authoring service bureaus:

•   studio affiliates, including Universal DVCC, Warner CVC, and Sony, who specialize in transferring DVD titles from their parent company motion picture studio’s collections of films;

•   distribution companies who license programs from content owners and then release them on DVD using in-house authoring equipment and personnel;

•   DVD replication facilities that offer both authoring and mastering services to their clients;

•   Video post production facilities that have added DVD authoring services to their traditional video and audio post, telecine, and color correction services; and

•   DVD authoring service bureaus that offer services directly related to creating a DVD title. Many DVD authoring service bureaus have formed strategic alliances with studios, distributors, replication facilities, and post production houses.

Specialists

The DVD authoring business has now matured to the point at which it can sustain companies that provide niche or specialized services required on some, but not all, DVD titles. These specialized services include:

•   audio mixing for stereo and surround sound, as well as compression in the Dolby Digital, DTS, and SDDS formats;

•   menu graphic design for both static and dynamic (motion) menus;

•   package graphic design for the disc label, inserts, and outside cover artwork;

•   translation services to generate content for menus, audio tracks, and subpicture streams for multi-language DVD titles;

•   subtitle services to generate the individual graphic files required for each subtitle, as well as a script file with in and out time codes that can be imported into the authoring system;

•   video processing and compression services, which can include noise reduction, and high quality variable bit rate MPEG-2 compression; and

•   WebDVD and DVD-ROM feature development for inclusion on DVD-Video titles.

Replication Facilities

In the early days of DVD there were only a few replication facilities that could actually produce a DVD disc that would work correctly on consumer DVD-Video players. Today there are at least 20 replication facilities offering DVD products and services. Typical services offered by a DVD replication facility include:

•   glass mastering, which is the process of creating the glass master and molds from a DLT tape;

•   Check Disc Package, which is delivering a limited quantity of production discs to allow the content owner or DVD authoring company to verify that the disc is working properly before committing to a large production run;

•   mass duplication services, including short runs of 1,000 discs or less, moderate runs of between 1,000 and 50,000 discs, and large runs that may require millions of discs to be made in just a few weeks of production;

•   packaging services, including assembly of the finished disc, printed materials, and the disc case, application of security measures and shrink-wrap, and boxing discs in standard quantities ready for shipment; and

•   warehousing and direct to retail shipping services.

Distributors

Distributors purchase large quantities of DVD product from content owners and then sell smaller quantities to a variety of secondary distributors, retailers, and in some cases directly to the consumer. There are several different types of distributors in the DVD business including the following.

•   Master distributors have the exclusive right to one or more specific DVD titles. Many studios have their own in-house distribution companies. Companies like Image Entertainment, DVD International, and others act as master distributors for titles not carried directly by a studio distribution company.

•   Aggregators purchase DVD titles from one or more distributors and sell to large retailers, such as Best Buy, Kmart, and others. An aggregator will combine all the titles ordered by a retail outlet into a single shipment, thus saving the parent company and the retail store the time and effort required to order titles from each studio and arrange to have them shipped to each retail outlet.

Retailers

In the United States there are three basic types of DVD retailers.

•   Superstores, such as Best Buy, Music Land, Kmart, and others, account for over 70 percent of the total sales of DVD titles. In general, superstores sell DVD titles at a ten to 20 percent discount off Suggested Retail Price (SRP).

•   Specialty stores, such as Tower Records, Virgin Records, and others, sell DVD titles at SRP or with a slight discount.

•   Internet retailers offer titles from all genres to consumers, but they may stock only the top 1,000 selling titles. In general, Internet retailers offer DVD titles at a 20 to 40 percent discount off SRP.

The old adage that “Content is King” is just as true in the DVD business as it is in the movie business. With over 8,000 DVD titles available to consumers, the market for DVD titles is quite crowded. In order for a DVD title to be a commercial success, it must include content that is of interest to at least a segment of consumers. In today’s market the top 100 DVD titles from the major motion pictures studios generate almost 90 percent of the total sales of DVD titles worldwide. With blockbuster hits like The Matrix selling upwards of 10,000,000 copies on DVD, it is easy for an unknown title to get lost in the shuffle. While there is a thriving market for back catalog movies, special interest, and niche titles, the average sales volume for these titles is less than 50,000 copies per year. More than half the DVD titles on the market today sell less than 10,000 copies per year, so it is very important to bring titles to market in an efficient and cost effective manner.

Since “Content is King” in the DVD world, the content owner is generally involved in each step of the DVD authoring and production process. The content owner will initiate the process of bringing a DVD title to market by deciding which of their video properties will be released on DVD. Once a decision has been made to bring out a new DVD title, the content owner must also decide when the title will be available, what the SRP will be, what companies will be involved in authoring, producing, replicating and distributing the title, and how much money will be allocated to each step of the process.

The typical path for a new DVD title starts with the content owner, winds its way through a DVD authoring service bureau, with an optional stop-over at a DVD specialist for custom audio processing, motion menu design, or other features that are not offered by the DVD authoring facility. Once the title has been completed by the DVD authoring facility, and approved by the content owner, a DLT tape is sent to a replication facility. When DVD check discs are approved by the content owner, and in many cases the authoring facility as well, the replication facility will start the disc production process. For many DVD titles this means making 5,000 to 10,000 discs, while for a few titles it can mean making 5,000,000 to 10,000,000 discs. Obviously the price and level of service that a content owner gets from a replication facility is directly related to the number of discs produced for a specific title. You can bet when Lucas Films sells 25,000,000 copies of Star Wars on DVD that they will get better pricing and service from their replication facility than I have received on StarGaze, which has sold approximately 25,000 copies to date. Don’t get me wrong — Panasonic Disc Services Corporation (PDSC), who handles the replication for StarGaze, has done a great job. However, PDSC, and all other replicators, naturally provide their best prices and level of service to their largest clients.

Once the replication facility has completed the manufacturing process, finished goods are shipped to distribution companies. Each major motion picture studio has either an in-house distribution company or works closely with another studio to get their products into the market. In some cases content owners will sell direct to retailers, or even direct to consumers, but in most cases the product will go from the replication facility to a distributor, and then on to retailers who sell to consumers. Approximately 70 percent of the DVD titles sold in the United States go through a few large retail chains. In general each of these major retailers has a few distributors with whom they prefer to work. These preferred distributors provide ancillary services to their customers, such as warehousing, direct shipment of aggregated orders to individual retail stores, and coordination of product returns at the end of their shelf life.

Follow the Money

Before you can make money in the DVD authoring and production business, you need to understand how money flows from the sale of a DVD title. They key items that you need to understand are the suggested retail price (SRP), wholesale price, cost of goods, production costs, and any royalty costs that are paid on a per disc basis.

SRP is quite simply the list price for the title. Some titles are sold to consumers at SRP, but retailers discount many titles.

The wholesale price is what retailers and distributors pay for copies of the title. In general, a DVD title’s wholesale price is between 40 and 60 percent less than the SRP, depending on a variety of factors.

Cost of goods is simply the total net cost of manufacturing and shipping the DVD title to a distributor or retailer. Cost of goods will include separate fees for disc replication, disc printing, package costs, assembly of the disc and the package, warehousing, and shipment of finished goods.

Production costs will include one-time fees paid to video post-production facilities, graphic art shops, and DVD authoring facilities that are directly related to creating the final DVD disc image and sending a DLT tape to the replication facilities. In some cases the replication facility will charge a one-time fee for creating the glass masters and negatives for printing the disc label, so these can also be included in the disc production cost.

Last, but not least, many content owners are required to pay a royalty for each copy of a title sold, whether it is on VHS, Laserdisc, Audio CD, DVD-Video, DVD-Audio, or SACD. Royalties are generally paid on a quarterly basis for discs that have actually been sold and shipped to retailers or distributors. In some cases a small portion of the royalty due will be set aside as a reserve against future returns.

Another key factor is a DVD title’s break-even point, which is the number of discs that must be sold to recover the production costs. A large part of the decision to publish a title on DVD is determining if, and when, it will sell enough copies to reach the break-even point. For the top 100 selling DVD titles this is not a major concern since they will generate millions of dollars in revenue for the studios within a few months of the DVD release date. However for the other 7,900 DVD titles on the market today the ability to reach the break even point within one year of release is often a key factor in deciding to release a title. Since most DVD titles have a sales life of 2–3 years, requiring a break even point by the end of the first year is a prudent way to ensure that DVD titles will be profitable for a content owner.

DVD Authoring & Production Business Models

Most of the people who are reading this book are either in the DVD authoring and production business or want to get into this business. Developing DVD titles for content owners, or for your own company, can be a rewarding and profitable business. Unfortunately, for every DVD authoring and production company success story there are also examples of failed businesses. There are several different business models that can be adopted by a DVD authoring and production facility including

•   the horizontal business model,

•   the specialist business model, and

•   the vertical business model.

Each business model has its own unique rewards and challenges, and there are examples of successful and failed DVD authoring and production companies that have used each model. There is no single best way to run a DVD authoring and production business, so I can’t tell you which model is right for your company. Your client base, skill set, and location will determine which business model makes the most sense for your company. The best advice is to offer high-quality services at a fair price and to provide your clients with the best level of customer service you can. This is a proven formula for success in many different business areas, and it works just as well in the DVD authoring and production business.

Horizontal Business Model

In the horizontal business model a specific DVD product or service is offered to a broad segment of the market. For example, a DVD authoring and production company using the horizontal business model will offer a full range of DVD authoring services to clients in the entertainment, corporate, government, and education markets. The keys to success using the horizontal business model are to automate the production process, provide quality products and services, provide good customer service, and keep your equipment, facility and staff up to the latest standards. Most major video post-production facilities that offer DVD authoring and production services use the horizontal business model. Successful companies can leverage their existing customer base to offer a wide variety of services, thus generating more revenue from each client than would be possible by offering them only a single service. In addition to offering each client whatever services they need, a horizontal business model company will also attract and retain customers from a variety of business areas, thus reducing the risk that losing one or two clients will significantly affect the company’s business.

DVD authoring and production companies that use a horizontal business model need to be able to develop all different types of DVD titles, including movies from their entertainment customers, sales or marketing presentations from the corporate customers, and training titles from the educational institution customers. This diversity in the type of DVD title that must be developed means that a horizontal business model company must have a wide range of DVD authoring tools and equipment as well as trained staff members that are comfortable working on any type of DVD title.

Specialist Business Model

In the specialist business model, a company offers a limited set of DVD products or services and tries to find a niche market in which they can make a living. A single area of DVD production is selected and marketed to a broad segment of the market. The specific product or service offered can be only a piece of the DVD authoring and production process, such as translation services, 5.1 surround mixing, or just DVD authoring. The keys to success for a DVD authoring and production company using the specialist business model are to be the best at what you do, deliver a high-quality product on time, provide good customer service, and develop a captive client base who use only your services.

Over the past few years a number of companies using the specialist business model has increased. Many studios routinely farm out the tasks of menu creation, audio mixing and compression, and translation and subtitle graphic generation to small specialist companies. The advantage to the studios is a better quality product, and in some cases a lower price than from a DVD production company offering all the services required to develop a DVD title.

DVD authoring and production companies that employ the specialist business model do not need to buy high end DVD authoring tools. They can generally use a subset of the hardware and software required to develop a complete DVD title. Specialist companies should develop relationships with Horizontal DVD authoring companies who may be able to take advantage of their unique services on some of their projects.

Vertical Business Model

In the vertical business model all aspects of developing, manufacturing, and selling a DVD product are brought in-house, including content acquisition and creation, authoring, replication, and distribution. The keys to success for the vertical business model include bringing every aspect of the DVD production process in-house to minimize cost and maximize profit, maintaining access to a deep product catalog, and developing a consistent look and feel for all titles so that authoring templates can be used to reduce cost and time required for development.

The vertical business model is the most difficult method of developing DVD titles since it requires the most investment in authoring and replication hardware and software, and the largest staff in order to perform each of the required tasks. Many motion picture studios have adopted the vertical business model as it offers them the maximum amount of revenues and profits on each of the DVD titles they publish. Since a single company controls each step of the process, the vertical business model can offer the most cost effective and efficient method of developing DVD titles. This is a powerful argument in favor of this approach. The one major risk in using the Vertical business model is what happens when the catalog of titles available have already been released on DVD. If this happens DVD authoring and production companies that use a vertical business model may need to shift to one of the other models to find work from other sources.

DVD Authoring & Production Equipment

DVD authoring and production companies need a fair amount of equipment in order to offer professional products and services. As outlined in Chapter 10 there are wide variety of tools and equipment available for use in DVD authoring. Table 9.1 shows the approximate cost of each item of equipment or software required for a consumer, corporate or professional DVD authoring and production system. DVD authoring systems are available for Windows, Mac, and SGI platforms. In general I recommend that you only look at DVD authoring tools that work on the platform that you are already using in your organization. If you are a Mac shop you should only look at products from Sonic Solutions or Apple, while if you are an SGI shop you will want to look at Sonic’s tools. Windows shops have the most choices with at least a half dozen excellent vendors for DVD authoring and production tools. There are two reasons I recommend that you restrict your search to only those products that work on the platform you normally use. First there are excellent DVD authoring tools available in a variety of price ranges for the Mac, Windows, and SGI platforms. Second you will want to connect your DVD authoring and production equipment to your internal network so that you can share data easily among your production systems. While it is possible to connect Mac, Windows, and SGI systems to the same network, it is much easier and more efficient to run the same operating system and maintain and upgrade your systems if all of your network workstations run the same operating system.

As you can see from Table 9.1 there are wide price ranges for professional, corporate and consumer DVD authoring and production systems. A large percentage of the cost of each of these systems is related to the video source equipment, computer workstation, and output devices that are common to all platforms. Typically only about 33 percent of the cost of a DVD authoring and production system is actually spent on the hardware and software items required to author a DVD title.

Table 9.1 DVD Authoring & Production System Costs

DVD Authoring & Production Staff

Authoring and producing a DVD title can require many different staff members, as shown in Figure 9.2. A typical DVD authoring and production company may have video compressionist, audio compressionist, DVD author, graphic artist, producer, sales and marketing, and quality assurance staff members assigned to a specific DVD project. While each staff member can work on several projects at once, there are distinct skill sets involved in performing each function.

Figure 9.2  DVD Authoring & Production Staff Members

The functions performed by each of the staff members shown in Figure 9.2 are as follows.

The customer service staff member is the primary interface with the customer once the order has been received. The customer service representative coordinates receipt of all media assets, gets client approvals, schedules internal resources to complete a job, coordinates external resources required for a job, communicates with the customer on a regular basis, is involved in problem identification and resolution, and keeps the project schedule updated. This function can be combined with the sales and technical support functions in smaller organizations.

The DVD author operates the DVD authoring system to combine all the digital media assets to create the final DVD program desired by the client. A computer programming background is beneficial for development of sophisticated DVD titles, as well as familiarity with workstation computers, networks, and a variety of operating systems. It is very important that the DVD author attend training classes for the various software tools that will be used. The DVD author takes direction from the producer, will work with customer service and QA/QC representatives, but should have minimal direct contact with the client. This function can be combined with the video/audio compression function in smaller organizations.

The graphic artist designs and develops all graphics required for the project, including the background and overlay graphics for each menu, graphics for any still images or slide shows, and graphics for package art and disc label art. The graphic artist may also create graphics for associated WebDVD HTML pages. He or she must understand how graphics are displayed by DVD players; know the limitations of various TV displays, display resolutions, menu highlights, NTSC/PAL safe zones, and NTSC color-safe colors; and be comfortable with computer-based graphics programs to generate still images as well as animated graphics. The graphic artist takes direction from the producer, will work with customer service and QA/QC staff, and may need to work with client’s graphics department to maintain the desired look and feel for the title.

The producer must have a working knowledge of the DVD-Video format, and is responsible for overall design of the DVD title. He or she takes the client’s list of requirements and turns them into specific menus, media elements, and navigation flow for the DVD title; coordinates with the Graphic Artist to get menus and graphics completed; determines start and stop points for all video and audio content used on the title; and works closely with the client to ensure that the finished product is what they want. The producer is responsible for delivering a completed DVD title to the client on time, within budget, and within all the specifications.

The quality assurance staff member is responsible for ensuring that the final product meets all the client’s requirements. He or she should be involved in every step of the DVD production process, including the review of incoming media elements, DVD-R check discs, compressed video and audio elements, navigation implementation, and menus. The quality assurance team member works with the producer, DVD author, graphic artist and video/audio compressionist to ensure a good product. In smaller organizations it is common for staff members to QA/QC their own work — this is not a good idea!

The sales and marketing staff member is responsible for selling and marketing all DVD services, and for setting prices for all services. He or she should work closely with the producer to determine the appropriate price for each service, set standard prices for typical services, and publish a rate card. Custom pricing should be generated for jobs that require extraordinary services, custom authoring, or quantity discounts. Sales and marketing should work closely with customer service to make sure that the client is informed and that jobs are being completed in a timely manner. In some organizations the same person handles customer service and sales functions.

The video/audio compression staff member operates the MPEG-2 video compression system, the Dolby Digital audio compression system, and the DTS audio compression system. The video/audio compressionist should have a background in video or audio production and should be trained to use the video and audio compression systems. He or she should be familiar with workstation computers, networks, and a variety of operating systems, understand MPEG, Dolby Digital, and DTS compression parameters, and understand the quality/quantity trade-offs that are required to publish content on DVD. In smaller organizations it is common for one person to handle video/audio compression as well as DVD authoring.

DVD Authoring & Production Pricing

If you are going to offer DVD authoring and production services to entertainment, corporate, government, or education clients, you will need to develop a standard rate card that you can give out to prospective customers. A rate card lists the standard services you provide for DVD title development as well as the price range for those services. It is customary in the DVD business to publish a rate card with prices that vary by both quantity and required delivery times. In general, prices go lower as quantity increases, and prices go higher as the required delivery time decreases.

Your rate card should include the following services. I have included typical price ranges for these services in the United States. These prices are based on my experience in working with DVD authoring service bureaus throughout the country. In general, prices tend to be higher in the Los Angeles and New York City markets, although many service bureaus in these markets must match prices from companies outside their geographical location in order to stay competitive.

•   MPEG Video Compression

•   Constant Bit Rate Compression ($5–$10 per finished minute)

•   Variable Bit Rate Compression ($10–$15 per finished minute)

•   Dolby Digital (AC3) Audio Compression

•   Stereo (2.0) Format ($5–$10 per finished minute)

•   Surround (5.1) Format ($10–$20 per finished minute)

•   DTS Audio Compression ($10–$20 per finished minute)

•   DVD Authoring

•   Simple Title ($1,000–$2,000 per title)

•   Moderate Title ($2,000–$4,000 per title)

•   Complex Title ($4,000–$8,000 per title)

•   Ala Carte ($100–$200 per hour)

•   DVD Consulting Services ($100–$200 per hour)

•   Subtitle Graphics Generation

•   European Languages ($5–$10 per minute of subtitles)

•   Asian Languages ($10–$15 per minute of subtitles)

•   Menu Design

•   Static Menus ($50–$100 per hour)

•   Motion Menus ($500–$2,000 per menu)

•   DVD Packaging and Label Art Design ($50–$100 per hour)

•   DVD-R Replication ($25–$50 per disc)

•   DLT Tape Generation ($50–$100 per tape)

•   DVD Check Disc Package ($1,000–$2,000)

•   Short Run DVD Replication (i.e., less than 1,000 copies, $1.50–$5 per disc)

•   Long Run DVD Replication (i.e., more than 1,000 copies, $1.00–$3.00 per disc)

In addition to a rate card you will need to have published prices for several different standard DVD development efforts, and a description of what services are provided at that price. Some typical package deals on DVD-Video titles include the following.

Simple DVD-Video Title Package ($2,000–$5,000) This package includes up to 90 minutes of CBR MPEG-2 video, 90 minutes of Dolby Digital 2.0 audio, static menus (main menu, chapter menu, and credits menu), a single layer, single side disc (DVD-5) layout, one DVD-R check disc, and a DLT for replication. The client provides the video and audio masters, and gives guidance on menu design.

Moderate DVD-Video Title Package ($5,000–$10,000) This package includes up to 120 minutes of VBR MPEG-2 video, up to 120 minutes of Dolby Digital 5.1 audio, up to 120 minutes of Dolby Digital 2.0 audio, a dynamic main menu and static secondary menus (chapter menu, audio menu, subtitle, menu, and credits menu) up to 120 of minutes English subtitles, a single layer, single side disc (DVD-5) layout, one DVD-R check disc and a DLT for replication. The client provides the video and audio masters, and gives guidance on menu design.

Complex DVD-Video Title Package ($10,000–$15,000) This package includes up to 200 minutes of VBR MPEG-2 video including multiple angle or multiple story-line content, up to 120 minutes of Dolby Digital 5.1 audio, up to 240 minutes of Dolby Digital 2.0 audio, dynamic menus (main menu, chapter menu, audio menu, subtitle menu, credits menu), up to 200 minutes of subtitles in two languages, a dual layer, single side disc (DVD-9) layout, a replicated DVD check disc, and a DLT for replication. The client provides video and audio masters, and gives guidance on menu design.

In addition to a standard rate card and package prices for DVD title development you will often have to provide custom proposals for potential clients if their requirements do not fit into the standard pricing categories you have prepared. Having a rate card and package pricing will get you in the door to see many prospective clients, but you will need to prepare custom proposals and offer them discounts over your “published” prices to win their projects. The DVD authoring and production services business is quite competitive, so be prepared to match other offers that your prospective client may receive.

Over the past several years industry-wide prices for DVD authoring services have decreased significantly. This is primarily due to increased competition among service bureaus, but is also due in part to reductions in the acquisition costs for DVD authoring equipment, and increases in productivity as a result of advances in authoring tool design. I expect that prices will continue to drop, although they are close to the point at which companies may find it difficult to make a profit by offering DVD authoring services. With the recent release of low cost DVD authoring tools such as Apple DVD Studio Pro, many service bureaus will face competition not only from other service bureaus, but also from their corporate clients who decide to bring DVD development tasks in-house.

Alpha DVD Business Model

From 1990 to 1996 my company (NB Engineering) was a leading provider of off-line digital video compression services, and we developed custom multimedia CD-ROM titles for corporate, government, and educational clients. We opened the first digital video compression service bureau in the United States back in 1990 offering Intel Digital Video Interactive video compression using a $500,000 supercomputer and professional video equipment. Over a six-year period we upgraded our equipment and software to support new digital video compression codecs as they became popular. Over time our services gradually changed from Intel DVI compression, to Cinepak and Indeo compression, to MPEG-1 compression, and finally to MPEG-2 compression. Each time a new video compression codec came on the market we upgraded our equipment and software to accommodate the new technology. While we made enough money to pay for the required video compression equipment and software, and to pay our staff, we were never able to make a significant profit as a service bureau during this period of time.

During 1994 and 1995 we worked closely with Toshiba as they developed their new MMCD format, and saw it become an integral part of the DVD-Video specification that was released in 1996. Our extensive background in digital video compression and the development of high-end multimedia CD-ROM titles made us uniquely qualified to become an early adopter of DVD-Video technology. We formed a partnership with a video post-production facility in Los Angeles called The Post Group, and together we spent more than $500,000 and several man-years of effort becoming one of the first facilities to actually author a DVD-Video title. Unfortunately we were a bit ahead of the curve and even though we had the ability to develop high-end DVD titles, there were few clients who wanted to actually pay for DVD development services at that time.

From 1996 through 1998 my company completed over 100 DVD projects for a diverse set of entertainment, corporate, government, and education clients. After three years of work we made enough money to pay for the equipment and software needed to develop high-end DVD titles, and to pay the salaries of the staff required to develop DVD titles. Even though we had an excellent reputation in the DVD industry, provided quality products and services at reasonable prices, and delivered excellent customer support, we struggled to make a profit on our DVD business. As DVD became more popular we had to compete with companies that offered essentially the same products and services we did. Since most of these companies had waited for the DVD market to mature, they were able to purchase their DVD authoring equipment and software at a fraction of the cost we paid just a few years earlier, and thus it was easy for them to offer lower prices for DVD services than we could.

In early 1998 NB Engineering was closed due to a merger between our parent company and an Internet services company. The newly merged companies were going to concentrate on the new and exciting field of Internet advertising, so management decided to close all divisions that did not offer products and services directly related to the Internet. This was a difficult time as I was forced to lay-off about 20 full-time staff members, many of whom had worked for me for the past 10 years. I also had to sell off all the video compression and DVD authoring equipment we had accumulated, and tell our client base that they would have to find a new partner to fill their DVD authoring and production requirements.

So after 12 years of running my own company, and being responsible for the success of up to 30 friends and co-workers, I found myself without a job. As an expert in video compression and DVD title development I had several offers for new positions within the DVD authoring and production business. However my recent experience in having to lay off all my staff had left a bad taste in my mouth. I decided to take a few months off and figure out what I really wanted to do before jumping back into a full time job. Looking back I realized that over the past 12 years I had started and grown a company that was able to keep pace with the rapidly changing technology of digital video compression, and experience the launch of an entirely new home entertainment format, DVD-Video. Despite being a leader in these technologies, and winning our share of business, NB Engineering was unable to make consistent profits offering video compression or DVD authoring and production services to other companies. While I wanted to continue to work in the field of DVD authoring and production, I realized that I needed to make a fundamental change in the way I approached the business. Either I had such poor management skills that I was incapable of running a profitable company, or there was a basic flaw with DVD authoring and production service bureaus that prevented them from ever achieving profitability. The constant cycle of adopting new technologies every two or three years, and then competing with companies who would wait a year or two and acquire the same equipment and software for less than half the cost, seemed to me to be a losing proposition.

So in May of 1998 I came up with a new business model for DVD authoring, and I started a new company called Alpha DVD that is based on this model. I don’t have a name for this model, but it has a few guiding principals that I would like to share with you. The proof of any business model is always in the results, and I am happy to say that over the past three years Alpha DVD has made a profit every year, and each of the DVD projects we have worked on continue to generate revenues long after the project has been completed. Here are the guiding principles for the business model I use at Alpha DVD.

1. Get Paid in Royalties The first and most important principal is to own a small piece of every DVD title I work on. In the long run getting paid a royalty from every disc sold generates far more revenues than charging a fixed price for providing authoring services. I typically get a royalty between ten and 40 percent of the gross wholesale price of my DVD titles. I get a larger royalty on titles for which I create and produce the content, such as StarGaze, and smaller royalties on titles for which I simply provide the required DVD authoring services.

2. Quality & Quantity This principal is key to the success of my business model. Every title that gets released has to include the highest quality media elements possible. The flip side of this principal is that I need to release as many titles as possible. It is impossible to determine which DVD titles are going to be marginal and which are will be popular with consumers, so to insure success it is a good idea to put out as many titles as possible.

3. Do Everything In-House The third principal is to perform as much as possible of the DVD authoring and production in-house. In my case “in-house” has been taken quite literally since I actually work in my basement. Since 1998 I have purchased about $100,000 worth of hardware and software tools that allow me to control every aspect of the DVD authoring and production process from concept all the way through generation of DVD-R test discs and DLT tapes. A secondary benefit of doing everything in-house is that I have complete control over quality and scheduling issues for every part of the project.

4. Include Advanced Features I am not sure if this principal is essential, but in the long run I think it makes sense to author and produce DVD titles that take advantage of as many DVD-Video features as possible. Thus all my titles include some, if not all, of the advanced DVD-Video feature set. My experience over the past three years has shown that consumers prefer to buy titles that have advanced features. The law of diminishing returns does apply to this principal, so you want to balance the use of advanced features against the cost of producing them. In general I like to include advanced DVD-Video features such as multiple audio tracks, subtitles, and multiple language menus first. If there is enough development budget left over, I will consider adding DVD-ROM and WebDVD features as well.

5. Break Even in Less than Twelve Months This last principal is key to actually making a profit on my titles. Most DVD titles have a sales life of two to three years so if I only release titles that break even in a year or less I cant help but make money in the long run.

Even though this business model sounds simple, and is actually fairly easy to set up and run, there are some requirements of which you need to be aware. Before you embark on a similar business model you will need to have enough working capital to last at least six months, you will need to either purchase or lease all the DVD authoring hardware and software required to develop the kinds of titles you might publish, and you need to locate a DVD distributor who will license your titles and get them into the retail channel. Let’s talk about each of these requirements in more detail.

Working Capital A typical DVD-Video title takes about three months to go from the concept stage to completed DLT. Some projects can be done faster and others will take longer, but I have found 3 months to be about what it takes from the day I acquire new content to the day I can send a DLT out for replication. You may be able to complete projects in less time, but if you license content from someone else they will generally have the right to approve the final DVD disc image before replication. Having another company involved in any aspect of the DVD design and production process will slow things down. Unless you are lucky and can negotiate an advance with a distributor, you won’t have any cash flow while you are developing your first DVD title. To make matters worse most distributors negotiate payment terms for your royalty so that it will be 60–90 days after the title is available to consumers before you receive your first royalty check. Thus having at least six months of working capital available when you start your first title is essential.

DVD Authoring System While it may seem obvious that you will need a DVD authoring system to actually develop your first DVD title, I know several people who have tried to follow this business model without having the required hardware and software. If you don’t have a DVD authoring system at your disposal you will either have to have the title developed by someone else (which violates my third principal) or you simply will never release your first title. It is not necessary to spend $100,000 or more to buy a professional authoring system before you start your first title. In fact I recommend against that course of action as it is far too risky for most people. If you want to become a DVD developer following my business model I suggest you purchase (or lease) a Mac G4 system with DVD Studio Pro and the Apple Super Drive, or a Compaq Presario 7000 system with the same Pioneer DVD-R drive and Sonic ReelDVD. Both of these systems can be connected to high-end DV cameras and will allow you to generate professional looking DVD titles, for less than $5,000 in capital expenditures.

DVD Distributor Unless you are already involved in distributing and selling DVD titles to consumers you will be totally unprepared for the arcane way DVD titles are sold to the public. Many large retailers purchase DVD titles from only one or two distributors, who in turn purchase product from the studios and other distributors. In my opinion it is best to turn over the sales, marketing, advertising, and distribution of your titles to someone who does that for a living. There are a number of good DVD distributors who are always looking for new titles to license. Finding a distributor who will get your titles into the retail channel, pay you on time, and help you locate content for future titles is an essential component to using my business model.

Does this business model really work? If you stop and think about it you will see that this is essentially the same business model that is used by the major motion picture studios as well as several large DVD distribution companies. Each of these companies makes money by getting a royalty when someone buys a copy of any of their titles. I have simply adapted the Hollywood business model to work on a much smaller scale, and I can assure you that it works quite well for my company. By the time this book goes to print I will have over 30 DVD titles from which I receive royalties. My royalties vary from $0.50–$5.00 per disc, and I get royalty checks every month based on the number of units sold to the retail channel. During 2001 I will release approximately 25 new DVD titles, and by the end of 2002 I should have a total of 75 DVD titles from which I receive royalties. None of these titles will generate vast amounts of royalties, but when you add them all up it works out to be a good business. In addition to the financial benefits of this business model I have found it quite rewarding to go into Best Buy, Virgin Records, or Tower Records and see my titles on the shelves.

I am sure that the business model I use is not right for everyone. It requires a fair amount of working capital, access to DVD tools, the ability and knowledge to use those tools to produce quality DVD titles, a working relationship with an established DVD distributor, and a lot of hard work and perseverance. In my opinion the financial rewards from a royalty-based DVD business far outweigh the risks. Developing DVD titles in my basement is the most fun I have had at work in over 20 years, and I would recommend this approach to any DVD developer who has the skills and desire to make it work.