Warners, Netflix agree to new-release delay

Deal also increases the amount of catalog titles on Netflix

Got "Invictus" in your Netflix cue in hope of renting it the day the movie hits DVD?

Time for a rethink. Warner Bros. and Netflix on Wednesday unveiled a dramatic pact that will delay the studio's new-release discs reaching Netflix's 11 million online rental subscribers for 28 days.

Netflix agreed to the deal because it will boost the number of Warners catalog titles that Netflix will be allowed to offer while providing the delayed rental titles on less expensive terms. New-release rentals account for an estimated 30% of shipments by Netflix, whose customers skew toward catalog product.

Still, Blockbuster and other disc-rental operations will gain a competitive advantage among those wanting to rent new-release DVDs and Blu-ray Discs on the same day they hit stores. Eventually, the deal could have broad ripple effects within the home entertainment industry, but for now, the 28-day policy applies only to Netflix.

Similar agreements between other studios and additional retailers might proliferate during the coming months, if only as a means of dealing with the trend toward dollar rentals. Studios have become increasingly concerned about consumers' willingness to buy DVDs when Redbox and other DVD-kiosk companies are renting discs for a dollar a night.

Warners starts its new Netflix policy with two titles hitting the rest of the rental community Jan. 19: "The Invention of Lying" and "Whiteout." Netflix begins offering those titles Feb. 16. (Netflix does not offer new-release titles for digital viewing, a policy that will continue.)

"These new agreements build upon the strong relationship we have had with Netflix for nearly 10 years," Warner Home Video president Ron Sanders said. "The 28-day window allows us to continue making our most popular films available to Netflix subscribers while supporting our sell-through product."

Netflix chief content officer Ted Sarandos said some of the company's rental customers have been unable to obtain new releases because of insufficient product supply. In the future, customers will have to wait four weeks but then are assured of getting titles shipped immediately upon request.

"We're able to help an important business partner meet its objectives while improving service levels for our members by acquiring substantially more units than in the past after a relatively short sell-through window," Sarandos said. "At the same time, we're able to extend the range of choices available to be streamed to our members."

The Warners agreement reflects a belief among Netflix execs that "the long-term business is in digital streaming," he said.

Netflix proposed the deal to Warners a year ago and is in various stages of talks with other studios about similar agreements, Sarandos said. But nothing is likely to emerge from those discussions until current pacts with the rental companies expire.

Warners was out of contract with Netflix for most of last year but continued to supply discs.

Even before dollar rentals began to threaten disc sales, Hollywood was grappling with a significant decline in DVD revenue. But many execs believe that dollar rentals have exacerbated the decline in sales from format fatigue.

In any event, a decline in DVD revenue is expected to continue until at least 2011. That's when execs hope rising revenue from Blu-ray Disc sales will begin to compensate for the drop-off in DVD revenue dollar for dollar.

Meantime, a multistudio court battle wth Redbox has not been sorted out.

Should studios lose that showdown with the kiosk king, the major suppliers may create an industrywide "sell-through window" of 28 days or so, during which rentals would be prohibited and only disc sales would be allowed. That would get around Redbox's claim that it's being illegally singled out by studios refusing to supply discs to its kiosks.

Warners estimates that its new pact will be revenue-neutral for the studio in its dealings with Netflix. But Warners execs hope the deal will boost revenue from digitally distributed content and help protect its sell-through cash cow.

Warner Bros. Home Entertainment Group president Kevin Tsujihara said Warners has had talks about a similar deal with Blockbuster. But those discussions have proved more complicated than negotiations with Netflix because of the rental giant's more diverse footprint in bricks-and-mortar retail, online subscriptions and dollar-rental kiosks.

"Never say never," Tsujihara added when asked whether a Blockbuster deal is possible.
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