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

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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.”

9 Responses to “Warner Bros.-Netflix Deal is All About the Long Tail”

  1. Uh, how is this about the long tail? This is about new releases, which generate the overwhelming majority of the studios’ profits, but not much of Netflix’s.

    Windowing is an extremely effective market segmentation tactic intended to extract as much money as possible from consumers based on their willingness to pay. People are willing to pay far more (whether in the theater, on DVD, or Pay-per-view) for new hits than library titles.

    New releases are not as important for Netflix because Netflix’ effective margins (considering that their subscription model essentially values new and library titles equally) probably aren’t very good, whereas they could potentially be quite good for library titles.

    These subscription movie businesses (I would include HBO, Starz, and Showtime here as well) can be extremely profitable because they are able to arbitrage on the basis of the differential between aging, cheaper-to-acquire content and the consumer’s perception of their value propositions, which IMO (from working in the online “broadcast” media space for nearly 10 years) are largely based on some difficult-to-untangle combination of differentiated user experience, product bundling, and exclusive distribution rights.

    When you are monetizing, as the studios are (and as broadcast TV does), on a per title basis, hits are everything, because the fixed costs can be very high yet marginal costs are extremely low.

    So I see this as a smart arrangement for both Warner Bros and Netflix, and a minor PITA for consumers. As we move towards 100% digital distribution, I would not expect the studios to ever allow anyone with a subscription model (e.g. Netflix) to distribute new releases unless they offer a pay-per-view option.

  2. That’s a good point and ultimately why a physical medium like DVD will always be a necessity. There are inherent guarantees with a physical medium. As much as everyone would seemingly love to move to a completely online world where everything is downloaded and internet connected, it ultimately gives the consumer less control, and who’s to say that the movie you downloaded today will be there tomorrow? If I have a Beta tape from 1978, it still plays so long as I have a Beta player. Yes, it still has the limitations of a Beta tape, but it continues to work under the inherent guarantees that came with a Beta tape. In a virtual world, guarantees are out the window and cthe onsumer inevitably becomes the chump.

  3. The problem with these kinds of deals is that the companies involved never give us, the consumer, any real details as to what exactly it means, how it impacts us, or any figures so we can make our own decision if it’s good or not. We’re just suppose to believe what the studios or Netflix tells us and if they say it’s a good deal, well then it must be.

    If this is such a good deal, then how many hours of new digital content is Netflix getting access to? And how quickly will they get it? Over what period of time? How many movies or shows in total is it? How old will they be? Across what genre? No one involved is willing to share any details at all, yet want to keep trying to convince us to be happy as “it’s good for consumers”. No one wants consumers to question anything anymore.

    Many want to bring piracy into this subject and say it will only encourage consumers to steal more, but that’s not relevant. We are not all thieves and pirates when it comes to movies. It’s simple. Give us choice, let us decide what we consume, how we consumer it, the platform we play it back on and at competitive price. Notice I didn’t say “cheap”. We don’t get this as studios and now Netflix don’t want us to have any control. We can all disagree and argue about this topic all we want, but it all comes down to greed by the studios. That’s it. It really is that simple.

    How shortsighted of both companies