Best Buy: Delays on DVD rentals boost sales

The agreement by Netflix and other top video-rental services to wait 28 days before renting newly released DVDs appears to be boosting disc sales--as much as 30 percent in some cases, say two national retailers.

Representatives from retail chains Best Buy and Hastings Entertainment told CNET during the past week that disc sales and even rentals are up for movies that aren't available at Netflix or Redbox during what has come to be known as the "sales-only window."

"On sales of specific titles, we've seen our market share go up over time and degradation of sales has slowed [as a result of the 28-day window]," said Allen Hughes, merchant director for Best Buy, the man who handles disc sales for the chain of consumer-electronics stores.

Last August, Jeff Bewkes, CEO of Time Warner, parent company of Warner Bros. Pictures, credited the sales-only window with lifting DVD and Blu-ray sales at Warner Bros. Pictures, especially for the first four weeks after a title has gone on sale.

The sales-only window got its start in January 2010, when Netflix and Warner Bros. Home Entertainment announced an unprecedented deal. Netflix would delay renting the studio's newly released movies and then would use the money saved from purchasing new releases to acquire more content for its streaming-video service. Redbox soon agreed to honor a sales-only window and two other Hollywood film studios, NBC Universal and 20th Century Fox, also adopted similar windows.

The windows were designed to help protect sales of DVDs as well as Blu-ray discs, a physical format that is still growing. Overall disc sales for the entire industry, however, have declined for several years. Much of the problem can be traced to consumer tastes, which are shifting toward rental rather than ownership.

A year after the Netflix-Warner deal was struck, some retailers say they're encouraged by the results. If the trend continues, Netflix might be able to use the sales-only window to pen similar agreements with other TV and film companies and that could help the company acquire more streaming content. In many tech circles, the thinking is that the Web will become a dominate means for film distribution.

Related links
• Netflix, Warner Bros. rejigger movie renting
• Redbox, like Netflix, agrees to sales-only window

The transition from physical discs to the Internet, however, will not occur over night, according to John Marmaduke, CEO of Hastings Entertainment, a retail chain that sells books, DVDs, and CDs out of 146 stores in 21 states. He said there's still big demand for physical media, he said.

To learn how the sales-only window has impacted business, Hastings' managers analyzed 24 titles with similar box office receipts--half with the 28-day window and half without--to try and make an apples-to-apples comparison, according to Victor Fuentes, vice president of merchandising. The company tracked sales performance after four weeks and then again after eight weeks. Rentals were tracked at six weeks.

Sales for films that were protected by a sales-only window were 32 percent higher for the first four weeks than the group of films that were without a window, Marmaduke said. At the eight-week mark, the numbers were similar. The sales-only category was 29 percent higher for that period. For rentals, discs with the window fared better by 28 percent. Pricing and advertising strategies were the same for both categories, Fuentes said.

"We weren't surprised to see this kind of performance," Marmaduke said, adding that the way to fix DVD sales isn't a mystery. He said allowing Redbox to sell new releases for 99 cents would naturally make it harder for others to sell and rent movies at higher prices.

Techies aren't' whole marketplace
"This isn't brain surgery," Marmaduke said. "We saw the impacts that 99-cent rentals had on sell through. It doesn't take a great leap to figure out how that affects business." Marmaduke noted that the sales-only window was much criticized by tech pundits and that there's been a lot written by the death of the DVD.

"DVDs are still a $12 or $14 billion business," he said. "What people from the tech world often do is confuse themselves with the entire marketplace."

Critics of the sales-only window predicted that Netflix would alienate a large number of subscribers and in the end the scheme would fail to raise disc sales. They argued that consumers no longer want to collect movies and are unwilling to pay traditional prices to buy or rent. Techies also maintain the Internet has become the main entertainment hub in a growing number of households and that's where they will look to obtain movies as well.

It's still early yet in the development of Web TV but all those doomsday predictions haven't become realities. Netflix's decision to adopt a moratorium on rentals of new releases doesn't seem to have slowed the company's growth whatsoever. Last year, Netflix increased the number of subscribers by more than 60 percent from 2009, thanks mostly to the popularity of its streaming service. At the same time, most TV and film viewing still occurs via traditional outlets like DVDs, cable, and broadcast stations.

At Best Buy, managers believe Internet distribution will be big but still see a viable market for sales and rentals of discs, according to Hughes. He declined to share the same kind of data that Hastings offered but did provide an example of how the sales-only window was helping his company.

He said that if, say, a million discs were sold in the United States for a newly released title and Best Buy stores were responsible for 15 percent of those total sales, then typically for films with a sales-only window, the company might see 20 percent market share later on (note: the figures used by Hughes were just to illustrate his example).

No doubt, helping to drive some of the increases is that Best Buy is doing its best to play up its access to new releases. Not only has the company "aggressively priced" new releases, marking them down 10 to 15 percent in some cases, but in the company's online and offline ads for newly released titles it prominently notes that customers won't be able to acquire the videos from Netflix or Redbox until 28 days later.

Netflix spokesman Steve Swasey said only a relatively small percentage of subscribers seek new releases. He remarked that the sales-only window provides the company with extra resources to acquire streaming content while also benefiting its suppliers, the major film studios.

But when you talk about the future of physical media, it's hard to imagine a comeback--at least to the lofty revenue numbers it once generated. For years, home video sales outpaced box office. At the same time, all the major players are staking out turn in Internet distribution.

Netflix is doubling down on Web streaming. Time Warner and Comcast are pushing TV Everywhere, a service that enables subscribers to view cable content over the Web. Google, Wal-Mart, Apple, and Amazon also compete in Web video.

Marmaduke says studios shouldn't let themselves be won over by all this technology, and should remember what's missing from all the Web-video talk is profits.

"The most important reason not to give up on the DVD is that the studios have to make money," Marmaduke said. "Digital hasn't done it for them. When media goes digital it's a race to the bottom. The studios shouldn't make the same mistakes the music industry made. They should be more concerned about their profit model and less concerned about how they look in the [news] media."