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Warner CEO on Rental Surge: ‘Been There Before’

29 Jul, 2009 By: Erik Gruenwedel

Time Warner Inc. chairman and CEO Jeff Bewkes July 29 downplayed the surge in DVD rental this year as a temporary consumer reaction to the economy that wouldn’t significantly undercut margins.

Speaking to analysts during a second-quarter financial call, Bewkes said the rise in traditional packaged-media rentals and recent attention to $1-per-day rental kiosks wouldn’t detract from the home entertainment industry’s measured shift from DVD to digital distribution, including video-on-demand, downloads and streaming.

"We saw rental as the chief means of everybody watching films back in the days of Blockbuster VHS rentals,” Bewkes said. “And yet, it moved to sellthrough because it was more convenient for people to keep it and have it when they want.”

He said Warner had fair amount of flexibility when it came to pricing the various release windows. However, Bewkes did say he would prefer a separate release window for rental kiosks that followed standard day-and-date releases on DVD/Blu-ray and cable VOD.

“We think [rental kiosks] can be additive,” Bewkes said. “And to the extent it is competitive, we are not unduly concerned about it.”

The CEO has been an early proponent of offering new content on cable VOD the same day as the physical release, arguing that digital distribution produces greater margins than traditional rental and doesn’t adversely affect physical sellthrough. He said physical sellthrough on tent pole titles remains strong.

Bewkes also championed the recent test launch of “TV Everywhere” with Comcast and Time Warner Cable that allows subscribers free online access to repurposed content on demand.

Time Warner’s filmed-entertainment unit, which includes Warner Home Video, the largest distributor of DVD and Blu-ray titles, reported second-quarter (ended June 30) operating income of $143 million, up 52% from operating income of $94 million during the previous year’s comparable period.

The segment income increase was due in part to a 34% rise in operating income before depreciation and amortization (OIBDA) to $263 million because of lower theatrical print and advertising expenses, reduced overhead costs (following the shuttering of New Line Cinema) and fewer DVD catalog returns ($40 million reversal from last year).

"That's due to better than expected catalog performance over the past several quarters," said CFO John Martin.

The top five home video releases in the quarter included Gran Torino, Yes Man and He's Just Not That Into You, compared to 10 key home video titles last year.

Home video and electronic distribution (VOD, downloads) revenue from theatrical releases in the quarter declined nearly 25% to $581 million from $766 million, while packaged media and digital distribution sales for TV content fell nearly 16% to $161 million from $190 million last year.

Overall filmed-entertainment revenue declined 9% to $2.3 billion from $2.5 billion as a strong theatrical release slate spearheaded by The Hangover ($240 million box office through July 23 and top grossing 'R' rated comedy in history) offset sales declines in DVD due to fewer new releases, quantity shipments and catalog titles.

The prior year quarter’s release of the popular Lego: Indiana Jones video game negatively impacted this year’s entertainment results as well.

Martin said Warner's fiscal year would rely more heavily than in the past on fourth quarter results.

"That's just timing [of home video releases The Hangover, Terminator: Salvation and Harry Potter and the Half-Blood Prince] it doesn't reflect business fundamentals," he said.



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