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Why Target’s New Digital Video Service Could Face Complications

Launch of Target Ticket could be complicated by sale of Rovi division to a mystery entity

Within the next two weeks, Target expects to make its overdue entree into Internet video, taking on rivals like Walmart and Best Buy and major tech players Apple and Amazon.com.

The retail giant is aiming to debut the Target Ticket service Oct. 1, or even sooner, with a collection of about 30,000 TV and movie titles for purchase or rental.

But on the eve of Target’s big digital video launch, the company faces a potential wrinkle: The core system it is using just changed ownership.

On Sept. 1, entertainment technology firm Rovi completed the sale of its money-losing Rovi Entertainment Store, a one-stop shop for video e-commerce that powers Target Ticket, to an entity called Reliance Majestic Holdings — a Beverly Hills startup that is staying silent as to its plans. Rovi is not disclosing the number of employees that have transferred to the new company; as of Dec. 31, 2012, the group had a staff of 240.

Anne Stanchfield, Target’s divisional merchandise manager of entertainment overseeing the launch, does not anticipate any problems arising from the sale.

“Rovi has been an awesome partner, and we are confi dent in the technology,” she said. “We have met the team as they are transitioning and feel really good about their vision.”

That may be. But the Rovi Entertainment Store has been deeply in the red ever since Rovi picked up the business in 2011 via the $720 million acquisition of Sonic Solutions. In 2012, the unit generated revenue of $14.6 million and had a pre-tax operating loss of $49.2 million. For the first six months of 2013, it had sales of $7.4 million and an operating loss of $17.7 million (excluding a $73.1 million asset-impairment charge).

Target isn’t the only company that needs the Rovi Entertainment Store to remain a going concern: The system also runs Best Buy’s CinemaNow service. (Best Buy declined to comment.)

How Reliance Majestic intends to turn things around for the white-label broadband video platform, or even who is running the company, is not clear. Its placeholder website describes it as “an innovative new media company” backed by Proveho Capital, a private-equity firm in Austin, Texas. (“Reliance Majestic” appears to be a reference to Reliance-Majestic Studios, an early Hollywood studio that produced D.W. Griffith’s “The Birth of a Nation” in 1915.)

A phone number listed on the Reliance Majestic website connected to investment firm Archetype Capital. A message left at the number was not returned; Archetype managing director Michael Reinstein did not respond to an email. Principals at Proveho Capital also didn’t respond to requests for comment.

For Target, the viability of the Rovi Entertainment Store is only one of its challenges. The second-biggest U.S. retailer is late to the fast-growing Internet electronic sell-through market, which is on track to hit $1 billion in revenue this year, according to Digital Entertainment Group.

About half of Target’s customers have never downloaded or streamed entertainment, presenting an opportunity for the retailer to gain some share, according to Stanchfi eld.

“The industry is not brand new at this stage, but there is a significant portion of our guests who haven’t adopted digital entertainment yet,” she commented.

The company has secured deals with a number of studios including Disney, Paramount, Sony Pictures Entertainment, 20th Century Fox, Warner Bros., Universal and Lionsgate. TV networks in the mix include ABC, CBS, NBC, Fox, AMC, CW, FX, HBO, Showtime, Starz and USA. The television content is available for purchase only, but may be streamed or downloaded.

Target had considered launching a subscription-video service, a la Netflix. But Stanchfield said the company’s market research showed customers wanted “the newest content available” — in other words, titles in the EST window, which are not available on SVOD services.

Target Ticket is “definitely an evolution that we will build and refine,” Stanchfield said. The question is whether the new owners of Rovi Entertainment Store can help the retailer achieve its aims.

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