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Time Warner CEO: Windows Hurting Kiosks

4 Aug, 2010 By: Erik Gruenwedel

Time Warner Inc. CEO Jeff Bewkes said windowing of new-release DVD/Blu-ray Disc titles by select studios is having a desired effect on rental kiosks, in addition to pushing upward trends of electronic sellthrough and transactional video-on-demand (VOD).

In an Aug. 4 analyst call, Bewkes said early results indicate the strategy (mirrored by 20th Century Fox Home Entertainment and Universal Studios Home Entertainment) to delay new release movies 28 days to kiosk vendors such as Redbox and by-mail/streaming distributor Netflix is working “quite well” with big titles such as The Blind Side and Sherlock Holmes.

“We saw considerably higher sales [for the titles] in weeks two-to-four than we used to see in the previous week-by-week distribution of sales,” Bewkes said. “The net results of pushing new releases back looks quite good. The extent of the windows is that it moves demand to sellthrough and transactional VOD.”

He said the ongoing joint studio/cable marketing program to promote VOD has helped digital distribution. Bewkes said there still exists a fair amount of “upside room” for activity and effort in both DVD and VOD.

“We think [windows] is working and will work better going along,” he said. “We have seen other studios following that [window] plan, and we’ve seen the titles that come from the studios that are not using that window structure underperforming.”

Bewkes was referring Sony Pictures Home Entertainment, Paramount Home Entertainment, Walt Disney Studios Home Entertainment, Lionsgate and others that distribute new releases on retail street date via kiosks.

Bewkes comments regarding the impact the windows were having on kiosks was music to the ears of Jon Engen with the Video Buyers Group.

“It directly contradicts what Paramount and Disney said about the effects of the windows on [DVD/Blu-ray Disc] sell-through,” Engen said.

That said, analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles said overall consensus wouldn’t necessarily agree with Bewkes, especially considering the relatively small sample size of delayed titles.

“I don’t think we’ll see more window deals this year,” Pachter said.

Bewkes described Netflix, which recently inked a TV programming streaming deal with Warner, as both a customer and potential competitor to Time Warner networks such as HBO.

“We are quite organized between Warner, HBO and Turner at how we look at [Netflix and others],” Bewkes said. He said that wherever Netflix has penetrated the market, Warner titles have “over-performed.”

When asked whether distributing catalog TV programming via Netflix streaming would adversely affect the company’s TV syndication business, Bewkes said the “relatively small” deal involving FX series “Nip/Tuck” revolved around the fact there were few third parties willing to pick up the series for syndication.

“Or we would have sold it to syndication,” Bewkes said. “We haven’t seen too many cases where companies have sold [content] that Netflix could potentially cannibalize [from syndication]. What were essentially talking about here is product nobody wants.”

Overall home entertainment revenue was down 8% year-over-year, which was largely attributed to a $30 million gain (cost savings) on disc returns during the previous-year quarter.

CFO John Martin said the studio is attempting to accelerate distribution of home video via digital channels, including transactional video-on-demand (VOD). He said digital distribution represents 20% of home entertainment revenue with electronic sellthrough up nearly 50%.

“Of course that revenue has higher margin attached to it, so that is both an improvement and encouraging,” Martin said.

He said despite the home video market showing signs of improvement with first-half sales comparative with last year, he said second-half comps will be difficult when factoring in comparisons with last year’s hits The Hangover and Harry Potter and the Half-Blood Prince.

Strong theatrical revenue from Clash of the Titans and Sex and the City 2 contributed to Time Warner’s filmed entertainment segment reporting second-quarter revenue of $2.5 billion, up 8% from revenue of $2.3 billion during the same period a year ago.

For filmed entertainment, which includes Warner Bros. Studios and Warner Home Video, the revenue increase was the largest since 2008. The studio last week announced it was the first to surpass $1 billion in domestic box office for the 10th straight year.

The quarterly results do not include the July 16 release of Inception, the No. 1 box office sci-fi thriller starring Leonardo DiCaprio from director Christopher Nolan that has generated more than $197 million in domestic ticket sales ($369 million globally) through Aug. 2. With its mind-bending special effects and complex storyline, Inception is expected to generate strong DVD/Blu-ray Disc sales when released later this year.

Adjusted operating income for the studio was down slightly at $173 million, compared with adjusted operating income of $176 million last year. Without ongoing restructuring charges, studio operating income would have increased nearly 21%.

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