Bloomberg News

Studios Manage DVD Death With Profits on Digital Rights

September 14, 2012

(Corrects Fox-HBO terms in 11th paragraph.)

Film premieres get all the attention in Hollywood while the cash cow for years has been selling those silver DVDs to a home video market far more predictable -- and profitable -- than the hit-or-miss theatrical release game. That’s why it was widely thought the movie business would take it on the chin as disc ownership gave way to digital distribution of content, just as the music business has been decimated by the shift to MP3s.

Yet Hollywood is discovering there’s life after the DVD. With Netflix Inc. (NFLX:US), Amazon.com Inc. (AMZN:US), and soon Verizon Communications Inc. (VZ:US) and Coinstar Inc. (CSTR:US)’s Redbox bidding for rights to stream movies on Kindles, iPads, and TVs, the studios are enjoying a boomlet that’s taking the edge off declining disc sales and rentals, Bloomberg Businessweek reports in its Sept. 17 issue.

Studio-backed pay-TV channel Epix became the latest to strike gold earlier this month when it signed a multiyear agreement with Amazon to supply such films as “The Hunger Games” and “Marvel’s The Avengers” for Amazon’s Prime Instant Video service.

Epix, co-owned by Viacom Inc. (VIAB:US)’s Paramount Pictures, Metro- Goldwyn-Mayer Pictures, and Lions Gate Entertainment Corp. (LGF:US) ended its exclusive deal with Netflix and is expected to make as much as $80 million more a year selling the same content to the two streaming rivals and to a third venture financed by Verizon and Redbox, BTIG Research analyst Rich Greenfield says.

Old Model

Epix’s journey illustrates how Hollywood’s old model, in which movies slowly made their way from theaters to small-screen reruns, continues to evolve. These days digital outlets such as Netflix and Amazon vie with Time Warner Inc. (TWX:US)’s HBO and CBS Corp. (CBS:US)’s Showtime for movies at the so-called premium cable window, a lucrative stop that comes after films have run in theaters, been sold as DVDs and appeared on pay-per-view.

That’s given Hollywood the chance to play the services against each other and replace some of the revenue lost with the drop in DVD sales and the decline of rental outlets such as Blockbuster.

The post-theatrical release market has grown from selling movies for late-night showings on three TV networks to providing content to over 200 cable, satellite, and Net services. Wary of following the music industry, which failed to see the threat of Net piracy and the downside of relying only on Apple Inc. (AAPL:US)’s iTunes for a la carte sales, Hollywood is looking for ways to embrace new business models without being tied to a single distribution outlet, says Mark Greenberg, chief executive officer of Epix.

‘Reinventing Ourselves’

“We are all reinventing ourselves and going after different competition in different ways,” he says.

As recently as the mid-2000s, a consumer might go to the theater, collect discs at $20 a pop and still pay to see “Steel Magnolias” again on HBO or other cable outlets that purchased exclusive rights to show the titles on TV months after they hit retail shelves.

Since Apple, Netflix, Google Inc. (GOOG:US) and others began serving up digital copies that give consumers access to flicks anywhere, anytime, fewer people are buying hard copies. Led by falling DVDs, home video sales have dropped 16 percent, to about $18 billion in 2011, since peaking at $21.8 billion in 2004. And pay-TV outlets are scrambling to find ways to retain viewers now that almost 90 percent of America’s 115 million TV households have the capacity to access a broad catalog of films via the Web.

Streaming Service

In August, HBO got News Corp. (NWSA:US)’s Twentieth Century Fox to extend its agreement to sell newer movies exclusively to the premium channel. The deal, through 2022, lets the same Fox content be sold through online outlets like Apple and Amazon while it’s on HBO, though not to subscription services like Hulu LLC, Jeff Cusson, a spokesman for the channel, says.

“HBO considers exclusivity valuable, whether it be our original programming or theatrical” releases, Cusson says.

For now, HBO can take solace in studies that show almost 75 percent of viewing households still haven’t accessed content online. Still, it’s only a matter of time. So Time Warner CEO Jeffrey Bewkes is pushing his cable channels to produce more original content, such as HBO’s “Game of Thrones,” and serve it up via the Web.

Premium channels also will try to strike deals to get studios’ top films first, says Jim Gianopulos, co-chairman of Fox Filmed Entertainment.

“Eventually these services will differentiate themselves by the content they offer.”

Strike Deals

Cable and streaming outfits have seen the price of movie content soar -- Netflix’s costs to acquire content in 2012 will rise to more than $2 billion from about $800 million, predicts Wedbush Securities. So they’re parsing the numbers more closely.

Armed with data about what its subscribers are watching, Netflix is taking a harder look at its content costs. Because Epix offers movies to Charter Communications Inc. (CHTR:US), Dish Network Corp. (DISH:US), and Verizon’s FiOS service, and enforced a 90-day delay in Netflix showing those same titles, Netflix cut the amount it pays Epix in exchange for letting it strike deals with other online subscription services, says Ted Sarandos, the online service’s chief content officer.

To give it additional negotiating leverage, Netflix is developing its own programming. Next year five shows, including Kevin Spacey’s “House of Cards” and new episodes of the cult comedy “Arrested Development,” will be exclusive to Netflix’s 25 million U.S. subscribers.

Such moves are a shot across the studios’ bow. Should Netflix, Amazon and other online subscription sites not see their customer rolls jump as a result of the expensive deals they’ve cut with the studios, they will focus less on movie acquisitions and more on developing original programming, says Clark Hallren, an independent financial entertainment adviser.

“It’s temporary while people see if this money they’re spending generates subscribers.”

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Michael White in Los Angeles at mwhite8@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; James Ellis at jellis27@bloomberg.net


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