Sunnyvale, Calif.-based Kaleidescape makes a highly regarded line of home media servers, but it faces at least two major hurdles to growth. First, it's been embroiled in a years-long battle with the entertainment industry over the legality of its core products. And second, the price tag on those products -- the entry-level Kaleidescape system costs around $15,000 -- confines them to the ultra-luxury niche.
On Tuesday, the company is making a significant step toward hurdling the second barrier by releasing a $4,000 media server, dubbed the Cinema One. That's still a bridge too far for the typical DVD renter, but it's no longer out of reach for homeowners who splurge on custom home theater installations. The latter category is surprisingly large; the top 100 installers put in nearly half a million home theaters in the United States last year.
These custom installations represent a huge opportunity for a company that now has an installed base of a little more than 14,700 users. Of course, Kaleidescape will have a hard time capitalizing on it if it can't make peace with the entertainment industry, which has been trying to bar the company from selling its devices.
Cheena Srinivasan, Kaleidescape's founder and executive vice president, hinted in an interview Monday that the company is making progress on that front as well, but it has announced a licensing agreement with only one of the major Hollywood studios so far: Warner Bros.
The company's legal problems stem from the fact that its devices extract digital copies of movies from DVDs, a practice that Hollywood studios had long banned. They now allow it if it's done according to the dictates of a consortium called UltraViolet that's run in part by the studios.
Like its more expensive brethren, the Cinema One will rip DVDs and CDs into its internal, 4-terabyte hard drive, which has enough capacity for 600 standard-definition or 100 high-definition movies. It will rip Blu-ray discs too, although won't play them unless the disc is put back into the device or in a disc storage unit that Kaleidescape sells separately. But it would be missing the point to view the Cinema One or its higher-end predecessors as a piracy tool.
On average, the company's customers own a little more than 100 discs before they buy a Kaleidescape device, but their collections quickly grow to more than 500 titles, Srinivasan said. That translates to an average of 51 movie purchases per year, which is more than 10 times the average for all American households, he said.
Just as Amazon's Kindles are designed to encourage people to shop at Amazon, Kaleidescape's media servers are tuned to encourage people to buy video downloads from the company's online store. Said store's library of movies and television shows are available only for sale, not rental, and they deliver content only to Kaleidescape servers.
This dedication to "electronic sell-through" should be music to the studios' ears, considering how much larger the industry's profit margins are on sales than on rentals. But it's also facing some tough headwinds in the market, as consumers increasingly opt to save money by renting movies rather than buying them.
Kaleidescape's target market isn't consumers who want to watch something new for the lowest price possible. On the other hand, Srinivasan said, it's not just movie collectors, either. Instead, it's people willing to pay for the privilege of being able to watch a movie at some point in the future, whenever it suits them.
The company also is focused on making sure that ownership has privileges that rental and streaming services don't offer. For example, its downloadable movies include all the special features from DVDs and Blu-rays, with the latter in full Blu-ray picture and sound quality -- something Srinivasan said no other online retailer does. And the company's engineers have inserted bookmarks for key scenes in thousands of titles, enabling people to quickly jump to those clips (e.g., Indiana Jones' escape from the rolling boulder in "Indiana Jones and the Temple of Doom") or even create a playlist of highlights from different movies.
"It's all about the experience," Srinivasan said. "If you can make it so simple ... people will want to buy more."
The device's slick menus automatically rearrange how movies within the owner's collection are displayed whenever he or she moves the cursor to a title, bringing related movies and TV shows to the forefront. But Kaleidescape doesn't do much to suggest titles to buy that its customers might like, other than to offer a menu of titles that are popular among other users. Srinivasan says the anonymized data the company collects from users could help it develop a powerful recommendation engine, but hasn't implemented one yet.
Kaleidescape also plans to implement more of UltraViolet's features. When users buy a title from Kaleidescape's download store that comes with an UltraViolet token, they automatically earn the right to stream that title through UltraViolet-compliant services to compatible devices. The store also offers the ability to upgrade stored DVDs to Blu-ray quality files with UltraViolet rights for $7 per title. Next up: the ability to convert a Blu-ray disc into a stored digital file that can be played without having to insert the disc. This "disc to digital" feature of UltraViolet is likely to carry a fee too -- the studios demand a royalty for the privilege of copying a disc, even if it's one you've already purchased -- but Srinivasan said it's likely to be smaller than the charge to upgrade a movie file to high definition.
Evidently, the price of peace with Hollywood is in requiring people to pay to rip the Blu-ray discs they own. One interesting question is whether Kaleidescape will also be forced to start collecting a fee from users who rip the DVDs they own.
The company's bet on movie ownership and local storage may seem like a gamble these days, as streaming services and cloud-based storage rapidly gain traction. Netflix just announced that it is closing in on 30 million subscribers, or three orders of magnitude more than Kaleidescape.
Srinivasan, however, argued that the precipitous drop in hard drive prices has made it possible for people to create a digital library of movies and TV shows at home to match what they've done with their CDs. As bandwidth improves and storage costs drop online, people will eventually embrace virtual collections in the cloud, he said, but added, "Is the timing right now? No."
At least, that's what Kaleidescape hopes. And assuming the company can persuade the entertainment industry to call off its legal beagles, its lower-priced Cinema One will let Srinivasan test his theory on a much bigger audience.
Jon Healey writes editorials for The Times' Opinion section. Follow him on Twitter @jcahealey