The Red Circle

By Tom Nix

UPDATE 01.06.10: Warner Brothers has become the first studio to institute a release window. All new WB titles will become available on Neflix 28 days after release to retail. However, part of the deal with WB constitutes that the studio will make more Direct-to DVD titles available to Netflix subscribers, as well as increasing the amount of Instant Play content. These certainly feel like consolation prizes, but any steps taken to increase Netflix’s already fantastic On-Demand section is good news.

Now we just wait for the floodgates to open, as the rest of the studios neatly get in line to broker similar deals. Warner Brothers was the studio that decided the HD-DVD/Blu-ray War. It looks like they’ve fired the first shot in this one.

The good guys might lose this one.

It looks like Hollywood, in a move that can only be described as recklessly greedy, is in the final stages of implementing a 30-Day Waiting Period with Netflix for access to new release content. You see, they feel that the allure of an all-you-can eat model of film consumption is driving people away from the big box retailers, and thus away from purchasing DVDs and Blu-Rays. And thus, keeping money out of the pockets of the studio heads. It’s a blame game that has no business being played. Sales are down from last year, but maybe it’s  because instead of films like The Dark Knight, Iron Man, and Wall-E as top selling discs of 2008, we’re faced with Twilight, Madagascar 2, and the Miley Cyrus movie holding the weight this year.

The reason less and less movies are being sold is that less and less movies are worth owning.

But, regardless. Let’s look at the facts of this new development. The studios want a 30 Day Window in which they can exclusively sell their wares at retail without consumers fleeing to their Netflix queue. In return, they have offered to sell Neflix the movies they ship out to their 11 Million subscribers at a lower rate. Netflix sees an improvement in thier NOP (That’s Net Operating Profit), and the studios will hopefully see an increase in DVD and Blu-Ray sales and rentals. It seems though, in an age where piracy of media is so rampant to begin with, taking away one of the only real-deal legitimate ways of consuming new material will only lead to an increase of people stealing money from the studios. In terms of the relationship between Hollywood and its audience, its decidedly lose/lose.

Let’s be clear on one important thing: Rental chains like Blockbuster and Hollywood are NOT affected by the 30 Day Window. These retailers charge per disc rental fees, and they also sell new release films. This is the model Hollywood would prefer. It’s strictly companies like Netflix who have a monthly plan, and RedBox, who rent out heavily discounted new releases via their ubiquitous machine, who will be subject to this new policy.

Netflix gets 70% of its business from catalog titles being shipped out all across the country, leaving a relatively small 30% of strictly new content being pushed into mailboxes around the country. So, maybe this deal won’t hurt Netflix as bad as a lot of people are saying it will. But there’s still a question floating around: What constitutes a new release? Are we to assume that a new release is any film released on any format on a certain date, or are new releases the movies that are getting their first time introduction to home video after a few moths of theatrical screenings? For example, this week saw both Up and Monsters Inc. hit blu-ray. Would Netflix subscribers have to wait until December 10th to rent both flicks, or would the already released on DVD Monsters Inc. see no restrictions placed on its availability?

I contacted Netflix to ask this specific question and was given a “no comment” by Steve Swasey, VP of Corporate Communications. Either its simply too early in negotiations to give a reliable answer (probably the case), or we are looking at a day-and-date lockout. Which means that not only will James Cameron’s Avatar be a month delayed in getting to our TV screens, so, too will Peter Jackson’s Lord of the Rings Blu-Ray re-release. I think its a no-brainer how this will affect RedBox’s business. Let’s take a look at the potential outcomes of this agreement for Netflix.

1. Netflix rejects the 30-Day Window. The least plausible scenario. Netflix turning down this agreement will inevitably lead to one or more studios pulling support from Netflix. This will see less and less titles available, and more and more customers leaving the company. Bottom Line: Netflix loses customers. Neflix loses revenue.

2. Netflix agrees to the 30-Day Window, goes about business a usual. Netflix users will still get their catalog titles in a fair amount of time. With the cost break offered by the studios, Netflix is able to purchase more of the new release titles that are delayed, decreasing ship time to subscribers who have stayed on. They will also be able to increase the amount of films available for instant play, increasing the customer base who does not need a physical format. The customers who use Netflix as a one-price-fits-all alternative to waiting in line at Blockbuster may find the need to cancel their memberships. Bottom Line: Netflix loses customers. Netflix remains profitable.

3. Netflix offers the triple dip. As I’m sure many of you are aware, there is an additional fee to get Blu-Ray discs shipped as part of your plan. The $8.99/mo 1-at-a-time unlimited rental/streaming becomes $10.99. The $17.99/mo three-at-a-time unlimited plan (easily the most popular choice) becomes $20.99. With the addition of a “New Release Fee,” those prices could increase another three to five dollars a month for access to the newest content. The Netflix loyalists will either bite the bullet or stay on and not pay the new fee. Netflix will see a drastic downturn in new subscribers, and many long-time users will feel betrayed and over-charged. Bottom Line: Netflix loses customers. Netflix loses revenue.

4. Netflix takes out stake in Brick and Mortar. Netflis opens a small amount of brick and mortar stores with a 30-Day shelf life on new releases. These rentals are handled only through a monthly subscription to Netflix – All existing users are welcome to the store – and Netflix options a new “Store Based” pricing scheme that does not ship by mail, and is relegated to an all you can eat of New Releases handled through the store. Perhaps $30/mo for non subscribers, and an additional $10/mo for existing users. This allows both Netflix to maintain a very profitable web-and-post based business, as well as a way of issuing new releases in a pseudo-pay-per-use plan to keep the studios happy. The likelihood of this becoming a reality is incredibly slim, but the Bottom Line: Netflix Adds Customers (but charges them significantly more). Netflix remains profitable.

Netflix has had its share of defeats in the past, and to be sure, this is just a stumbling block. Their business is almost bulletproof. The more they focus on the on-demand market, and the more they can increase the flow of next-gen media to the customers not equipped with the digital download tech, the better off they will be.

It’s just a shame that no matter how you look at it, the good guys – Us – the people that pay for these services and media – get the short end of the stick again. As if the release of Transformers: Revenge of the Fallen didn’t signify that Hollywood thinks of us as a bunch of idiots with dollar signs tattooed on our foreheads, this pretty much seals the deal.

Are you a Netflix subscriber? How do you feel about this development? Leave a comment below!

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