Netflix, Studios discuss a new DVD deal

Sometimes in Hollywood, misery loves company. And, while three film studios are locked in a legal tussle with video vending machine operator RedBox and its $1 rentals, another company that’s feeling Hollywood’s the less than warm embrace these days is online DVD rental powerhouse Netflix (NFLX). At least three studios –- which I’m told are Warner Brothers (TWX), Fox (NWS) and Universal (GE) — are trying to arm-wrestle a better deal out of the Los Gatos, Calif. company, whose nearly 12 million subscribers are expected to generate about $1.7 billion in DVD rentals this year.

None of the studios will discuss Netflix, although Jeff Bewkes, CEO of Warner’s parent company Time Warner, did say at a recent investor conference that Netflix’s “economics” didn’t make sense for his company. And he said the studio was in discussions with the subscription service. Industry insiders, in fact, say that Warner has given Netflix a “take it or leave it” style offer: pay the studio more or pay a lesser amount and receive DVDs sometime after they are shipped out to retailers like Wal-Mart (WMT), Best Buy (BBY) or Blockbuster (BBI). A Netflix spokesman acknowledges only that the company “continues to discuss the changing markets with the studios.”

The changing market, of course, is a euphemism for the fact that DVD sales are cratering, off by 9.6% so far this year, according to a recent report by Bernstein Research. At the same time, recession-staggered folks are renting more DVDs, including at Netflix, whose revenues so far this year are up 21%, the company said in its most recent financial release. The problem is that the studios get roughly $16 for every DVD they sell through a retailer and only about $12 for each one that Netflix buys, according to Bernstein’s Michael Nathanson.

The studios clearly want more dough. The same three studios have been sued by RedBox after negotations fell through on deals that might have hiked RedBox’s costs. Fox, for instance, offered to either increase its price to RedBox or sell the vending machine opeator its DVDs at a lower price but 30 days after retailers got them. RedBox refused.

Now the studios have turned their attention to what they see as a relationship Netflix that needs fixing. Some of the studios have agreements with Netflix in which they share revenues from each rental – estimated at about 30-40% of a transaction, according to industry sources. But even that arrangement lasts for only six weeks after the DVD hits the market, according to one studio executive. After that, the movie is no longer considered a new release and covered under the revenue sharing arrangement.

Some of the studios want the six week window extended; others want more a higher upfront purchase price from Netflix. The studios have lots of carrots they can offer Netflix to get them to come to the table. Bewkes mentioned, for instance, that Warner Brothers might give Netflix more of its TV shows (which include Friends and E.R) for its video streaming service “if there is a reason for us to participate with them in making that product available.”

So maybe there is a deal to be had with Netflix. If not, well, then things could get interesting. Would Warner Brothers really withhold its DVDs from an major player like Netflix – as they have threatened to do with RedBox – and instead give Netflix the discs weeks after they go to rival Blockbuster? Maybe. Maybe not. But it sure could end up being fun to watch.

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