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.
