Disney, Theater Chains Fight over DVDs in Movieland Dilemma

The Walt Disney Co. (DIS) may have narrowly escaped its own Alice in Wonderland moment. Two days before the Feb. 25 London premiere of director Tim Burton's $150 million film, Disney executives were scrambling to strike deals with Britain's largest theater chains—including the one hosting the big event—to get the film on screen. To overcome the chains' objections to Disney's plan to accelerate the DVD release of Alice, a move that could depress box-office sales, the Burbank (Calif.) company agreed in one deal it struck to limit the number of films that will get early DVD releases.

Hollywood's $13 billion-a-year DVD business has become its own "Jabberwocky"-like nonsense. Studios are hustling to find new ways to jump-start a once-potent home video market caught in the economic downdraft, without causing a backlash from its partners. Warner Bros. (TWX) has faced off against two major video rental businesses, Netflix (NFLX) and Coinstar's (CSTR) Redbox video rental kiosks, forcing both to wait 28 days before getting Warner's new DVD releases. Sony (SNE) experimented by offering owners of its Bravia TVs the animated flick Cloudy with a Chance of Meatballs delivered online a month before it hit video stores—but slapped on a 24-hour rental fee of $24.95.

As Disney learned, however, any move to boost DVD sales courts a harsh reaction in a business that had relied on a system of "windows" that gave each potential market a clear shot at marketing the film. But those "windows" have collapsed as DVD sales cratered. Studios released DVDs five months after their theatrical release just five years ago; now the average is four months, according to the industry publication DVD & Blu-ray Release Report. Other than huge hits, most films play in theaters for only about a month. Paramount plans to release the George Clooney film Up in the Air on DVD on Mar. 9, just over three months after its Dec. 23 release, to take advantage of its Oscar buzz.

Studios are using the windows as "levers because that and price are the only things we have," says one Hollywood movie executive, who spoke without attribution because he did not want to appear to be criticizing Disney.

Theater Chain Reaction

Disney CEO Robert Iger declared during the company's Feb. 9 earnings conference call that "it's time on a case-by-case basis, movie by movie, to really take a look at how we're windowing the home video product." That set off alarms for U.S. theater owners with whom Disney had been discussing moving up its Alice in Wonderland DVD release by more than a month from the current 17 weeks. U.S. theater chains held their fire, but Odeon, Britain's largest theater chain, said it wouldn't release the film "as a result of Disney's insistence on reducing at short notice the theatrical window for a major 3D title." Disney executives immediately jetted to London to promise that the company planned to set earlier releases for only two or three films a year, said a source with knowledge of the talks. On Feb. 23, Disney announced an agreement with Vue Entertainment, another large British theater chain, to show the movie. Disney is working on a resolution with Odeon, Alice in Wonderland producer Joe Roth says. Disney officials declined to comment.

"What they were doing was right," Roth says. "Within a month most people who want to see a film have already seen it in a theater. But the way that they went about doing it was just wrong."

What's less clear is whether tinkering with the windows, or much of anything else that the studios are trying, will help video sales that fell by 10% last year. "Consumers have turned off on buying DVDs when they can wait a little longer and rent them for $1," says Frank Biondi, a former CEO of Viacom (VIAB) and Universal Studios. The Sony streaming of Cloudy with a Chance of Meatballs was at best a modest success, according to people with knowledge of the sales, although that may be because there are relatively few Internet-connected TV sets in use. And Warner Bros.' decision to restrict sales of its DVDs to subscription service Netflix and Redbox's $1 kiosks until 28 days after they are released comes at a time when the rental market is one of the few home entertainment areas that is growing. Other studios are almost certainly going to emulate Warner's 28-day window.

Further down the road, Hollywood's DVD maundering could pay dividends, as the format will get a boost as more consumers get Blu-ray players and buy the more expensive, high-definition Blu-ray discs. Warner's 28-day delay could prompt more Internet movie rentals, which carry wider margins, says Lazard (LAZ) analyst Barton Crockett. Until then, however, it looks an awful lot like all of Hollywood is trying to climb out of its rabbit hole.

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