Will Mark Cuban (Finally) Revolutionize Hollywood?

October 24, 2005

by Edward Jay Epstein

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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