Warner Bros.-Netflix Deal is All About the Long Tail

The New York Times Bits blog has an interesting piece up today that sheds a little more light on the deal Warner Bros. (s TWX) and Netflix (s NFLX) announced earlier this week. As we reported before, Warner agreed to give Netflix a better rate for its DVDs as well as more digital content in exchange for a 28-day release window for new movies. Warner will have this time to sell its DVDs directly to consumers before they’re able to rent the same titles on Netflix.

The reactions to this deal were all over the map. MG Siegler over at TechCrunch titled “Netflix Stabs Us In The Heart So Hollywood Can Drink Our Blood.” Our own Ryan Lawler on the other hand thought that “everyone wins” under the new agreement. So what is it? The truth is somewhere in the middle – and has a lot do do with how rental kiosks and online video are transforming the home video market.

Bits blog writer Brad Stone is reporting that Warner got the idea for this deal from Europe, where some countries lack a U.S.-like first sale doctrine, thus making it easier for studios to withhold new DVD titles from rental chains to maximize sales to consumers. Stone quotes Warner Bros. Home Entertainment Group president Kevin Tsujihara saying that his company “wanted to create as much headway as (it) could for that higher-margin business.” In other words: Warner wanted a new release window in a world where such windows are starting to disappear, and Netflix agreed to make it happen.

Much has been written about this being a bet on a post-DVD future, but Netflix CEO Reid Hastings told us during his fireside chat with Om at NewTeeVee Live that he isn’t seeing DVDs disappear any time soon. “DVD is still growing for us,” he explained, boldly forecasting that the company probably will still ship physical discs in 2030.

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At the same time, it’s obvious that Netflix is betting big on online delivery.The rental chain has been putting its streaming service front and center in recent months, urging users of its web site to give that watch instantly feature a try and striking alliances with major CE makers to make Netflix streams available on as many devices as possible.

The New York Times reports that the deal with Warner will add to this momentum by making more back catalog titles available for streaming. Hastings downplayed this part of the agreement when talking to the Times, calling it “not that much of a breakthrough,” but it’s actually a key indicator on how Netflix is positioning itself in the home video market. The company is willing to hold off on new blockbuster releases for a few weeks because it knows that it’s actually making more money with the long tail — the back catalog titles and indie movies you won’t find at your local Blockbuster or Best Buy — than with current releases. In fact, the Times reported a while back that up to 80 percent of all Netflix rentals are long tail movies. Keep this in mind when looking at the deal with Warner, and it suddenly becomes clear that this wasn’t about online vs. DVDs, but about new releases vs. the long tail.

Does that mean Hollywood will succeed with establishing a new release window for DVD sales? It’s doubtful, if only for the fact that this part of the market gets aggressively courted by rental kiosk offerings from Redbox (s CSTR), and now Blockbuster (s BBI). Rental kiosks have quickly become a new front in the fight for home video, and Hollywood clearly feels threatened by $1 rentals. Netflix  decided to stay out of this feud, instead betting on the long tail to grow its business.

And growing its business could be the key to eventually getting those hot new movies for its streaming service, possibly even with better terms than the current DVD agreements. Or, as Hastings put it: “The more we can write big checks, the more content we’re gonna get.”