Cable VOD gives Warners pause

Exec: Day-date trials hint at alternative to rental biz

Time Warner's Warner Bros. Home Entertainment Group is looking at more broadly distributing product via cable VOD as an alternative to traditional video rentals, with early day-and-date release trials with cable operators seeming to prove favorable economics, president Kevin Tsujihara said Monday at an investor conference.

He cited data showing increased DVD sales for Warners in trial markets, while others in the industry have signaled a need for more research to ensure no negative impact on the DVD business.

Speaking at the Deutsche Bank Media & Telecom Conference here, he also said that U.S. boxoffice receipts look to grow 10% this year to hit "almost $10 billion."

The U.S. DVD market should see its biggest fourth quarter in history and end 2007 about flat to up 1% compared with 2006 despite a sluggish performance so far this year, Tsujihara added. He cited the holiday-quarter releases of such early summer blockbusters as "Spider-Man 3" and the third installments of the "Shrek" and "Pirates of the Caribbean" franchises.

In a conference session that was available via webcast, the executive gave a bullish review of early day-and-date film release trials via VOD with Comcast Corp. and Time Warner Cable.

The first six months of the two-market Comcast trial have shown a 50% increase in buy rates across all studios, Tsujihara said, with Warners also seeing a 10% rise in DVD sell-through and only "a marginal impact" on its rental business. He highlighted the ability to promote a $4 VOD release and the DVD release at the same time as an efficient marketing approach.

The executive also said that studios only get 15%-20% of the $7 billion-$8 billion rental business compared with 60%-70% in the case of VOD, which means that a shift in focus makes good business sense. Tsujihara also signaled little need to support rental firms, highlighting that they compete with the studios in the space of previously viewed movies.

A spokesman at Blockbuster Inc. didn't comment beyond reiterating that the video rental giant believes studios will be "very cautious in introducing any new, less-profitable service that could be cannibalistic to the rental and retail channel" because the sale and rental of DVDs together represents the studios' largest revenue stream at almost 70%.

"We see it as incremental," Tsujihara summed up as his studio's take on the day-and-date VOD business based on the trial numbers to date. He also said VOD releases should be a key driver in improving studio margins during the next 12-24 months.

Given weakened DVD growth, the home entertainment group also is looking to boost profitability by driving adoption of HD-DVDs and cutting costs 5%-10% in such areas as manufacturing and shipping, according to Tsujihara.

He didn't specify a timeline for the broader deployment of the VOD offers but said that while Warners hopes to pull other studios along, it could go things alone as in the past.

News Corp. president and COO Peter Chernin said last month that more research is needed to rule out DVD sales being cannibalized by VOD releases (HR 5/10).

Tsujihara also emphasized that Warners will continue to create new revenue streams by using its existing infrastructure for things like video games. Currently, the company makes three or four games a year and hopes to add to its distributed titles via partnerships, he said, signaling that it was close to a licensing deal for Warners content that also will include game distribution for the partner.

In the same Deutsche Bank session Monday, Warner Bros. Television Group president Bruce Rosenblum said the CW is looking for high-single-digit advertising rate increases in the current upfront ad market. The CW is continuing to offer so-called "content wraps," which advertisers have liked, and also is starting to offer five-second ad spots known as "quickies" this upfront season, he added.

Rosenblum also said he hopes to iron out with networks over the next year or so new financial models for the program supplier-network relationship in the Internet age.

Advertising-supported Web uses of TV shows dominate and likely will remain most popular, but his unit is looking to "move up monetization," he said.

For example, Rosenblum said future deals could guarantee content suppliers a chance to stream product in broadband form and sell and retain ads for themselves.

Also at the conference Monday, Viacom Inc. president and CEO Philippe Dauman shrugged off suggestions of a harsh competitive spirit between his firm and CBS Corp., which also is controlled by Sumner Redstone. "We have our own strategic missions" and run more against other media companies than each other, he said.

Dauman added that Viacom wasn't, for example, in the running to acquire online music discovery network, which CBS bought last week.

The Viacom CEO again highlighted that the Paramount Pictures film unit is looking to diversify its revenue streams, citing original program productions for Viacom and other networks as well as licensing as key opportunities.

He also reiterated that Viacom is likely to exceed its goal of $500 million in revenue from digital operations this year.