Warner Enters 56-Day Embargo With Netflix

[rdodolak]

Article from last week's Home Media Magazine. Another nail in the coffin for Netflix's disc based program.

http://www.nxtbook.com/nxtbooks/ques...57c86a7983c#/0

Warner Home Video’s intent on doubling the 28-day delay of new-release titles into rental channels isn’t going to affect Redbox — for now anyway — a spokesperson for the kiosk vendor told Home Media Magazine.

Warner Bros. Home Entertainment Group Jan. 10 formally declared it was implementing a 56-day rental embargo on new-release titles — an announcement made jointly with Netflix, which agreed to the extended retail window. “Netflix wants to ensure members have continued secure access to Warner Bros. DVDs and Bluray discs and, as such, is accepting the 56-day holdback,” said Netflix VP of content Anna Lee.

Universal Studios Home Entertainment’s 28-day delay agreement with Redbox and Netflix is up for renewal in April, and 20th Century Fox Home Entertainment has the right to terminate its agreement as early as April 2013, according to Ralph Schackart, analyst with William Blair & Co. in Chicago. Walt Disney Studios Home Entertainment does not have a window.

Warner has seen a measurable uptick in sellthrough of new-release movies since implementing the 28-day window for subscription and kiosk vendors in 2010, said Mark Horak, president of Warner Home Video North America. “One of the key initiatives for Warner is to improve the value of ownership for the consumer, and the extension of the rental window — along with our support of UltraViolet — is an important piece of that strategy.”

A studio source familiar with the deal said the initial embargo extension affected just Netflix and that discussions with other rental vendors were ongoing.

No. 1 kiosk vendor Redbox’s license agreement with Warner, which calls for a 28-day embargo, expires at the end of the month. Redbox spokesperson Kate Brennan said in an email the current agreement that parent Coinstar has with Warner is to receive movie titles 28-days after their release.

“No revised agreements are in place,” read the official Coinstar statement.

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said Netflix was wise to take the extension in exchange for lower-priced disc rentals, but he expects Redbox to reject the window.

He said Redbox, which operates more than 40,000 kiosks in 27,000 locations, is heavily invested in offering new releases near street date — a business strategy it could not afford to change going forward. Wold expects Redbox — if confronted with an extended embargo — to push through a workaround program obtaining Warner titles through alternative sources, including big-box retail.

The analyst said Redbox has spent the past two years perfecting just such a strategy and is better prepared to implement it than it was two years ago when confronted by studio embargoes for the first time.

“We continue to expect Coinstar to … implement a long-term replacement workaround strategy,” Wold wrote in a Jan. 11 note. “In our opinion, this remains the smarter move for the company.”

Russ Crupnick, senior industry analyst with The NPD Group, wonders whether studio attempts to manufacture scarcity of new product through windowing matters any more to consumers in today’s movie retail environment.

Crupnick said NPD research indicates that more than 90% of renters would not consider acquiring a title through alternative channels, i.e. sellthrough.

“The challenge is that the extended window will likely help only a select number of titles, and extending the window may actually hurt some fringe releases,” Crupnick wrote in a blog. “Consumers will simply rent them later on, or maybe not at all.”

At the same time, if the extended windows increase sellthrough at higher margins of just 3%, it’s an incremental win for studios, the analyst said.

He said effectiveness of “appointment” viewing of movies is diminishing with the rise in lowercost VOD options and DVR use. Crupnick wondered when a “Triple-A” title isn’t available for rent on street date, will consumers simply switch to time-shifted TV content or streamed episodes of “Breaking Bad” on Netflix?