On-Demand big in Warner’s corner

Studio aims to lure millions more to VOD

The numbers couldn’t be more stark: Movie sales and rentals on DVD generated $23 billion last year in the U.S. compared with only $1 billion or so from pay-per-view.

But Warner Bros., enticed by lucrative revenue splits and the chance to boost the revenues of Time Warner Cable, is hell-bent on luring millions more to video on demand, either through their cable box or Internet services such as Apple’s iTunes Store.

The studio, like its rivals, also wants to fend off piracy by making its movies easily accessible through legal means. To that end, Warners has compressed the PPV-VOD window on most of its movies, making them available the same day that each movie’s DVD hits the retail stores.

So far, no other major studio has followed suit. Tom Adams, a DVD analyst and head of Adams Media Research, says one big reason Warner Bros. has taken on the role of corporate canary in the coalmine is that it’s trying to generate extra coin for its Time Warner Cable sibling. (Time Warner, the parent company, will split off its cable operation into a standalone company by the end of the year.)

Andy Millett, senior VP of digital distribution for the studio, doesn’t deny that Time Warner Cable will benefit from a big leap in buy rates, but says Warners devised the day-and-date strategy to help all cable operators.

He calls cable VOD “a sleeping giant” and points to the potential revenue bonanza: The studio keeps 70% of every VOD rental compared to a paltry 30% or so for each disc rental.

The five other majors are aware of the favorable split, which is one reason why four of them — Disney, Paramount, Fox and Universal — are continuing their 18-month-long day-and-date test with Comcast Corp., the biggest cable op in the country. Comcast has set aside its cable systems in Pittsburgh, Atlanta and Denver for the test. Sony has taken a pass because it’s convinced the $4.99 rental price of each title should be a couple of bucks higher.

These Comcast experiments may not cause other studios to follow the Warner Bros. blueprint, but the tryouts are likely to stay in place because of an ongoing industry nightmare: Too many people are using illegal file-sharing to download movies off the Internet without paying for them.

It’s no secret that piracy costs the majors billions of dollars in lost revenues each year. But balanced against these disappearing dollars are studio worries that VOD will potentially steal Wal-Mart DVD customers, says Ted Engen, president and CEO of the Video Buyers Group, which represents 1,800 independent video stores.

But Millett says his studio competitors are being unduly cautious. “In our tests with Comcast and (research firm) Frank N. Magid Associates,” Millett says, “we found that day-and-date PPV has had little negative impact on rental of DVDs” in the stores and through subscription outlets like Netflix.

In the early results of Warners’ go-it-alone strategy, the studio has chalked up gains of between 30% and 60%, depending on the title, he says. With no competition from his major-studio rivals, Millett says Warners’ market share of the day-and-date PPV business has shot up by 40%.

But Joyce Woodward, senior VP of content for Blockbuster, says Blu-ray discs could prove mighty competish for VOD. The cable-TV equivalent of Blu-ray, high-definition PPV, is still in its early stages, giving retail stores the marketing ploy of a superior viewing experience from Blu-ray disc than from any PPV rental in the home.

In Woodward’s analysis, the rental and sale of the physical DVD will continue to easily be the most profitable window for the average theatrical movie. But the vidtailer is still trying to become a major player in electronic sell-through and rental; it recently bought Movielink, a digital platform once backed by the majors, and integrated it with Blockbuster.com. “Our goal is to follow what the consumer wants to do, no matter what the platform,” she says.

Woodward also points out that well over 40% of cable viewers can’t get VOD because they don’t subscribe to digital cable. And Bruce Leichtman, head of his own media-research company, says even when they do, operators figure to be more excited about promoting two other potentially bigger cash cows: telephone service and high-speed connections to the Internet.

That’s why studios may have to flog operators to keep promoting VOD. However, if the ops get too successful with day-and-date VOD, studios might start losing coin.

Adams says the studios can pocket as much as $17 dollars from the sale of one DVD. And the six majors and a few other movie companies, he adds, will harvest $15.50 from each movie download sold through Apple’s iTunes Store the same day that the DVDs go on sale.

The beauty of the iTunes arrangement is that it does away with the physical DVD and its packaging and distribution, an expense that the studios have to shoulder. Apple also sells movie rentals through its iTunes Store.

The stores argue that the manufacturing and shipping cost of physical discs is modest considering that “DVDs have generated the greatest windfall of profits in Hollywood history,” says John Marmaduke, chairman and CEO of Hastings Entertainment, a chain of retail stores spread throughout 21 states. “To jeopardize those profits with the unfulfilled promise of VOD would be extremely reckless.”

Millett doesn’t think DVD profits are in danger, citing the millions that Warners is spending in marketing a movie to run simultaneously on VOD and in DVD. “All of these promotional dollars,” he says, “make a larger number of people more aware of a movie’s availability.”

That awareness “will also drive the sale of the DVD,” he argues. Warners does not make major tentpoles such as “Harry Potter,” and “I Am Legend” available day and date “because these pictures already have tremendous awareness.”

And presumably, millions that will want to pay more money to own these movies for future viewing. In cases like that Warners will gladly give the retail stores and electronic sell-through services an exclusive window of up to 30 days to gather the bulk of their sales before cable viewers can rent the pictures on VOD.

Millet’s goal is to keep the money rolling on all fronts.

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