Warner Bros. is setting its sights on Redbox and Netflix amid the latest sign that consumers are abandoning retail DVD stores in favor of the fast-growing rental kiosks and mail subscription companies.
The Time Warner-owned studio on Thursday joined 20th Century Fox and Universal Pictures in announcing that it would not provide movies to leading kiosk operator Redbox until 28 days after they go on sale.
In a surprising move that hasn't yet been made by any of its competitors, Warner said it would impose the same restriction on Netflix and other DVD-by-mail subscription providers unless they agreed to "a day-and-date revenue sharing option."
The announcement came as Blockbuster Inc., the nation's largest retail DVD chain, released a grim quarterly report in which it said revenue plummeted 22% for the three months that ended in June, underscoring consumers' growing disinterest in browsing store shelves for a movie to take home and watch.
Like every major studio, Warner Bros. has a revenue-sharing agreement for some of the movies it rents through Netflix. It's apparently seeking a more lucrative deal as Netflix continues to grow amid an overall declining home entertainment market.
"We'll evaluate the current proposal and discuss it with the studio, which is what we've always done," Ken Ross, Netflix vice president of corporate communications, said in response to the announcement.
Warner Bros. is the first studio to try to renegotiate its deal with Netflix recently. Its public move could be a sign that other studios will be looking to Netflix to help make up for declining revenue from DVD sales and retail rentals.
While that's happening, Warner Bros. probably will find itself on the receiving end of a lawsuit from Redbox soon, just as Fox and Universal have been for their similar attempts to delay DVD kiosk operators from offering new releases.
All of those studios are concerned that Redbox's $1-per-night rentals are undercutting more lucrative rentals from other services and DVD sales.
On a conference call after the conglomerate's most recent quarterly report, Time Warner CEO Jeff Bewkes compared Redbox to theaters that show movies several months after they premiere: "In general, we think there may well be a role for $1 rental kiosks," he said, "just like $1 movie theaters."
Lions Gate Entertainment and Sony Pictures, meanwhile, both recently signed five-year deals with Redbox worth more than $200 million and $460 million, respectively, guaranteeing that they will provide their discs to the company.
The reasons for Hollywood's anxiety over Redbox and Netflix were clear in Thursday's financial report from Blockbuster, which not long ago was the nation's dominant provider of home video rentals.
Its same-store rental revenue fell 13.3%. Blockbuster said the drop was partly due to reduced inventory as it tried to generate more cash to handle its debt load. Although CEO Jim Keyes said in a call with analysts after the company's last earnings report that a renegotiation of a revolving line of credit meant stores would be fully stocked and more aggressively marketed, he conceded Thursday that that didn't happen.
"Temporarily during the first and second quarter, we put our plans for increased availability on hold," he said on a call with analysts. "We made this change with the recognition that we were also facing new and very aggressive competition who are better capitalized and would likely take share from us as we pulled back."
The company also blamed the rental decline on "the challenging macroeconomic environment and the increasingly competitive landscape." Redbox and Netflix, the two leaders in that "landscape," saw their revenue last quarter grow 110% and 20%, respectively.
Same-store sales, meanwhile, plunged 37.9%, a drop Blockbuster blamed on poor performance in the video game segment. Blockbuster is also working to deploy DVD renting kiosks. Keyes said there would be 2,500 in the market by the end of the year. Redbox plans to have 21,000 to 22,000.