Studios editing video strategy

As one of their most lucrative sources of revenue stagnates, several Hollywood studios are considering something that would have been unthinkable even two years ago: renting films to cable subscribers and Internet users on the same day they’re released on DVD.

The studios have resisted such a move, fearing that offering a cheap movie rental with the click of a mouse or remote control on the same day as its DVD release would undercut DVD sales. Even worse, such an action could invite retaliation from powerful retailers such as Wal-Mart Stores Inc., the single largest seller of DVDs in the country.

Warner Bros. was the first to change its strategy, saying tests with two cable operators proved fears of “cannibalization” unfounded. Now, Twentieth Century Fox says it will consider releasing certain films simultaneously on DVD and for rental via cable and online.

Walt Disney Co. and Universal Studios, meanwhile, are tinkering with release dates, shortening the period between a film’s release on DVD and its availability for rental on cable or the Internet. Disney last year shortened the gap to 15 days from 45 days for selected titles such as “National Treasure 2: Book of Secrets.” Universal cut the lag to 29 days from 45 days.

And in an even bigger change, some Hollywood studios now want to open a new “window” -- offering high-definition versions of movies for rental viewing in the home ahead of their DVD release -- if the Federal Communications Commission grants cable and satellite companies permission to block in-home copying.

Such experimentation is part of a series of studio initiatives to pump up revenue from movies after they have left the theater, at a time when double-digit growth of DVD sales has become a thing of the past.

The DVD dramatically altered studio fortunes. Consumers, who in the VHS era primarily rented feature films and limited their purchases to children’s classics that could be viewed until the tape broke, rushed to amass DVD film libraries.

DVD sales and rentals account for more than half of a movie’s revenue. But the home-video market peaked in 2004 and has declined every year since, according to Adams Media Research. The media analyst projects that revenue will fall $500 million this year to $23.6 billion.

Consequently, Hollywood is looking for the next top home-entertainment model.

“As we’ve reached maturation in the DVD business, we’ve got to find ways to grow,” said Ron Sanders, president of Warner Home Video.

However, there don’t appear to be any quick fixes. Instead, the studios are banking on a combination of new technologies to gradually supplant the old DVD gravy train. First stop: A crisper picture for that summer popcorn movie on the widescreen TV.

At the start of the year, Warner Bros. threw its support behind Blu-ray discs, one of two technologies vying to set the standard for high-definition video in the home. Studio executives say the decision to unite behind a single standard -- together with the availability this month of less expensive Blu-ray players -- should help to reverse declining DVD sales this year and return them to growth by 2009.

“We have seen increases because the consumer has no more confusion, has no more hesitation to jump into the market,” said Bob Chapek, president of Disney Studios Home Entertainment. “Once bigger retail sections devoted to Blu-ray, complete with signage and prominent fixtures, start to appear [this month], it’s going to be a huge catalyst.”

So far, however, Blu-ray has been slow to catch on.

“We have a hard time understanding why consumers will rush out to Best Buy to pick up the Blu-ray version of ‘Caddyshack’ or ‘Sleepless in Seattle,’ ” wrote Bernstein Research analyst Michael Nathanson in a recent report. He said that early adopters were buying fewer high-definition movies than they did in the first years after the introduction of the standard-definition DVD.

At the same time, Hollywood is accelerating efforts to sell and rent movies online, with a spate of deals coming together in the last month. For example, all the studios except Disney had refused to sell their new films through Apple Inc.’s online iTunes store, for fear of creating a behemoth like Wal-Mart, which they feared could dictate the market. (Disney, whose single largest shareholder is Apple Chief Executive Steve Jobs, was the first studio to offer downloadable movies and television shows through iTunes.) But Disney’s rivals relented in May, after Apple agreed to pay more for those titles. Now iTunes sells the latest movies on the same day that they are released on DVD, although most of the studios still refuse to offer them immediately as rentals.

Meanwhile, Disney agreed last month to offer its feature films to TiVo subscribers who have high-speed Internet connections, allowing them to select and watch movies on their TVs. This is the second big movie deal for TiVo Inc., which offers the films of other studios through Amazon.com Inc.’s Unbox online service.

Perhaps the most enthusiastically received announcement came from Netflix Inc. to give its 8.2 million subscribers the option of watching movies without waiting for the postal service. The Los Gatos, Calif.-based mail-order movie service unveiled a $99 device to stream Netflix’s movies to the TV. For now, at least, it lacks the rights to stream the latest blockbuster movies, and instead offers classics such as “Ben Hur” and independent titles such as “Pan’s Labyrinth.” The company says it is talking with the studios to offer more current fare.

But the future is slow in coming. Online distribution of films and TV shows through iTunes, Amazon and others is comparatively minuscule, accounting for $293 million in revenue this year and growing to $1.6 billion by 2012, Adams Media Research estimates. Cable’s equivalent, video on demand, will reach $1.8 billion.

Indeed, studio executives don’t expect any single technology -- video on demand, digital downloads or Blu-ray -- to replace the DVD cash cow. Within four years, Adams projects, the high-definition Blu-ray disc will partially supplant DVD and account for $14 billion of an estimated $26-billion market in the U.S.

“The closer we get to filling people’s time in the most convenient way possible, and in as many ways as possible -- in the back seat of your minivan or on your iPod in the subway -- our business will increase,” said Mike Dunn, president of Twentieth Century Fox Home Entertainment.

Such thinking is causing studios to reevaluate old business taboos.

Hollywood has repeatedly balked at providing movies to the cable industry’s on-demand services because the companies have historically done a poor job of marketing and promoting films, and an even worse job designing a navigation system to find what to watch.

Nonetheless, all the major studios, except Sony, joined the nation’s largest cable operator, Comcast Corp., in an 18-month test in Pittsburgh, Denver and later Atlanta to determine how simultaneous release of a film on DVD and for video on demand would affect sales. Time Warner Cable, the second largest, conducted a similar day-and-date trial in Greensboro, N.C.

Warner said the initial trials, with more than 140 movies, not only boosted video-on-demand rentals by more than 50%, it also spurred purchases of DVDs, which benefited from the added promotion on cable. Only video store rentals declined.

“Consumer interest in renting this stuff simultaneous [with the DVD release] is way, way up, off the charts,” said Sanders, Warner’s head of home video.

The trade-off of in-store DVD rentals for video on demand is one the studio could afford to make, Bernstein Research said. In retail, studios take 30% of revenue, whereas they grab 70% of a video-on-demand purchase.

Such a calculation was not lost on Time Warner, which announced in April that its Warner Bros. studio would release its DVD titles, including such forthcoming releases as “Fool’s Gold” and “10,000 BC,” simultaneously on cable and iTunes.

“You saw Warner Bros. go first. Another studio will go in the not too distant future. It’ll just keep adding,” Comcast Chief Operating Officer Stephen B. Burke said. “It’s hard to predict when all that happens, but I think there’s a growing belief that this . . . is additive.”

Other studios are watching closely.

Fox’s Dunn said it would prefer to preserve the traditional distribution model -- offering movies for sale immediately after the theatrical release, then renting them online and through cable video-on-demand services. But it’s considering offering day-and-date distribution for films that would benefit from broader distribution.

“You would look at a few movies to go day and date, movies that need as many points of access as you can get, to encourage sampling,” Dunn said.

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dawn.chmielewski@latimes.com