Netflix Agrees to 28-Day Window for New Warner DVDs6 Jan, 2010 By: Erik Gruenwedel
Following months of suggestive comments from the CEOs of Netflix and Time Warner Inc., Warner Bros. Home Entertainment and Netflix Jan. 6 announced a pact designed to both satiate the rental market while capitalizing on the sales potential of new-release DVDs and Blu-ray Discs.
Under the agreement, which replaces a previous revenue-sharing deal that expired last February, Warner Home Video will continue to directly supply Netflix with new titles, which will be made available to its subscribers 28 days after street date. The month-long window was chosen after sales data suggested 75% of sellthrough occurs in the first four weeks of release.
The delay matches the 28-day embargo imposed by Warner last year on rental kiosks, including market leader Redbox, which subsequently sued the studio, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment for similar acts.
Warner also will significantly upgrade Netflix’s selection of direct-to-video titles and catalog movies available for the Los Gatos, Calif.-based service’s instant streaming platform to Web-enabled TVs and computers.
Despite the apparent slight to Netflix subscribers, the deal — initiated by Netflix more than year ago and earmarked for replication with other studios — underscores the company’s relative indifference toward new release titles, which represent just 30% of its revenue compared to 70% catalog, according to spokesperson Ken Ross.
“The way we merchandise all content available is more around connecting you with a movie you will love versus a movie that came out yesterday,” Ross said.
Ross said the deal gives Netflix a “meaningful” reduction in disc costs while affording it greater title availability on Day 29, and the expansion of streaming content.
In other words, while Netflix’s 11 million subscribers wait 28 days for future Warner releases The Blind Side, Sherlock Holmes and Invictus, they will have streaming access to Caddyshack, All the President’s Men, the Matrix franchise, and virtually every movie starring Clint Eastwood, among others.
Ted Sarandos, chief content officer for Netflix, said the revised license deal offers common ground between rental and studios; the latter heretofore loathe supporting what they considered a low-margin business.
Sarandos said a separate window for sellthrough mimics studios’ philosophy of a distribution hierarchy and combats traditional fears that rental negatively impacts retail sales.
He said the deal gives Netflix an incentive not to rent new releases on street date while affording additional resources toward other parts of the business, including streaming and greater in-stock availability.
“We would like to expand this [license deal] and see it expand across other retailers as well,” Sarandos said.
Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles who covers Netflix, said the company is likely paying Warner identical content costs in exchange for higher unit volumes.
“If they bought 1 million copies of one title at $12 before, they will now buy 1.5 million copies for $8 and get it 28 days later,” Pachter said.
He said the big plus for Netflix revolves around greater selection of streaming content, which has been driving its subscriber growth.
“Streaming matters to them,” Pachter said, adding that Redbox and Blockbuster emerge as significant beneficiaries from the deal.
Michelle Metzger, spokesperson for Blockbuster, said the Warner/Netflix deal “absolutely” was a positive for the No. 1 DVD rental service when its significant competitors don’t have the ability to rent select new releases.
Metzger said Blockbuster respects whatever release windows studios adopt and will negotiate accordingly.
“If Warner decides to impose the by-mail subscription window on everybody, including us, then of course, we’ll respect that,” she said. “We still have retail.”
DVD and Blu-ray Disc sellthrough was at the heart of the deal, according to Ron Sanders, president of Warner Home Video, who characterized as “critical” the first four weeks of a title’s release at retail.
Sanders described negotiations as a “really good process” with a “trusted” business partner.
“It’s not about litigation, it’s about how do you work together to find solutions,” Sanders said.
He said the deal was unique to Netflix and would not be incorporated automatically with other brick-and-mortar businesses such as Blockbuster.
“We’re exploring options on that but we’re not pushing a new deal with any other customers at this point,” Sanders said.
The executive said studios across the board are examining all release windows, including theatrical, in an effort to generate increased margins and return the industry to a “growth story,” despite the current economic recession.
Indeed, Bob Chapek, president of distribution at The Walt Disney Studios, recently told the Los Angeles Times that studios typically generate 80% of a movie’s box office revenue in the first three weeks, and waiting four months to release the title on DVD only favored piracy.
“The economics just don’t makes sense,” Chapek told The Times.
The average theatrical release window fell 20 days to three months, 10 days from October to December last year, compared to four months, 10 days during the same period in 2008, according to The National Association of Theatre Owners.
John Fithian, president and CEO of NATO, speaking last year at an industry event, implored studios to resist tampering with the theatrical release window due to declining DVD sales.
“In doing so, they only endanger the healthiest and largest revenue producing segment of the industry,” Fithian said.
Netflix’s Sarandos said the current theatrical window represents a “waste” of marketing resources whereby many titles get “lost in the shuffle” when released at retail months later.
“Studios do this brilliant job of creating a ton of demand for something that most of America can’t have [steady access to],” Sarandos said. “Now, with the Internet, having a big gap between demand and access is incredibly risky.”
WHV’s Sanders, however, said theatrical owners would have to understand how they, along with everyone in the entertainment ecosystem, could benefit from altered windows.
“We did video-on-demand, day-and-date [with DVD] early on and it was seen as a really scary, troubling thing,” Sanders said. “We showed over time that it didn’t cannibalize sellthrough, and we grew the [overall] pie by giving the consumer more choice. That is the kind of approach you will have to take in the theatrical window as well.”