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Netflix agrees to delay in renting out Warner movies

Under the deal, the fast-growing DVD subscription company will wait until 28 days after a movie goes on sale before offering it to customers.

January 07, 2010|By Ben Fritz and Dawn C. Chmielewski
  • Netflix workers sort DVDs at the company's Piscataway, N.J., distribution center in March.
Netflix workers sort DVDs at the company's Piscataway, N.J., distribution… (Marine Laouchez / AFP/Getty…)

Reporting from Los Angeles and Las Vegas — On Wednesday evening, Mike Chauvet opened a red envelope from Netflix and popped "The Hangover" into his DVD player.

"I try to get most of the movies I watch through Netflix," said the 30-year-old physician, who lives in Queens, N.Y.

Now he's going to have to wait for the privilege.

Warner Bros. has struck a deal with Netflix Inc. whereby the fast-growing DVD subscription firm won't offer the studio's movies until 28 days after they go on sale. Had the deal been in effect last month, "The Hangover," which went on sale Dec. 15, wouldn't be available on Netflix until Jan. 14.

It's part of a strategy by several studios to create staggered releases of DVDs so that the most profitable transactions are available first and cheaper rental options take effect further down the road. The move could be copied by other studios, forcing consumers to wait nearly a month if they want to rent popular movies from Netflix.

"Within the home entertainment category, we're creating different times at which a product is available at different prices," said Kevin Tsujihara, Warner Bros.' home entertainment president.

The studio is hoping that the four-week window will push consumers interested in watching movies at home to buy the DVDs or pay a premium to rent them from stores like Blockbuster or from Internet and cable video-on-demand services. Warner Bros. already imposes a 28-day window on $1-a-night kiosk firm Redbox.

Although Warner's unilateral move against Redbox has led to a court battle, Netflix agreed to the 28-day window in exchange for improved financial terms and more content for its Internet streaming service.

DVD sales declined 13.7% last year, and some studios have fingered Redbox and Netflix as primary culprits. Despite their fast growth, Redbox and Netflix rentals generate comparatively smaller profits for studios.

Other studios besides Warner have privately expressed similar concerns about Netflix, which has more than 11 million subscribers. 20th Century Fox and Universal Pictures, in a possible signal of their intentions toward Netflix, have already restricted the availability of their DVDs to Redbox.

The new Netflix deal terms represent a bet by both sides that consumers will be willing to spend about $20 to buy what they want right away or otherwise wait nearly a month to get it as part of their subscription.

"This deal uniquely works for Netflix because our subscribers are desensitized to street dates and more interested in being matched to the perfect movie," said Ted Sarandos, Netflix's chief content officer, who handles studio relationships. "Some subscribers will so passionately want to see it in the first 28 days they may go out and buy it, just as some people want to see 'Avatar' so badly they pay to watch it in 3-D."

Under the complex renewal terms finally worked out, Netflix agreed to the 28-day delay in exchange for a more favorable percentage of rental revenue from Warner Bros. discs. Netflix will use the savings to expand its stock of the studio's DVDs and triple the number of Warner catalog titles it provides through its online streaming option.

Sarandos said that Internet streaming is a key growth area for Netflix and that he hoped other studios would follow Warner's lead.

"There are all different levels of interest," he said. "Future deals will depend on timing and other studios' appetites to make a bet on that window."

ben.fritz@latimes.com

dawn.chmielewski @latimes.com

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