Feb 21 2010

Warner Bros. Heralds Future of Video Rental

The Blockbuster closest to my house recently sold, shuttered, and gutted, grimly foreshadowing the end of the video-rental store era.  Like Sony Walkman cassette players (do my younger readers even know what these are?), VHS has all but vanished.  DVD and Blu-ray, too, are trembling before the inevitable growth of online video streaming.  Like a herald among the studios, Warner Bros. has negotiated deals with Netflix and Redbox that will change how movies are rented and keep the studios profitable.

According to a January 6, 2010 announcement, roughly 75% of a DVD’s total sales will occur in its first four weeks on the shelves.  In trying to recapture this critical window, Warner Brothers brokered this deal:

New release titles on DVD and Blu-ray will be made available to Netflix members after a 28-day window, giving Warner Bros. the opportunity to maximize the sales potential of those titles and Netflix the benefits of reduced product costs and significantly more units and better in-stock levels four weeks after street date.  At the same time, a renewed and expanded license for Warner Bros. streaming content will allow Netflix to offer its members more movies they can watch instantly.

With this agreement, Warner Bros. has successfully staunched the upfront loss of DVD and Blu-ray new release sales and positioned itself to be better-represented in the growing (legal) online video streaming rental business.  Netflix loses a small percentage of new release rentals but gains a larger, cheaper library and more firmly entrenches itself as a key player in what will be the future of all video rentals.

 Redbox Automated Convenience Store.  Photo by objet design.

Building on this model, Warner Bros. then approached Coinstar-owned Redbox, a $1/day DVD rental kiosk popular in fast food restaurants, pharmacies, grocery stores, and convenience stores.  Because Redbox is a kiosk for hard DVDs with no online business, the terms are a bit different:

The new arrangement provides Redbox with reduced product costs, sufficient quantities of product and optimal stock levels four weeks after street date as well as extends Redbox’s access to Blu-ray titles, which Redbox is currently testing in select markets.

Again Warner Bros. gets to recapture 75% in DVD sales, and Redbox gets timely aid in venturing into Blu-ray rentals, which Coinstar CEO Paul Davis said will be rolled out in the second quarter of 2010.

Currently, 20th Century Fox and Universal simply won’t negotiate with Redbox and have prohibited wholesalers from supplying them for 30 and 45 days (respectively).  Sony Pictures, on the other hand, signed a $460-million-deal with Coinstar through September 2014.  I fully expect the former two studios to follow Warner Bros., but it may be too late for the latter.  By 2014, the Redbox rental model could easily be outdated or fading into unprofitability.

To illustrate this, let’s take a look at the emerging picture of video rentals:

  1. The majority of renters are establishing queues of movies online through services like Netflix and Blockbuster Online and will have 2-5 cycling through the mail at any given time.
  2. Humans, spontaneous by nature, love to run out and grab a movie to fit the mood of a group or a miserable, lonely night with ice cream and alcohol (not that I’ve ever done that…ever…).  This used to be done at brick-and-mortar stores but is shifting toward Redbox.
  3. Humans, impatient and lazy by nature, will give up even simple sources like Redbox in favor of instant streams and downloads as bandwidth increases and streaming rental support grows.  With very large, HD computer screens and the ability to output video from computers to even larger HDTVs, there will be practically no downside to this option.  Goodbye, Redbox.  What’s a brick-and-mortar, again?

The only hope I see for Redbox to survive as it operates now is in the fact people will always need to go to the store for groceries, and a Redbox rental may be just another thing to bring home.  The brick-and-mortars don’t have any hope.  Tear.

Are you upset by the studio-demanded delay in DVD and Blu-ray releases?  Do you see a future for hard-copy DVDs?  If video moves to flash memory, how would you like to rent it?  Comment, discus, and share!

Photo credits: Warner Bros. water tower courtesy of jasoninhollywood


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