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Analysts: Warner/Redbox Deal Creates 'Digital Window'

17 Feb, 2010 By: Erik Gruenwedel

Warner's determination to shore up packaged-media sales by delaying new releases to select rental channels also is an effort to create a digital window, analysts say.

While the focus on yesterday's apparent capitulation by Redbox to accept a 28-day delay for new-release movies from Warner Home Video would appear to benefit retail sales of DVD and Blu-ray Disc, it also underscores the studio's long-held fascination with video-on-demand (VOD) and the format's higher margins. Indeed, Redbox's signature $1-a-day rental business model to the studios cheapens the value proposition of other distribution channels and is especially threatening to both DVD/Blu-ray sales and VOD/pay-per-view.

Studios typically capture about 65% of the revenue (and margin) from VOD/PPV compared to 35% from traditional physical rental, according to analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles.

In addition, digital content, unlike packaged media, carries no “first sale doctrine” protection, meaning consumers are not allowed to resell/rent a digital movie to a third party.

"It is clear that the movie studios dislike the [traditional] rental model," Pachter said in a note. "From a studio perspective, the most desirable distribution channels are those which provide the largest revenue share."

Indeed, Kevin Tsujihara, president of Warner Home Entertainment Group and staunch advocate of digital distribution, was an early architect of the studio's drive to release DVD movies day-and-date with cable VOD and PPV — a strategy now commonly accepted within the industry.

“The 28-day window enables us to get the most from the sales potential of our titles and maximize VOD usage,” Tsujihara said, following the deal with Redbox.

With Redbox agreeing to the 28-day retail window, digital becomes the most convenient way to rent content, echoed Richard Schackart, digital analyst with William Blair & Co. in Chicago.

Schackart said the deal would positively impact Best Buy's rollout this summer of a digital store featuring VOD entertainment and related hardware. He said the Redbox/Warner announcement underscores a secular shift to digital and the view that studios will continue to move consumers to digital and away from physical DVDs.

The analyst believes Best Buy will launch the digital store in tandem with discounted Web-enabled hardware devices priced as low as $50. In addition, Schackart believes the No. 1 consumer electronics retailer will offer "significant" rebates and free digital movies to encourage consumers to adopt the digital format.

"We believe Best Buy and studios will make content available at attractive prices, potentially including free downloads or streams with purchase of dedicated hardware," Schackart wrote in a note.


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