NEW YORK — Comcast, the giant cable operator, has convinced five of the six major studios to participate in a test that could turn pay-per-view movies from a nothing revenue stream into a profit-generating bonanza.
As part of an unballyhooed experiment that kicked off 10 weeks ago, people who subscribe to Comcast’s digital service in Denver and Pittsburgh can order titles such as “Superman Returns” through PPV video-on-demand on the same day the movie’s DVD hits videostores. (“Superman Returns” was Comcast’s inaugural movie, kicking off on Nov. 28.)
That day-and-date blueprint is a first: Before it gets hold of a movie, cable PPV typically has to wait anywhere from 30 to 60 days before the title springs free of its exclusive bondage in the videostore window.
These windows — which are, at least in part, responsible for the sluggishness of the PPV VOD business — were justifiable when DVD rentals were funneling big profit increases into the studios’ coffers year after year.
But the business of DVD rentals has begun to soften in the last two years, propelling the studios to scout around for fresh income sources.
Enter Comcast chairman Brian Roberts, who has pleaded with the studios for more than a decade to stop giving vidstores what he regards as an unfair advantage in movie windows.
The studios listened this time, not only because DVD rentals have stopped climbing but because Comcast has passed a milestone: More than 50% of its 24.1 million subscribers buy the digital boxes that allow them to order PPV movies on demand (with the ability to pause, fast-forward and rewind).
That’s a lot of potential PPV movie renters, permitting cable to claim another advantage over Blockbuster: For every $4 PPV movie rented by a cable subscriber, the studios pocket $2.40. That same $4 DVD rented by a videostore customer delivers only $1.20 to the studios.
Comcast hasn’t put out any hard data on the Denver/Pittsburgh initiative, but Roberts told analysts recently that buy rates in the two cities are up substantially.
So even if PPV rentals through cable TV ended up demolishing the DVD rental business outside the home, the studios still would come out substantially ahead.
So why are the studios moving so cautiously, keeping the trial limited to only two cable systems? Because there’s an even more lucrative DVD business that could be dented by PPV-on-demand: the sale of movie DVDs in chains such as Wal-Mart and Target.
Craig Moffett, media analyst with Bernstein Research, says his data show revenue from the sale of DVDs or videos in Wal-Mart, Target and other retailers has ballooned to $19 billion a year, compared with $8.2 billion a year for rentals (including Netflix and online movie services such as CinemaNow).
If the sale price of a DVD averages $16.50, according to Moffat’s numbers, the studios typically harvest about 53% of each purchase, or $8.75. What worries the studios is that people who can rent a PPV movie on the day its DVD goes on sale at Wal-Mart may not only avoid renting the DVD but also steer clear of buying it. It would take almost four PPV rentals at $2.40 apiece to cover the loss of one DVD purchase at $8.75.
But Page Thompson, senior VP/general manager of video services for Comcast, says the buyer of a movie on DVD is a different animal from a renter of the title on DVD. “People want to collect DVDs of movies they like,” Thompson says. “People also buy lots of DVDs as gifts. And the DVD extras are often a lure for someone who wants to learn more about a particular title.”
The next battleground between cable TV and the retail stores could well be high-definition. Thompson says Comcast is offering digital subscribers as many as 100 hours a month of high-def VOD, including PPV movies, free movies, musicvideos and selected TV series like “CSI.”
But Michael Pachter, an L.A.-based media analyst for Wedbush Morgan, says the studios are salivating at the prospect of re-releasing hundreds of their titles in the new format, charging up to $30 a movie for a high-def DVD, $16 of which would zip straight to the bottom line.
The last thing the studios want, Pachter says, is to make it so easy for cable subscribers to rent a PPV movie early in the window that they’d lose all interest in buying an expensive HD-DVD player, depriving the movie companies of billions of dollars in potential profits.
Maybe that’s why Wal-Mart doesn’t appear to be losing any sleep over the Comcast test in Denver and Pittsburgh, secure in the conviction that the studios will always gravitate to where the money is.