Netflix, Warner Bros. rejigger movie renting

Netflix has agreed not to rent new titles for 28 days after they are released. In exchange, Netflix gets more streaming content, and that's the company's future.

Netflix CEO Reed Hastings
Reed Hastings does some significant horse trading with Warner Bros. Greg Sandoval/CNET

Netflix subscribers who stream films over the Web will soon be getting access to a greater number of movies from Warner Bros.

In a groundbreaking deal for online movie rentals, Netflix and Warner Bros. Home Entertainment announced Wednesday that they have expanded their licensing arrangement for streaming movies, and Netflix now has licensing rights to more of the studio's catalog content. In exchange, Netflix agreed to do something it has never done before. The movie-by-mail service won't offer new releases from the studio on DVD or Blu-ray discs until 28 days after they go on sale.

Before you new-movie fans go berserk, listen to what the deal means for the studio and the Web's No. 1 film-rental service . Let's start with Netflix.

Netflix needs content for the company's streaming service and must obtain that content in a difficult market.

CEO Reed Hastings has proved he can obtain plenty of physical film discs, even when the studios have tried to stop him. But to stream movies, Netflix needs licensing rights and those are much tougher to come by than discs. With the Warner Bros. contract, Hastings has obtained those rights from one of the major Hollywood film studios. In addition, Warner Bros. has promised to provide Netflix with a greater number of DVD and Blu-ray discs to rent once the "sales-only" period for a film runs out.

"We're able to help an important business partner meet its objectives while improving service levels for our members by acquiring substantially more units...after a relatively short sell-through window," said Ted Sarandos, chief content officer at Netflix. "At the same time, we're able to extend the range of choices available to be streamed to our members."

Not everybody is buying the idea. On Wednesday afternoon, Twitter was awash in complaints about the 28-day waiting period. The naysayers may want to consider, however, that to secure content for its streaming service , which is undoubtedly the company's future, Netflix is going to have to either pay through the nose or find some other way to compensate the studios.

Netflix is in the precarious position of having to negotiate for content with companies that have at varying times distrusted Netflix's business model or were openly hostile towards it.

"It sounds like Warner has found a way to support sales while also supporting rental."
--Jan Saxton, Adams Media analyst

Here's the starting point: The studios would much rather sell consumers a DVD than rent them one. Profit margins on a movie sale are higher than on a rental.

In the past, when the studios tried to stop Netflix from obtaining content, the company has frustrated them by acquiring discs from other retailers. Then there was Netflix's deal with cable movie channel Starz. Instead of obtaining the streaming rights from the studios,' Netflix found what some studio execs consider a backdoor route to those movies. That didn't endear Hastings to them.

Then there's the competition. With almost everybody in film distribution charging to the Web, including cable and video-on-demand services that pay huge fees to obtain movie rights, the studios have plenty of people willing to compensate them for Internet rights. Hollywood isn't just going to give those rights away.

Netflix would unlikely be unable to pay the studios what they want for those rights and continue to offer customers all-you-can-eat movie viewing for $9 a month.

This might be why Hastings dispatched Sarandos to Hollywood recently to sell the sales-only plan to studio chiefs.

For Hastings, it comes down to either helping the studios protect a sales-only window and forcing a 28-day waiting period for new releases--which only makes up about 30 percent of Netflix's business--or raising subscription fees. Which would you choose?

If you believe the Web is Netflix's future, it's an easy pick.

Jan Saxton, an analyst with Adams Media Research, called the deal "brilliant."

For Warner Bros., the deal could be a watershed moment if the studio can convince other services to respect a similar sales-only window. DVD sales are in decline and the studios are determined to try to preserve them. Saxton said that by striking this unprecedented deal with Netflix, Warner is proving that it is willing to experiment.

"What the studios are learning is that in the recession, as consumers are watching their dollars and the bargain for a single viewing is a better than buying," Saxton said. "It sounds like Warner has found a way to support sales while also supporting rental."

Saxton added that the agreement continues Netflix's long history of using technology and innovation to grow its business. First came the automated sorting machines to build the breakthrough mail-order business.

Then came the hardware deals with set-top makers, such as Roku , LG, and Microsoft that enabled viewers to watch Netflix's streaming video on their TV sets, which Saxton says was crucial.

"Netflix's management have proved to be extremely nimble and able," Saxton said. "Their leadership has been brilliant at adapting technology and using it to create the right approach for the market."

 

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