Do Netflix, Redbox, and Blockbuster Think We're Stupid?

Time Warner (NYSE: TWX  ) is playing interior decorator again, and this time it wants even more window coverings.

It's been two years since the media giant brokered a deal with Netflix (Nasdaq: NFLX  ) for a new distribution window. If Netflix would hold off on making Time Warner movies available to its subscribers for the title's first 28 days on the market, Time Warner would provide the company with cheaper discs.

Time Warner pushed for the window, pointing out how 75% of its retail DVD and Blu-ray sales take place during the first four weeks that a movie's on the market. If it could stop Netflix from practically giving it away as part of its unlimited rentals plan, surely sales would spike.

A month later, Time Warner brokered a similar deal with Coinstar's (Nasdaq: CSTR  ) Redbox, making sure that folks weren't renting new releases from cheap disc-spewing kiosks until a new title had sold most of its copies through retail distributors.

Blockbuster -- before being acquired last year by DISH Network (Nasdaq: DISH  ) -- did the right thing. It didn't take a bite out of Time Warner's apple. It not only continued to offer Warner Bros. releases the moment they came out, but it even publicly taunted Netflix and Redbox by pointing out how the DVD rental pioneer could offer movies not available through its cheaper adversaries.

Well, that's all changing now.

According to AllThingsD's Peter Kafka, Time Warner will announce next week that all three DVD rental giants will refrain from offering Warner Bros. releases during the first 56 days on the market.

Another squandered opportunity
Shame on you Netflix, Redbox, and Blockbuster.

Is selling your soul for bulk pricing really worth the eight-week freeze?

What were you thinking, Netflix? You argue that your subscribers don't care about new releases, but it's funny how it's always the latest releases that aren't available on my queue. You raised prices on subscribers with dual plans by as much as 60% in September. The least you could do is tell Time Warner to beat it, and buy fewer copies at retail pricing to offer them when they come out.

What were you thinking, Redbox? Instead of learning Netflix's lesson about a poorly timed rate hike, you went ahead and jacked up your prices by 20% this past Halloween. Trick or treat? Surely Time Warner is going to be offering even sweeter bulk pricing terms in exchange for doubling the release window. How dare you lower your content costs while increasing the price of your kiosk rentals? Happy gouging, you lifeless automatons!

What were you thinking, Blockbuster? You had the competition where you wanted them. Your website's home page continues to promote a "Why Wait" icon that promises "many new releases available 28 days before Netflix and Redbox." Is that going away, or is this Time Warner dance a one-shot deal?

Time Warner was cocky in demanding a 56-day window. All three of you were greedy to accept.

Actions speak louder than words
Rhetoric is cheap. Netflix knows that its subscribers do care about new releases. It's the only time that studios actively advertise a flick outside of its original theatrical release. If Netflix members didn't care -- and I'm sure that many don't care, but a lot do -- why would Time Warner be extending this window? The only reason Time Warner is doing this is because it thinks Netflix subscribers are so impatient for new content that they will go out and physically buy it. Think about it.

At the very least, Blockbuster, Netflix, and Redbox have to concede that their product becomes inferior the moment they begin holding back content just so a studio can sell DVDs. Redbox and Blockbuster in particular are retail formats that thrive on fresh releases.

Besides, we really know what happened here. Time Warner's 28-day window didn't work. It didn't sell more optical discs. Folks just aren't buying DVDs and Blu-rays the way they used to, and it has nothing to do with rental availability. Lengthening the release window to 56 days isn't going to boost sales either. All that will do is make couch potatoes forget that they ever wanted to see some of these laggards.

Digital purchases are a compelling market for studios to help offset the sting of sluggish DVD sales, but the product is priced out of whack. The perceived value of bulky digital files isn't there. The lack of portability -- unlike music -- is a problem, but this isn't something that's as easy a fix as Tinseltown's imperfect UltraViolet initiative would have viewers believe.

The original 28-day window was a win-win for the studio and rental company, but a losing proposition for the consumer. This new deal is a lose-lose-lose situation. The studios won't sell more movies. The services will further alienate their customers. Shut-out consumers will grow more detached from the release cycles that studios wanted them to be more cognizant about.

Hooray for Hollywood! You blew it.

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Motley Fool newsletter services have recommended buying shares of Netflix and Coinstar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (31) | Recommend This Article (20)

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  • Report this Comment On January 06, 2012, at 10:53 AM, MKArch wrote:

    Rick you make a huge logical error in assuming they had a choice in over the new terms. I've been pointing out for a year now on your articles that Netflix is minnow among sharks and you've got this whole thing bass ackwards. If Netflix signed up all 75M U.S. broadband households to it's $8.00/ month all you can eat subscription streaming service it would amount to ~$7.2B a year in revenues. Comcast alone already spends that much on video content. I don't understand how you don't get that the terms of deals Netflix is signing are all about ensuring Netflix doesn't screw up content deals with cable. IE: Netflix will get exactly the content that cable doesn't care that they get. That'll be what cable is going to give away in tv everywhere anyway.

  • Report this Comment On January 06, 2012, at 11:04 AM, MKArch wrote:

    Just to be clear Netflix isn't in negotiations for content they are being given take it or leave it offers that are designed to keep the cable companies happy.

  • Report this Comment On January 06, 2012, at 12:09 PM, SwiperFox wrote:

    Watched part II of "The Deathly Hallows" last night on DVD, then the "Absolute Wilson" documentary streaming.

    I don't mind waiting and I will never buy a Bluray or another DVD.

    ...and, I'll never go back to Directv. I wish they'd stop sending me their desperate, pleading letters :)

  • Report this Comment On January 06, 2012, at 12:22 PM, BlazerMania wrote:

    Rick, I'm not sure what you're worked up about. Count me as another Netflix customer who couldn't care less about this issue.

  • Report this Comment On January 06, 2012, at 12:40 PM, sheldonross wrote:

    Hmm, the media corporations just don't seem to get it. Here it is laid out as simple as possible.

    People want easy unfettered access to media.

    If you make a product that delivers that at reasonable cost, you get customers. That's what Netflix did, that's what iTunes accomplished with music.

    But the more artificial barriers you introduce, the more people will look to alternative means. Netflix may not get movies for 56 days, but a little site with the initials TPB gets them on release day...

    Time Warner, et al's luddite ways will backfire until they are dragged kicking and screaming into the digital age.

  • Report this Comment On January 06, 2012, at 12:50 PM, damonksoul wrote:

    Lose lose lose... Is right. The ONLY plus is that Netflix will have the same level of play when it comes to DVD.... But reed Hastings doesn't care about DVD business anyways!

    The studios are plain stupid... People who buy DVDs will buy not matter what... People who don't buy and wait for rentals well they will wait no matter what... Studios are shooting themselves in the foot!

    Netflix streaming subscription is crap.. But they have me hooked for the kid content.. Which is irreplaceable .. So I am willing to bet people with kids love this service... And I wouldn't be surprised if another wave of price increase is scheduled for Netflix users....

  • Report this Comment On January 06, 2012, at 12:54 PM, Melaschasm wrote:

    If the 28 day delay for Netflix was such a bad idea, why did Blockbuster enjoy big market share gains?

    People who want to see a movie right away watch it in the theater. The rest of us wait until it is available to rent.

    The author of this article is right about one thing. Time Warner is shooting themselves in the foot. People don't buy a movie because they can not rent it for a couple more months. People buy a movie because they plan to watch it frequently, or because they like having a huge movie collection.

  • Report this Comment On January 06, 2012, at 12:55 PM, Melaschasm wrote:

    The above comment should say: "why didn't Blockbuster enjoy big market share gains?"

  • Report this Comment On January 06, 2012, at 2:11 PM, MKArch wrote:

    sheldonross with all due respect the people who claim the "media corporations" don't get it are the one's who actually don't get it. This is real simple, you want to replace your $50/ month cable service with an $8.00/ month Netflix subscription. It ain't going to happen because the economics don't work. What does work is getting $8.00/ month of entertainment for an $8.00/ month subscription which translates to tv re-runs and ancient movies that the cable companies will be giving away with your cable subscription anyway. You get what you pay for and for $8.00/ month it ain't much.

  • Report this Comment On January 06, 2012, at 2:20 PM, MKArch wrote:

    BTW Reed Hastings has been telling you this in a round about way for a while. He's embraced the tv re-run service moniker in past shareholder letters and in his latest he argues that his subs value Pawn Stars re-runs more than Starz newer movie content because Stars content viewing time is only 8% of thier total. It was ~16% of the total before they lost the Sony content earlier in 2011 which should be a big clue about why on a percentage of viewing time basis tv re-runs beat Stars movies. Hint a new movie is two hours, there are probably dozens of hours of Pawn Stars re-runs. For $8.00/ month you get the convenience of viewing last years Pawn Stars episodes when ever you want instead of waiting for them to show up on the History channel. That is until your cable company strikes a deal to add this to their tv everywhere service in the near future.

  • Report this Comment On January 06, 2012, at 2:35 PM, sheldonross wrote:

    MKArch, your post is actually inline with mine. You seem to be arguing the economics of Netflix's position. I would consider this new media. Netflix rapid rise to prominence was a result of pent up demand for a superior media delivery system.

    Now the "old" media Time Warner, Sony etc, are putting up barriers to Netflix success. And subscriber numbers and customer satisfaction with Netflix is diminishing.

    The old media should embrace digital distribution and even if netflix's prices went up, if the content were there, people would stay.

    And you point about me not getting it doesn't make sense. I can't speak for everyone obviously, but I spelled out pretty clearly where I stand. I never buy DVDs or Blu-ray. I am willing to pay for a decent streaming service. Or I will consume my media some other way (TPB) or go without.

  • Report this Comment On January 06, 2012, at 2:41 PM, MKArch wrote:

    http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?F...

    Here's a better way to explain why you ain't replacing your cable company for $8.00/ month. Comcast has 22.36M video customers which is about the same number of Netflix streaming subs. Their programming costs in Q3 were $1.964B or annualized $$7.856B. Michael Pachter a long time bearish analyst on NFLX puts their content costs for 2012 at ~$2B or 25% of what Comcast pays. If Netflix signed up all 75M U.S. broadband households to their $8.00/ month streaming video plan it would only come out to ~$7.2B/ year in revenues. Comcast is paying ~$29/ month per video sub for programming right now. You ain't replacing this with an $8.00/ month all you can eat plan. This is why Netflix isn't negotiating content deals they're being told what they can have and can take the deal or leave it.

  • Report this Comment On January 06, 2012, at 2:43 PM, MKArch wrote:

    sheldon they are putting up barriers because Netflix is a pimple on their arse and the numbers don't work. You're not replacing your cable company for $8.00/ month no matter how unfair you think it is.

  • Report this Comment On January 06, 2012, at 2:43 PM, sheldonross wrote:

    And history has shown the folly of trying to hold on to old distribution mediums.

    The digital music revolution is a good blueprint for what's happening in video right now.

    CD's started declining and people turned to illegal services like Napster and Kazaa for simple access to music. The music industry fought tooth and nail to prevent this revolution, still clinging to the concept of selling CDs.

    It wasn't until iTunes came along that record companies saw the light. iTunes provides simple and easy access to the music people want and people are willing to pay a reasonable price for it.

    CD sales are still diminishing, but the music industry has finally embraced digital distribution. And iTunes is a cash cow.

    Video needs to reach some sort of analogue to this.

  • Report this Comment On January 06, 2012, at 2:46 PM, sheldonross wrote:

    "You're not replacing your cable company for $8.00/ month no matter how unfair you think it is."

    I've replaced my cable company with nothing but a internet connection, and Time Warner et al has simply lost all business from me. I guess they don't want my money.

  • Report this Comment On January 06, 2012, at 2:57 PM, MKArch wrote:

    Sheldon as long as you are O.K. with tv re-runs and ancient movies your internet connection and Netflix is fine for you. Hopefully you aren't a sports fan and don't mind missing the local news.

    I need to replace my BMW and would love to buy a new one for $5,000.00. No matter how much I wish my local BMW dealer would sell me one for $5,000.00 and how unfair I think it is that he won't it will never happen. For $5,000.00 I could probably buy back my current 2002 BMW.

  • Report this Comment On January 06, 2012, at 3:04 PM, MKArch wrote:

    BTW this new media streaming stuff is a bunch of hogwash, the cable companies have been streaming videos for decades. There's nothing new about having video sent to you over a wire.

  • Report this Comment On January 06, 2012, at 3:22 PM, seattle1115 wrote:

    Have you noticed that people will pay a premium for Apple products over and above the price they will pay for comparable products from other vendors? Part of the reason for that is the interface - most people simply find Macs and iPhones more intuitive than Wintel computers and Android phones.

    Likewise, comparing Netflix to the cable company's on-demand streaming service makes clear that the cable companies aren't interested in making their service easy and intuitive. (Similarly, comparing TiVo's interface with Comcast's godawful DVR interface reminds one once again that cable companies don't really understand or value their customers - but that's another rant.)

    The interface is the main reason why I love my Netflix streaming service and why I loathe Comcast's OnDemand. Unless and until the cable companies pay attention to these details, they'll be losing business that was theirs to capture.

  • Report this Comment On January 06, 2012, at 3:40 PM, MKArch wrote:

    I've got three words for you seattle:

    CONTENT, CONTENT CONTENT!

    Nobodies paying for a more convenient way of viewing crappy content. If you don't beleive me check out NFLX churn stats. Half of their sub base walked in the last 6 months alone. You are also wrong that the cable companies are not offering the same convenience. They call it tv everywhere and if you are a NFLX shareholder you better start paying attention to this.

    This is another one that Reed Hastings has been cluing you into in his shareholder letters even though analyst have been sleeping through it. The acronym is something like MSPD (multiple platform service deployment ) or something like that but it's cable & telco and tv their tv everywhere initiative. He's stated in his last few shareholders letters that this is the biggest competition to Netflix. Gee who would have guessed that having the cable companies give away exactly what Netflix charges for would be a threat?

  • Report this Comment On January 06, 2012, at 3:50 PM, MKArch wrote:

    BTW seattle if you want some good analogs for Netflix business I've got them. For competeing with free look at Netscape for a cheap as dirt subscription service with little substance look at AOL.

  • Report this Comment On January 07, 2012, at 12:26 AM, dgwife42 wrote:

    This also assumes all them signed the deal, Redbox has already spoken of a workaround strategy and Blockbuster Stores have been working around WB titles for months now already.

  • Report this Comment On January 07, 2012, at 2:40 AM, SirGalahad71 wrote:

    Sheldon nailed it on all on the head with his comparison to the Music industry and iTunes.

    I buy DVD's because I plan to watch them over and over so I don't care if Netflix makes them available immediately or in 56 days.

    I also agree that by making me wait longer to see a movie I am far more likely to forget about it all together. A good deal of the time the only reason I end up watching one of those movies they made me wait for is because I saw a preview on another DVD I was watching and it reminded me I hadn't seen it. Then I watch it on Instant view!

    Time Warner would be far better served to be asking Netflix to include previews for new releases of their movies at the intros to the instant view content.

    As for watching live sporting events, and current TV shows for that matter, there are plenty of sites on the internet which provide streaming content of those events LIVE and if you look around a bit you can find them for FREE! JustinTV for example.

    I watch instant movies, TV series, Documentries and whatever else when I want and where I want. All that for $8 plus the cost of my internet connection, which I would have anyway. That's a HELL of a deal and I DON'T have to skip commercials BECAUSE THERE AREN'T ANY!

    As for the argument that all the content is old, whatever! My Instant Queue is so long there isn't anyway I'm going to run out of things to watch anytime soon, old or not.

    If Netflix is so terrible buy stock in cable or Dish. In 5 years, or less, you'll be crying and wishing you had Netflix stock.

  • Report this Comment On January 07, 2012, at 2:41 AM, SirGalahad71 wrote:

    You guys bad mouthing Neflix are confusing the hell out of me. The stock jumps $16 in 2 days, and even if they only make back half of the $300+ share price they had before, anyone buying their stock now will be a VERY happy shareholder!

    Netflix made some bad calls, absolutely, but I agree with MF and see them going very much in the right direction!

  • Report this Comment On January 07, 2012, at 2:48 AM, seattle1115 wrote:

    @MKArch: No, I am not a NFLX shareholder. I am, however, an exceedingly satisfied customer. I get that you don't like their service, and that's fine. I however, do - a lot. It has completely changed the way I watch television.

  • Report this Comment On January 07, 2012, at 9:06 AM, MKArch wrote:

    SirGalahad,

    I was predicting an implosion for Netflix when it was at $180 running up to $300. I could care less what the momo's do with the stock for a couple of weeks the business of selling all you can eat streaming video's for $8.00/ month is a money loser and not sustainable and this thing will be trading in the single digits in a year or so if it doesn't go BK. I'm not a trader I'm an investor and as a long to TMF H.G. sub I know TMF is about investing not trading. My comments are directed at the investability of this business and IMO it's worthless. Maybe they get lucky and Microsoft decides to throw away another $8B and save their necks but if they are not taken over and have to rely on selling subscriptions to content the big boys are going to give away for free I pity the fool holding this bag.

  • Report this Comment On January 07, 2012, at 10:02 AM, MKArch wrote:

    BTW S.G. in addition to the latest buy out rumor with no substance there was some news from news from Netflix that sounds fantastic at a blush but when you dig into it shows desperation. They've never disclosed hours viewed until ole Reed mentioned at a conference recently that they expected viewing hours to be over 1B. Low and behold a few months later they disclose that viewing hours were actually over 2B.

    Sub growth would make money if their costs didn't scale with sub growth (which contrary to bull opinion they do) viewing hours don't make money. The fact that ole Reed sets up a newly minted bogey that he guaranteed he would beat so that he could manufacture some good news tells me there isn't any actual good news to be reported.

    I've already got a healthy gain on my NFLX red thumb in CAPS I'll be using this stupid run up to close out and re-up for even more gains. I don't know if the momo's are finished or not but I know where this thing is headed when reality finally sets back in.

  • Report this Comment On January 09, 2012, at 6:47 PM, SirGalahad71 wrote:

    Hey MKArch, how do you like Netflix now?????

    Gee don't all of us Netflix lovers feel so stupid now that the share price has gone up $29 since I wanted to buy it at $69.

    But I guess you think that's more manufactured good news huh?

    Netflix could well be the iTunes of the movie industry and it sure doesn't look like they are going to fade away anytime soon based on market activity over the last 3 days trading.

    AOL used to be the king of the internet. They told their customers where they could go, what they could view and how they could view it. THEN, the general public finally caught on that you didn't need AOL at all, just a simple web browser and you could go ANYWHERE you wanted. No more BIG Brother AOL telling you what to do.

    When the general public finally realizes they can get all the same shows and movies from the internet and Netflix, the only thing the cable companies are going to have left is PPV.

    People will no longer be limited to the programming the Cable companies allow them to see, it'll be the programming the customer WANT'S to see!

    As I see it, everyone dropped their stock because of the some bad decisions management made.

    Now that those mistakes have been corrected and management is back on the straight and narrow, everyone is buying back their stock. Which to me, means that there is every probability this train isn't going to stop till at least $300 a share or more.

    IMHO the price is going to continue to rise until at least $150 a share before it begins to slow down. Personally I think thats being conservative. It could easily be $200 and we are still no where near the $300 that they had per share during 2011.

  • Report this Comment On January 09, 2012, at 6:58 PM, SirGalahad71 wrote:

    MKArch, you seem to be hung up on the $8 all you can eat thing. You maybe right, perhaps it isn't sustainable, then again I would say the same thing about having to buy Blu Ray movies at $40 a pop.

    Think about this, if Netflix were to make a deal with the networks to show their programming and Netflix were to double, triple or quadruple the cost of the Sub, I'd pay that! It would STILL be a better deal than Cable! The possibilities become endless at that point. If they were to offer PPV?????

    At the moment it's just movies and re-runs and the cable companies are certainly taking notice, as are the movie studios. I think they are the ones looking scared.

  • Report this Comment On January 10, 2012, at 2:28 PM, bwilcox33 wrote:

    I just can't understand why people describe nflx content as "ancient movies and old tv reruns". This simply isn't true. I streamed 3 movies this past weekend, loved 2 of them, and all were from 2011. There's everything there from vintage to newer and very recent flicks. In making your points, this false premise needs to go. Also....everyone seems to forget that nflx is fast becoming global, so your USA based numbers are irrelevant.

  • Report this Comment On January 10, 2012, at 5:16 PM, classicspam wrote:

    Well Netflix I can understand due to the fact that Warner Brother's was probably going to hold their streaming content hostage which is the market Netflix wants to get into as a condition of them accepting the delay on DVD releases which is a market that Netflix wants out of. This is Netflix's biggest problem, in that, they have 0 leverage over the content providers and can be decimated on whim.

    As far as Blockbuster and Redbox...not sure other than there had to be some leverage by the studio's or something they gained by doing it or else they might have just as easily said no thank you we will buy them discs retail...

    Since Blockbuster was bought out, Dish may want Warner Brother's to play ball with Video on Demand...who knows...

  • Report this Comment On January 13, 2012, at 5:26 PM, trrll wrote:

    I've got hundreds of movies on my streaming list, and hundreds on my disks-by-mail list, more than I'll be able to see in years, so I don't much care about when the new releases show up. I put them in the "Save" section of my queue, and they show up when they show up. There's plenty to watch in the meantime.

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