It's not just those pesky $1 rentals at Coinstar's (Nasdaq: CSTR ) Redbox kiosks that are bothering Tinseltown these days. Time Warner (NYSE: TWX ) is thinking about tightening the screws on revenue-sharing arrangements with Netflix (Nasdaq: NFLX ) on its freshest releases.
Under a possible scenario, Netflix would have to pay up if it wants to offer Time Warner movies on the same day the DVD hits the market.
This is a lousy way for the studios to deal with sluggish DVD sales. In their Hollywood hearts, they believe that if value-priced rental outlets such as Redbox or Netflix don't begin offering titles until the releases have had a few weeks on the open market, couch potatoes will buy the DVDs instead.
The idea may sound logical in theory, but it would be a lose-lose deal.
Netflix would obviously suffer. It would probably stock fewer new releases or bump its rates higher. Either way, the consumer winds up paying the price, by sacrificing either availability or greenbacks.
The studios wouldn't be laughing all the way to the bank, either. For starters, Hollywood would have to enact a third wave of ad spending. Currently, movies are marketed when they hit the local multiplexes, followed a few months later by a smaller campaign to mark the home video release. Under the new scenario, studios would feel pressured to bankroll another advertising attack when a flick becomes available through Netflix, Redbox, and perhaps even Blockbuster (NYSE: BBI ) . Otherwise, rental-related revenue would shrivel up for a lack of consumer awareness.
There are also no assurances that renters will buy a DVD just because it isn't immediately available through Netflix. If they waited for months after a film's cinematic run, what's the problem with holding out for a few more weeks? Either consumers will wait, or apathy will creep in by the time the DVDs quietly enter the rental market. If that happened, Redbox and Netflix would simply order fewer copies.
Show me the winner here, because all I see are losers.
I understand that studios hate watching the deteriorating value proposition of their DVDs. Time Warner has already joined News Corp.'s (NYSE: NWS ) 20th Century Fox and General Electric's (NYSE: GE ) majority-owned Universal Studios in cutting off Redbox when it comes to its brand-new movies. The legality of the move is questionable, but the stupidity is undeniable.
If this were only a matter of rentals that eat into DVD sales, shares of Blockbuster would be trading for less than an overnight Redbox rental. Consumers have way too many choices when it comes to free or discounted viewing choices. The widening breadth lowers the perceived value of the medium. That's unfortunate, but it's also irreversible.
Since there is no Hollywood special-effects crew that can kill the Internet, shooting at the few growing revenue streams is exactly as stupid as it sounds.
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