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Industry Now Playing the Waiting Game

12 Apr, 2010 By: Thomas K. Arnold

The home entertainment business is being restructured before our very eyes. With Netflix agreeing to a 28-day window on new releases from three major studios — Warner, 20th Century Fox and Universal — we are seeing a new reality that I believe will spread to the other studios as well as the other key non-traditional rental player, Redbox.

The new reality is this: Netflix and Redbox won't get to rent new releases until 28 days after street date. For Netflix, the incentive is money  — the three studios that got the subscription rental pioneer to agree to a 28-day window made huge concessions in pricing. For Redbox, which should fall in line shortly, the incentive is both money and hassle — with several studios refusing to sell the kiosk vendor their product, Redbox's only alternative was to send scores of employees to Wal-Mart stores every Tuesday, armed with gift cards and instructions to buy as many copies of verboten titles as they can carry. Talk about a logistical nightmare!

The end result is that Netflix and Redbox customers are going to have to wait a month before they can rent hot new releases. The studios are hoping this will lead to at least a minor bump in the sellthrough end of the business, which is still hovering down about 10 percentage points even from last year. But if you consider how much more money the studios make from DVD and Blu-ray Disc sales to consumers, even a slight uptick in unit sales of 3% to 5% should be enough to put the overall sellthrough business back in positive territory, according to my calculations — particularly when you factor in digital delivery or VOD, which also gains an advantage over rental.

The studios also are hoping that the strategy will allow Blockbuster to survive. Hollywood has never really liked Blockbuster, but the studios dislike Netflix more — and passionately hate Redbox, with its dollar rentals and kiosks conveniently located in the lobbies of supermarkets and discount stores, including Wal-mart, their No. 1 sellthrough account. If Blockbuster goes, Netflix and Redbox become the only real game in town, and the studios certainly don't want those two to have a virtual monopoly on the rental market.

Netflix and Redbox, though, wouldn't go along with this strategy, regardless of how much money they can save (and, in the case of Redbox, hassle they can avoid), if they didn't believe the importance of new releases to their business is vastly overinflated. Even a leading analyst, Eric Wold of Merriman Curhan Ford in New York, told Home Media Magazine news editor Erik Gruenwedel that he believes "most consumers will wait the 28 days in order (and choose a different movie for now) in order to obtain the much lower pricing of Redbox and/or Netflix after the window passes." (To read Erik's story, click here.)

Under the best-case scenario for all involved, the studios will realize a decent gain in DVD and Blu-ray Disc sales as well as VOD transactions, Blockbuster will see a significant spike in rental turns, and Netflix and Redbox will rent more catalog titles and recent releases in lieu of the latest hits. And because of this last point, overall consumer spending on home entertainment will go up. Sales will increase, while the overall rental business will be flat, with older stuff making up for the newer stuff that's no longer available on street date.

The worst-case scenario: The impact on sales will be nil, Blockbuster will die anyway and consumers will simply rent less from Netflix and Redbox. Maybe they'll read more books. Regardless, overall consumer spending on home entertainment will go down.

But these are all just theories. Now it's time to wait and see what actually transpires, once these titles-with-windows start coming out. I'm as anxious as anyone, because after a recent conversation with three friends, there's certainly no indication which way the business is headed.

Friend No. 1 was disappointed when I told her about the window situation. "I'm tempted to cancel my subscription to Netflix," she said.

Friend No. 2: "I guess I'll just have to wait."

Me: "Why not buy it? You can get just about any new release for $15."

Friend No. 2: "It's not an issue of price. I've got too much stuff in my house and don't want to add anymore clutter."

Me: "What about Blockbuster?"

Friend No. 2: "The one in my neighborhood closed and I don't even know where to look for another one."

Friend No. 3: "Why don't you just pay-per-view it? That's what I do."

Friend No. 2: "No, I just don't want to."

So there you have it, folks. Let the waiting game begin.


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