• In Trying to Preserve DVD Sales, Studios Are in a Tight Spot

    It's not news that DVD sales - the lifeblood of Hollywood studios' P&Ls - are in a freefall. In response, the studios are doing all sorts of things to eke out just a little more profitability from the sales of the shiny discs. But as several news items over the last week underscore, the studios have little wiggle room before their efforts to shore up DVD sales have real or perceived consequences for key business partners.

    Exhibit A is the brouhaha over Disney's new plan to release Johnny Depp's "Alice in Wonderland" on DVD 12 1/2 weeks after its theatrical opening, instead of the usual 16 1/2 weeks, regardless of whether it's still playing in theaters. In the past, when a film's "release windows" were distinct and well-separated, everyone in the distribution chain knew they'd have their separate bite of the apple. With collapsing windows, those bites are converging, leaving some feeling they're not going to get their fair share. In the U.S. there has mostly been just grousing about Disney's plan among theater owners, but in Europe there are threats by large theater chains of an all-out boycott of the film.

    It's hard not to feel some sympathy for the theater owners as the "Alice" plan isn't a random event. Sony recently ran a misguided promotional campaign giving away "Cloudy with a Chance of Meatballs" DVDs to certain Bravia buyers while the film was still playing in theaters. And it attempted to accelerate the release of the Michael Jackson "This Is It" DVD until theater owners drew the line. No doubt there are plenty of other examples being floated privately in Hollywood.

    Meanwhile, news also broke this week that Redbox, the $1 a day rental kiosk chain had acceded to Warner Bros.' demand that it not rent any films until 28 days after their DVD release, in order to help preserve initial sales. As part of the deal Warner dropped its lawsuit against Redbox. In return, Redbox got lower pricing on its Warner DVD purchases. The deal mirrors the 28-day deal Netflix did with Warner last month, which I thought was a win for everyone. But the key difference in that deal vs. Redbox's is that Netflix has a huge rental catalog available for its subscribers to choose from, meaning new releases are far less important (Netflix says only 23% of rental requests are for new releases). On the other hand, Redbox's whole value proposition rests on low prices and selection of new releases. What is Redbox's fate if it does similar deals with other studios?

    Putting the squeeze on Redbox and its kiosks seems like a dubious strategy by studios. In an age where piracy looms large, studios should be focused on enhancing, not diminishing the accessibility of their product (as a Coke executive once famously explained the company's marketing goal: "always within an arm's length of desire"). While Hollywood doesn't like Redbox's lower margins, focusing on that issue excessively when the product is clearly in decline is missing the forest for the trees.

    Studios' desire to preserve DVD sales is going to further intensify, but defending them is only going to get harder. Certainly part of the reason is that the ongoing recession is forcing many consumers to cut back on their discretionary purchases. But the larger issue is that there's huge momentum behind the shift to online subscription/rental and even free models. The data shows that online viewing hit an inflection point in 2009, with free premium sites like Hulu experiencing extraordinary growth.

    And the data showing online's appeal pours in almost daily; yesterday it was The Diffusion Group reporting results of a study of Netflix users showing that two-thirds of them that have a broadband connection are now using the "Watch Instantly" streaming feature. This week's launch of HBO Go, the premium channel's site for its subscribers, and its distribution deal with Verizon, are evidence that even the mighty HBO can't resist online's allure. Last but not least, in 2010 TV Everywhere rollouts will gain steam.

    There's no denying the truth that DVD sales are under assault from all sides. Studios, desperate to hold on to DVDs' precious profits, are increasingly contorting themselves to keep the DVD cash cow alive a little longer. No surprise though, their efforts are not without consequences. At what point do the studios capitulate and throw DVD sales under the bus? We'll have to wait and see.

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