The
Hollywood Economist
The
numbers behind the industry.
The
End of DVD Rentals
I
recently demonstrated my high definition projector by showing
scenes from the beautifully shot Eternal Sunshine Of
The Spotless Mind. First, I played a HD recording made
by the Tivo-style digital recorder that Time Warner cable
provides. Next, I played the same scenes from a DVD. The
HD recording was so clearly visually superior to the DVD
that one guest asked: “Why would anyone ever rent
a DVD if they could record it in HD?”
He had a point. No only is a HD recording sharper—it
has about 5 times the information as the DVD format (which
has a slightly better picture quality as conventional TV)—it
is much more convenient. There’s no trip to the video
store, no credit card hassle, no concern about late fees,
no scratched disc, no labyrinth of set-up menus. Why would
anyone choose to make two trips to the video store or, with
Netflix, to the mailbox? The studios are aware of this.
That’s why they have created an artificial barrier,
called the video window, which prevents cable operators
and television stations from showing movies at the same
time as their release on video and DVD. In the case of Pay-Per-View,
the window is 45 days, and, with subscription cable, such
as HBO, it is at least 4 months. If someone wants to see
a new movie when it arrives in video stores, he does not
have the option of recording it with a Tivo-like device.
Because most people rent movies the week of their release—indeed,
more than 80 percent of rental earnings in 2004 came from
the first two weeks—most would-be renters have already
seen a new release by the time the 45 day window has elapsed.
If that barrier were removed, a large part, if not all,
of the DVD rental business would disappear.
The reasons for maintaining this barrier may be more political
than economic. If the studios did not give DVDs a 45-day
head start, and a large number of DVD renters switched to
Pay-Per-View to get the same movies, the studios would make
much more money. Electronic delivery not only would eliminate
the manufacturing, warehousing, distribution, sales, and
return cost of DVDs—which averaged about $6 per DVD
in 2004—but it would cut out the video stores, which
at present get about 40 percent of the rental money. It
might also greatly expand the audience for renting movies
so that, depending on how electronic delivery is priced,
the lost sales of purchased DVDs would be offset.
What has prevented the studios from closing the video window
is simply Wal-Mart. The company, which is the single biggest
seller of DVDs, has made it clear that it does not want
to compete with home delivery. Wal-Mart executives told
Viacom’s home entertainment division, in no uncertain
terms, that if any studio does away with the 45-day video
window for a single title, they would risk losing access
to Wal-Mart’s shelf space for all of its titles. Wal-Mart
provided studios with more than one-third of their U.S.
DVD revenue in 2004. In the face of Wal-Mart’s retail
power, the studios have not dared (yet) to do away with
the protective video window.
Enter Mark Cuban. Along with his longtime business partner
Todd Wagner, Cuban became a multi-billionaire selling his
Internet company, Broadcast.Com, to Yahoo for $5.7 billion.
Cuban and Wagner then created an entertainment conglomerate
that includes controlling interests in a movie production
company (HDNet Films), a distributor (Magnolia Pictures),
an art house chain (Landmark Theaters), a television and
video library (Rysher Entertainment), and a high-definition
television network (HD Net). Cuban believes that Hollywood’s
distribution system requires radical change. He wants to
do away with artificial windows so that consumers can buy
a movie, as he notes in his blog, “How they want it,
when they want it, where they want it.” He argues
that movies should be made available simultaneously on cable
television, DVD, and the movie theaters, and consumers can
decide whether they prefer to see it at home (even if it
means paying a premium for a new release) or to see it in
the theater.
Nor is this mere theory. Cuban is using his HDNet to lead
“the charge in collapsing windows all the way to Day
and Date releases of Movies in theaters, on TV (HDNet Movies),
and soon, on video.” His company released The War
Within on September 30th simultaneously in theaters and
on HDNet TV channels. Cuban plans to make this facility
available to other movie producers. The Hollywood studios
can hardly ignore Cuban’s experiment. The movie audience
has a finite amount of time, or “clock,” to
spend on movies. If more and more independent film companies
follow Cuban’s lead, the studio system of artificial
delay could cost Hollywood a significant part of both their
movie and their DVD rental audience.
To be sure, Hollywood has a long history of resisting new
forms of delivery. When television first came on the scene
in the 1940s, the studios had attempted to kill this infant
medium by refusing to let the networks show films from their
libraries or use their facilities to produce programs. When
the VCR was introduced, the studios attempted to strangle
it with 8 years of litigation. Even when Sony and Warner
Bros launched the DVD, the other major studios did not join
them for a year or so. By now, the top studio executives
recognize that the electronic delivery of digital movies
is inevitable—it is only a question of who will defy
Wal-Mart and when.
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