Studios Giving Up on DVD, Pushing VOD Instead

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The time lag between DVD release dates and the availability of films on cable video-on-demand services has been drastically reduced over the past year, falling to just five days in the first half of this year, according to BTIG analyst Richard Greenfield. Not only has the window collapsed, but the vast majority of film titles are now being released on cable VOD the same day-and-date that they’re available in stores.

In 2006, the typical window between DVD and VOD release was 30 days, with some titles lasting up to 45 days before they became available. As recently as 2009, the average wait between DVDs hitting shelves and films being available on VOD was still 21 days. So why has the DVD-to-VOD window suddenly collapsed?

Greenfield believes it’s happening because Hollywood studios have begun to worry less about protecting DVD sales and more about protecting rental economics from the likes of Netflix and Redbox. While Netflix offers consumers unlimited DVD-by-mail rentals for as little as $8.99 a month, and Redbox rents DVDs for just $1 a day, VOD prices are typically $4.99 for a title in standard definition and $5.99 in HD. As a result, Greenfield writes:

“VOD has far better economics (profitability) on a per unit basis than Netflix or Redbox offer the studios, not to mention traditional rental stores such as Blockbuster. In addition, day and date VOD offers even better economics than traditional (windowed) VOD, with 70% of the $4.99 (SD) or $5.99 (HD) rental fee going to the studio, compared to 60% for windowed VOD releases.”

Not just that, but consumers are showing less and less willingness to buy physical media. With the vast and growing proliferation of rental avenues, the importance of owning a DVD is dwindling. As Greenfield writes, the “only movies where Hollywood is maintaining a window before a DVD’s release are successful kids/family titles and certain Blockbuster titles (Avatar), with the nearly all other films going day-and-date.” As a result, even Paramount, which held fast with a four-week DVD-to-VOD window a year ago, will only have a one-week window when Iron Man 2 is released on DVD next month.

Given the better economics of VOD rentals and the dwindling interest in DVD purchases anyway, it makes sense for studios to begin offering VOD releases day-and-date with DVD sales. However, the one thing that doesn’t make sense, at least to Greenfield, is why more studios aren’t creating windows for DVD and VOD sales before their titles are available through Netflix or Redbox. He writes:

“What drives us nuts is how certain studios (Disney, Paramount and Sony) allow Redbox and Netflix to offer their content day-and-date with a DVD’s release, but put a window on VOD (see our blog from 6/2, click here related to renting Alice in Wonderland). If one believes that a VOD window is still necessary on key films (such as Alice for Disney, Iron Man 2 for Paramount and Karate Kid for Sony), why in the world would those same studios let consumers rent it via Redbox and Netflix on the same day the DVD is released for sale?”

Greenfield points out that Disney’s Toy Story 3 will be available at Redbox kiosks for a dollar rental on the day the DVD is released, but won’t be available for $5 or $6 VOD rental until later. Conversely, Universal’s Despicable Me is being released on DVD on December 14, but won’t be available on Redbox, Netflix or VOD until after the holidays, which means the only way to get the disc is to buy it or rent it from Blockbuster. While there will no doubt be a ton of families that purchase Toy Story 3 for their kids, the studio is probably not getting the maximum value for its release.

While in the long term, the economics of pushing VOD and de-emphasizing DVD sales makes sense, there’s still some pain ahead for studios as consumer behavior changes. DVD sales have been a cash cow for the studios over the last several years, and it will be difficult for them to replace the loss of revenue from declining sales with increased VOD volume.

Photo courtesy of Flickr user Kenneth Lu.

Related content on GigaOM Pro: For Hollywood, The VOD Price Is Right (subscription required)

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