OPINION: Sales warranty

Don’t look now, but the DVD rental business is very much in play as far as Warner Bros. is concerned.

Two weeks ago, Time Warner chairman/CEO Jeff Bewkes revealed that, henceforth, all Warner titles would be available via video-on-demand and pay-per-view on the same day they are released on DVD—a threshold no studio had previously crossed.

Bewkes stressed that Warner’s extensive testing of the strategy suggested that the availability of low-priced, on-demand access to new releases had no deleterious effect on DVD sales; if anything, he claimed, the added promotion around the VOD offering by cable operators may actually have boosted disc sales.

Moving up the VOD window did appear to depress DVD rentals somewhat, but Bewkes is apparently willing to live with that outcome.

Now comes word, courtesy of VB’s Susanne Ault, that Warner Home Video is rolling out an unusual new revenue-sharing plan through Rentrak that severely restricts retailers’ ability to sell-off excess rental inventory as previously-viewed DVDs.

As an inducement to accept those restrictions, Warner is waiving the usual requirement that retailers include late-rental fees in the pool of money to be shared with the studio.

In essence, the plan seems designed more to protect the market for new DVD sales by eliminating competition from previously-viewed discs than to maximize revenue from the rental market.

In other words, Warner seems increasingly willing to sacrifice the DVD rental market both to protect new DVD sales and to encourage the growth of video-on-demand.

Nor is Warner likely to be the only studio thinking along those lines. Now that one studio has taken the plunge, in fact, the usual “race to be third” is no doubt underway among the others, as each seeks to reap the maximum benefit from adopting Warner’s strategy while making sure its competitors take most of the heat from the aggrieved incumbent retailers.

The de facto DVD rental window—when the only competition was from higher-priced sales—is officially an endangered species, although the exact timeline for its extinction remains unclear.

Ironically, the DVD rental window is in large measure a victim of slumping DVD sales.

The DVD market, even in its current, flagging state, remains the studios' most important revenue stream. As sales begin to decline, however, the imperative of protecting that market only grows stronger.

Sales of new DVDs have always yielded bigger margins for the studios—on a per-transaction basis—than have rentals (including sales of previously-viewed discs).

So long as the overall market was growing, the studios could live with the trade-offs between the rental and sales markets. Now that it’s not, those trade-offs look increasingly like a zero-sum game for the studios.

With push finally coming to shove, the studios will do what they feel they have to do to protect the new release sell-through business.

At the same time, the downturn in DVD sales adds to the urgency of developing new revenue streams.

Like the DVD rental market, digital distribution may never yield the same profit contribution for the studios as the sell-through of packaged media. But for now, it’s the only hope the studios have for replacing at least the top-line revenue lost to slumping DVD sales.

If the studios could figure out a way to nurture the growth of the digital distribution business without undercutting the DVD rental market, they would do it. But as push finally starts to come to shove, such niceties may no longer be acceptable.