Netflix likes price-window tradeoff

PHYSICAL: Retailer asking for hefty discounts, which studios have yet to give

By Susanne Ault -- Video Business, 11/6/2009

NOV. 6 | PHYSICAL: Netflix will accept a one-month delay on new releases—an option it is discussing with several major studios—but only if its inventory cost is slashed by as much as half, according to sources.

The subscription rental company is believed to be discussing such an arrangement with Warner Home Video, Universal Studios Home Entertainment, 20th Century Fox Home Entertainment and possibly others. None of the studios has agreed to drop prices as much as Netflix wants, sources said.

The same three studios have already imposed a window of at least four weeks on rental kiosk operator Redbox, as they strive to either push low-cost rentals into a later window or realize more profit from kiosks and subscriptions.

Redbox is suing the three studios and stocking its kiosks with their titles bought at retail, but Netflix is more willing to take new releases in a later window for reduced title costs. In fact, insiders say it’s an idea Netflix pitched to studios several years ago.

“Creating a rental window is not a punitive action,” Netflix chief content officer Ted Sarandos said. “It’s a decision that the retailers and studios can make together. If the studios can entice a rentailer to create a rental window, I believe that rentailers, studios and consumers can all benefit from it.” He would not comment specifically on the pricing Netflix is looking for, but did confirm it is seeking discounts in exchange for the window.

Warner has publicly confirmed its current window negotiations with Netflix. Spokespeople for Fox and Universal declined comment on window considerations with Netflix.

Netflix’s core business is catalog transactions, which make up about 70% of its revenue. That should help ease an introduction of a 30-day delay on new releases, since most Netflix customers are relatively more interested in older content. Redbox, with nearly 100% of its business in new releases, sees the delay as more oppressive to its operations.

Studios and other sources note that Redbox and Netflix are the focus of delayed rental windows because they have much more momentum that bricks-and-mortar stores and are consequently viewed as the biggest threat to consumer sales.

“They’ve definitely grown and are a significant leader in the rental market,” said one studio executive of Netflix. “With a 30-day window, it won’t hurt their model. And they can help us overall with sales revenue.”

Studio sources said Blockbuster has been left out of the window discussion because it orders more product from the studios than Netflix and Redbox and pays a relatively high price for titles.

It’s unclear whether windowing at Netflix is imminent, but the rate at which the company is adding subscribers—it’s now at more than 11 million—is pushing studios into action.

“The economics with Netflix don’t work for us,” said another studio source. “There are several ways to change the outcome, one way is windowing, rev-share or acquisition price. But the economics need to change.”