It was supposed to be a cure for what ails the home entertaiment market, but a year after studios began instituting 28-day rental delays on new releases, sales of DVDs continue to plummet.
Analysts say the effect has been like handing out Band-aids for third-degree burns.
Overall, sales and rentals of movies on all home formats dropped 3 percent to $18.8 billion domestically in 2010. More worrisome, while sales of Blu-rays jumped 68 percent to $2.3 billion, sales of standard DVDs fell 11 percent to $14 billion, according to the Digital Entertainment Group.
"Windowing may improve things around the margins,“ Edward Jay Epstein, author of “The Hollywood Economist,” told TheWrap."But it's just a temporary fix."
No one denies that the 28-day delays in releasing films to Netflix and Redbox are having some impact.
Studio officials who spoke to TheWrap said that deals preventing Netflix and Redbox from renting movies until a month after they hit store shelves have bolstered sales by as much as 15 percent on some titles.
What's more, they hope to extend the window to as many as 45 days.
“We’d love to push the windows back and give our sell-through more time to breath, but it’s a matter of time because there are already arrangements in place. This is a unique and new business model,” a senior home-entertainment executive told TheWrap.
Doing that, however, could lead to courtroom battles -- ones that the studios could easily lose.
Currently, the U.S. Supreme Court prohibits content makers from preventing the resale of copyrighted goods. Redbox was at the center of legal cases involving Warner Bros., Universal and Fox for roughly a year before ultimately deciding it would be less costly to broker an agreement with the studios.
But should studios push to almost double the window, a court fight might make more economic sense.
Whether the lengths of the release delays is ultimately decided in corporate boardrooms or through protracted legal fights, a year after windowing went into effect, it’s clear that delays are a permanent addition to the rental map.
Redbox has deals in place with three studios, while Netflix maintains some form of windowing with four studios. All told, more than 50 percent of the major studios -- including Warner Bros., Sony, Universal and Fox -- now institute delays.
They might have company.
Holdouts such as Disney are being slammed by analysts for not embracing the policy, though studio chief Robert Iger says the studio will continue making its movies available for rental and sale on the same date.
“Getting a DVD window was a milestone; renewing it will be less monumental. It’s more about tweaking,” Tony Wible, an analyst at Janney Montgomery Scott, told TheWrap. “It’s a very dynamic landscape, but studios need to find a way to bolster studios profits.”
What’s good for the studios might not be good for Netflix and Redbox. Though Netflix has thrived in a windowed world, Redbox has seen its business battered by delays.
Netflix has long maintained that its core business is catalogue titles and not new releases, and the company’s decision to focus on building its library and expanding into streaming has resulted in record growth.
The subscription giant’s stock has more than tripled since it originally inked a release agreement with Warner's last January to over $220 per share, and subscription levels have reached 20 million, a 69 percent jump from 2009.
“We anticipated this change, we’d been planning for it, but it’s been even more meteoric than we had hoped,” Steve Swasey, a spokesperson for Netflix, told TheWrap.
For Netflix, the deals with studios -- in which they acquired more streaming rights to content and discounted copies of new releases in exchange for the delays -- helped foster that change.
“We’ve taken the money we are saving on new releases and put it back into growing our streaming business,” Swasey told TheWrap.
Not so Redbox. Coinstar, the kiosk company’s parent, reduced its revenue outlook for 2011 to between $1.7 billion and $1.85 billion, down from analysts’ projections of $1.91 billion.
The culprit: windowing.
Though a Redbox spokesperson said that the company wasn’t concerned with the 28-day rental delay, Paul Davis, CEO of Redbox parent Coinstar, had a message for studios: Move the window at your own peril.
“If it ever got to the point where it was too over-the-line, we could leverage the first-sale doctrine,” Davis told the media, referencing the Supreme Court decision allowing the company to buy discs from third-party distributors.
That means that if the studios hold Redbox’s feet to the fire, the kiosk company may opt to purchase new releases from other retailers as it has done in the past.
“Coinstar isn’t Netflix. They aren’t in the business of old movies. They may have to look for other [distribution] avenues, because their share price is getting clobbered,” Edward Woo, an analyst at Wedbush Securities, told TheWrap.
Ironically, the one player who stood to benefit the most from the 28-day delay was Blockbuster. Long at a competitive disadvantage with the cheaper Redbox and more-convenient Netflix, early access to new releases was seen as a lifeline to the rental chain.
Yet it was too little too late, as Blockbuster shuffled into Chapter 11 last fall.
With its creditors unable to agree on a reorganiation plan, the Dallas-based chain will likely be resold at a discount, potentially leaving the studios without a brick-and-mortar alternative to Redbox and Netflix.
Though the majority of studios are declaring windowing a success, there are naysayers from within the industry.
One studio executive told TheWrap that reports of a sales bump are inflated. The improvement in sales might not come from the delay, he said. Instead, studios may fail to take into account the natural desire consumers have to add a blockbuster film such as “Inception” or “Salt” to their DVD libraries.
With home entertainment picture in constant flux, as new technologies develop and new devices gain popularity, windowing may ultimately prove to be little more than a temporary stop-gap until studios can effectively monetize digital distribution.
To that end, studio executives and analysts predict that the impending launch of the all-platform video player UltraViolet, which allows users to play content they download on almost any device, may be more of a silver bullet.
It better be, because windowing may provide a modest sales bump. But game changer, it's not.