When Arnold Schwarzenegger's Terminator 3: Rise of the Machines arrives in video stores on Nov. 11, DVDs of the summer hit are sure to fly off the shelves. That will make the brass at the flick's studio, Warner Bros. Inc., very happy. Ditto for execs at retailers like Blockbuster Inc. and Hollywood Video. But there's one group in the entertainment food chain that won't be smiling: cable executives with an extreme case of video envy.
That's because cable's video-on-demand (VOD) services are far down the line and typically don't get the hot movies for six weeks after video stores get them. In the case of the California governor-elect's sequel, cable can't cash in until well after the Arnold craze is likely to have cooled off.
But a number of cable executives are looking to change all that. For one thing, video-on-demand, long promised by cable outfits, is about to take off. Just as important, as cable has consolidated, the industry is able to exert pressure on Hollywood to rethink the timetable for releasing movies to theaters, video stores, VOD, and outlets like HBO. At the very least, cable execs argue, they should get movies for VOD on the same day they go to retailers. Some are even calling for getting films for VOD on the day they hit theaters. "You could offer them in high-definition and charge $40, like a pay-per-view boxing match," Brian Roberts, CEO of No. 1 cable company Comcast Corp., suggested recently.
Hollywood has heard these arguments before, but until now it has been unwilling to jeopardize its long-standing relationships with video retailers. Suddenly, though, the moguls are listening more intently. Many of the companies that own movie studios also own cable channels. They know all too well that they need favorable deals with the nation's largest cable company. In fact, Comcast has opened up discussions in recent months with the media giants, hinting it might negotiate price and distribution deals in exchange for earlier VOD movie releases, say sources.
The problem is, even as they see a future gain from VOD, the last thing Hollywood wants to do is mess with its current bonanza in home video. Sales and rentals of VHS tapes and DVDs will hit nearly $24 billion this year, vs. $10 billion in box office revenues, estimates PricewaterhouseCoopers. Says Blockbuster CEO John F. Antioco: "At no time has it ever been more profitable and in [the studios'] best interest to protect that revenue stream than now. They would be trading a $15 margin [on a DVD sale] for a $2-to-$3 margin [on a VOD purchase]."
But consumer appetites are fickle. DVD sales will level off in the coming years, say some experts. And VOD looks a lot more compelling than it did just three years ago. After having spent more than $65 billion since 1996 to upgrade their systems, cable can now offer two-way technology that allows viewers to stop, rewind, and fast-forward a movie, unlike with pay-per-view movies. Consumers pay $3.95 for a new VOD movie, accessible for 24 hours.
But for now VOD is at a huge disadvantage, given that demand for a film is greatest in the first 35 days after it's released on video. "When people go to the TV screen and look for a movie, they usually say, 'I already went to the video store to get that one,"' says Stephen Brenner, CEO of inDemand, a VOD service owned by cable operators.
Some in Hollywood are tentatively testing out the new possibilities. The major studios there own VOD services but they still honor VOD release schedules. Even so, moguls concede it may be time to experiment. Metro-Goldwyn-Mayer Inc. Chairman Alex Yemenidjian says history has taught his industry valuable lessons. "For every dollar we make with new technology," he says, "we lose less than a dollar from all the others." Nudged by giant Comcast, Hollywood might just be willing to shake things up.
By Tom Lowry in New York and Ronald Grover in Los Angeles, with Stephanie Anderson Forest in Dallas