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Let's All Sue Netflix

By Rick Aristotle Munarriz | More Articles
March 9, 2010 | Comments (17)

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I'm no friend of Netflix's (Nasdaq: NFLX  ) recent policy to delay the rental availability of Time Warner (NYSE: TWX  ) DVDs by four weeks, but I never thought someone would get litigious about it.

A Manhattan woman is filing a class action lawsuit in federal court against Netflix. She says the deal between the DVD-rental service and Warner Home Video is a "scheme to restrain trade."

Time Warner has inked deals with Netflix and Coinstar's (Nasdaq: CSTR  ) Redbox to hold back on new releases for 28 days after their retail debut. Time Warner claims that 75% of its DVD purchases come from the first four weeks that a new title is on the market, and eliminating availability from $1 Redbox kiosks and Netflix's value-altering unlimited plans should stir up more sales and full-priced rentals. The deals pave the way for similar arrangements by studios including 20th Century Fox and General Electric's (NYSE: GE  ) majority-owned Universal that have bellyached in the past.

I'm no legal eagle, but it's hard to see any legs on this class action suit. Netflix's 12.3 million subscribers are free to move on -- and many do. Over 1.6 million movie buffs called it quits this past quarter -- though Netflix has historically been able to more than offset the cancellations through new member additions.

That doesn't mean this isn't a crummy business decision on Netflix's behalf. It is -- and I'm about to show you why. However, taking the matter to federal court is a bit of a stretch.

I'm both flattered and shocked that my "Netflix Sells Out Its Subscribers" article is part of the class action complaint. I certainly don't wish to condone the lawsuit. I just think that Netflix is stupid for striking this deal in the first place.

The invention of lying
Netflix's deal with Warner kicked off in January, with Ricky Gervais' The Invention of Lying becoming the first DVD going into the service's 28-day penalty box. Fishing for symbolism in the title is a noble quest for style points, but the truth is that the movie was a box office dud.

Netflix claimed during its fourth-quarter conference call in late January that it wasn't receiving complaints that that particular movie wasn't immediately available to subscribers.

Well, the open release window is starting to let the draft in these days. Right now, Netflix subscribers don't have access to The Informant!, The Box, and Where the Wild Things Are.

These movies weren't exactly blockbusters. None of them was among the 40 highest-grossing movies released domestically last year, though Where the Wild Things Are almost made the cut with $77 million in ticket sales.

The rub for Netflix is that the only legal alternative for consumers isn't to buy Where the Wild Things Are on DVD or Blu-ray. They can rent it at a local Blockbuster (NYSE: BBI  ) and even stream it digitally for $3.99 through Amazon.com (Nasdaq: AMZN  ) , Apple (Nasdaq: AAPL  ) , and Blockbuster.com. Fire up your cable provider's on-demand offerings, and it will probably be there at a similar price point.

See, Time Warner didn't eliminate timely rentals of its flicks. The studio simply washed out the discounters. Netflix and Redbox have become the equivalent of the second-run cinema. They just don't realize it yet.

The blind side
At the time of the deal's announcement, subscribers were sold on the benefits of the new rental caste system. Netflix would be getting a lot more copies of the DVDs at lower price points. Time Warner would also contribute more of its older titles to Netflix's online streaming initiative.

Did any of this really happen -- beyond the lower price points for Netflix?

The Time Traveler's Wife is your smoking gun. Netflix began shipping out the romantic drama to its subscribers yesterday. This was the second film to receive the window treatment. It's been available through nearly every other rental outlet for nearly a month. Time Warner isn't actively marketing the release anymore, since, by its own admission, 75% of those interested in the film have already bought it. So not only is Netflix beginning to stock a movie with crimped demand, but it apparently has more copies than it would usually carry per its agreement with Warner.

Well, I have the movie buried in my queue -- it's for my wife, OK? -- and I'm seeing the two words that Netflix seemed to imply that I wouldn't have to see under this soul-selling arrangement: Long Wait.

Are you kidding me? Netflix brushes off new releases, claiming that the majority of its rentals are for older titles. It's certainly good about that, given its deep catalog. However, it always seems that it's the latest releases that aren't available in my queue.

I can only imagine the uproar when a legitimate blockbuster is told to sit in the corner for four weeks. It's about to happen. The Blind Side hits every rental source short of Netflix and Redbox in two weeks. They will begin offering rentals in six weeks.

Godspeed, Netflix, if you think you can "Long Wait" that one without alienating the suddenly self-aware second-class couch potatoes.  

Is this a frivolous lawsuit? Is the delayed release deal good or bad for Netflix? Share your thoughts in the comments box below.

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Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He'salso part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2010, at 4:51 PM, stan8331 wrote:

    Look, first run is still in physical theaters - not in ANY form of rental. Anyone who's truly hot to see a new release isn't likely to wait for months for the rental to come out. Netflix subscribers now have a massive number of movies available for streaming, and this sort of deal will keep that number moving higher.

    I seriously doubt that a vast number of Netflix subscribers are champing at the bit to go pay $4 or more per rental when they'll be able to see the same movie for free in a few weeks. I'm a Netflix subscriber and I can guarantee I won't be making any of those purchases.

  • Report this Comment On March 09, 2010, at 5:02 PM, Melaschasm wrote:

    Netflix made a mistake by putting themselves at a time disadvantage with new releases. However, that mistake was not criminal in nature.

  • Report this Comment On March 09, 2010, at 5:44 PM, DavisFreeberg wrote:

    Before dismissing consumer's chances with the class action, you should at least try to get a qualified legal expert to opine on the topic. Surely someone at the Fool has a legal background or you could find an attorney whose interested in a little bit of free publicity to make an informed opinion. From where I sit, I see good chances for the lawsuit, but will also admit that I'm not a legal expert. Let's assume for a moment that instead of talking about video rentals we're talking about semiconductors for televisions. Normally, competition should keep prices low because if someone were to charge too much, the TV companies would go to a competitor, but because this industry is dominated by a small handful of firms, it opens the door to collusion. If a company like Samsung were to make a secret agreement with another company like Hynix Semiconductor to fix prices so that both firms would enjoy higher profit margins, it would absolutely be illegal. In fact, in 2005, Samsung entered a guilty plea on these exact charges. By limiting how low they were willing to discount their chips, they effectively harmed consumers.

    Is the discount rental industry all that different? Movie Gallery is in bankruptcy. Blockbuster will almost surely join them barring some kind of miracle. With Redbox and Netflix being the only two real survivor is it fair for the them to carve up the market for rentals by artificially agreeing to not rent WB titles? Since there are only a handful of studios it's not like consumers can turn elsewhere if this trend continues. At what point do their actions become a form of price fixing instead of good old fashioned competition? Consumers have clearly been hurt by these agreements while Netflix admitted that their profits were higher because of a better price point. Is it fair for Netflix to get DVDs at a cost that can drive Blockbuster out of business while harming consumers? I don't think it is and if I was on the jury I'd agree that this is a form of illegal restraint of trade. While these issues are always tricky, I think that the Fool owes more to their readers then to dismiss this one so easily.

    Because there are only a few dominant firms,

  • Report this Comment On March 09, 2010, at 7:19 PM, wolfersmith wrote:

    I think is is a sad commentary on American culture that something as frivolous as the release date of a movie would be the cause for a lawsuit. Get a life, people!!!

  • Report this Comment On March 09, 2010, at 7:31 PM, SUPERMANSTOCKS wrote:

    CSTR rocks! Netflix is ok. I have had issues with their billing. As I was saying about CoinStar, I love the Redbox. Because its cheaper to rent a movie for a dollar than to pay 6.00 for a month. If I want it an extra day it is still cheaper to use Redbox than Netflix

  • Report this Comment On March 09, 2010, at 7:31 PM, SUPERMANSTOCKS wrote:

    CSTR rocks! Netflix is ok. I have had issues with their billing. As I was saying about CoinStar, I love the Redbox. Because its cheaper to rent a movie for a dollar than to pay 6.00 for a month. If I want it an extra day it is still cheaper to use Redbox than Netflix

  • Report this Comment On March 09, 2010, at 8:17 PM, esxokm wrote:

    I find it very funny that studios want, on the one hand, no window restrictions when it comes to theatrical and home-video distribution, but on the other hand, don't want Netflix to infringe upon their maximization of home-video sell-thru.

    The solution? Simple: make each release in each window unique via added or subtracted features.

  • Report this Comment On March 09, 2010, at 8:36 PM, rabbithole2012 wrote:

    DavisFreeberg is spot on. An inch here and an inch there. Netflix subs have not felt this agreement yet because it is just into place. After they just get used to the substandard service, the next studio window deal will come. After all the studios are in on the fun, how about tacking on another week or two window. At what point does it become obvious that these deals constitute an unreasonable restraint of trade. Rick points out that customers can go rent elsewhere by paying higher prices - but that is exactly the goal of the 28 day window and the point of the lawsuit! If cost is really an issue, what would be reasonable would be to charge a bit more if you rent a warner movie during the first 28 days, but to completely cut everyone out is crossing the line.

  • Report this Comment On March 10, 2010, at 1:34 PM, cjd11 wrote:

    I primarily get my movie rentals through streaming Netflix, and I was happy w/ the "one month wait" because it actually cleared the way for movies to come to the streaming service on a schedule that makes sense. Right now, the end user doesn't really know when/how things will be available for streaming. If the answer is "You'll get the new stuff in a month", then that's a lot better than getting those releases in 3-6 months. If I really want to go out and rent "The Blindside" or something else... well, i'll drive to blockbuster and pay the 2 bucks for a one night rental. There are very few movies that I absolutely need to see the moment they come out on video. It's not selling out the consumers at all, it's ensuring that the service stays available and supported by the big studios who provide the bread and butter content that the service is built on. What I imagine they'll eventually do is some sort of added service where you can get all the rentals immediately through the mail, but you get charged an extra fee that WB, etc gets a cut of.

  • Report this Comment On March 10, 2010, at 1:37 PM, BMFPitt wrote:

    The only way this lawsuit could be legitimate would be if there was a long term contract involved in a NetFlix membership, and there isn't.

  • Report this Comment On March 14, 2010, at 11:11 AM, BioBat wrote:

    Netflix has been a 2nd tier rental operation since day 1. You always had to wait for the availability of things in your cue. If it was a new release, you were never going to get it on the release date - if you wanted that, you'd have to go to Blockbuster. As for on demand offerings, the prices keep creeping up. It was 3.99 a movie last year, it's now up to 4.99 for new releases and 2.99 for movies that used to be free and Blockbuster is soon to be out of business so there goes that avenue of rental. Long story short, I'll gladly take a delayed 'new' release for the advantage of having more and more streaming content at a reasonable price. Netflix was right on to develop this relationship before any one else thought of it.

  • Report this Comment On March 15, 2010, at 3:31 AM, myaubrieclaire wrote:

    Pretend you don't know when the release date is happening, have it #1 in your queue, read a book, then ABRACADABRA..! Amazing isn't it? Life goes on.

    Plus I'm sure Netflix is getting a pretty penny for the delay. Business baby, business.

  • Report this Comment On March 19, 2010, at 3:37 PM, eggwis wrote:

    Yep, I'd definately say, in my opinion, it's a frivilous suit. But who's to say that some people who value their movie watching a whole lot more than I do, aren't genuinely put out. . . . The question is what are the REAL damages? ...a 1-month subscription?

    It may be a good deal for Netflix. In fact, I'm pretty confident that Netflix likes it or they wouldn't have inked it. Evidently they believe the cost savings will outweigh lost revenues from subscribers jumping ship. For their sake, I hope they're right. BUT having huge numbers of brand new releases available is one thing that has been a big demand in the movie rental business and has made things difficult for the bricks and mortar guys. Why would Netflix think that customers wouldn't expect the same from them? traditional business model difficu

  • Report this Comment On March 21, 2010, at 3:01 AM, DMShaftoe wrote:

    There IS another way to see The Blind Side without buying the thing - BT Airlines or NG Railways.

    I've already seen Avatar on my iPod via NG Railways.

  • Report this Comment On May 25, 2011, at 4:26 PM, puffle9000 wrote:

    i agree with all of you guys lets all sue netflix and redbox for all the money they got

  • Report this Comment On May 25, 2011, at 4:53 PM, puffle9000 wrote:

    lets all sue both netflix and redbox for their fraud merchendise and flawful and flawness movies and game rentals and save blockbuster and save hollywood videos and save tower records from going out of business so people can be happy and 100% satisfied and be great costumers

  • Report this Comment On May 25, 2011, at 4:56 PM, puffle9000 wrote:

    netflix items and redbox items are failed and frauds and flops and fakes and never works and have complaining and angry costumers

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