Coming full circle on video rentals

I have covered the home video industry for as long as it’s been an industry. And it never ceases to amaze me the lengths to which the Hollywood studios will go to try to deny the reality of consumer demand. The latest case in point: their scheme to stop the shift in consumer spending from DVD purchases to DVD rentals by carving out a sales-only window before movies would be widely available for rental.

Since the studios can’t legally bar retailers from renting the “sales-only” copies (the First Sale Doctrine, and all that) they would have buy the rental outfits off, presumably by offering them a lower wholesale price for DVDs if the retailers agree to delay the rental window. In his third-quarter earnings call last week, Netflix CEO Reed Hastings suggested the DVD-by-mail service might agree to go along.

“If we can agree on low-enough pricing, delayed rental could potentially increase profits for everyone,” Hastings said.

If Netflix were to go along, it wouldn’t be hard to imagine Blockbuster getting on board as well; it could use the earnings boost even more than Netflix could.  The trickiest case would be kiosk operator Redbox, which has been growing rapidly on the strength of dollar-a-night rentals, much to the chagrin of the studios. Relations are tense between Redbox and Hollywood, so a deal might be tough to negotiate. But it might be a way to resolved the litigation between the kiosk company and the studios.

Independent retailers would probably balk at the deal, seeing instead an opportunity to grab some market share back from the big boys by offering earlier rentals. But Netflix, Blockbuster and Redbox, along with perhaps a few other large chains (Movie Gallery/Hollywood) have enough market share among them at this point that the system might basically work.

Ironically, creating a protected sales window would completely invert standard industry practice back in the VHS days, when the studios maintained a protected rental window by pricing videocassettes at an un-sellable $99, before knocking the price down to twenty bucks or so three to six months later. But it would be no more consumer-friendly.

How about this, studios: Price all DVDs at $10, out of the gate, and make them available in 70,000 supermarket outlets nationwide. If consumers still wanted to rent, they could rent. But how many of those supermarkets would be putting in Redbox kiosks if they were simultaneously selling cassettes for $8.99, on sale? I’d guess about none.

You want to sell a gussied-up version with a bunch of extras and try to get $15 for it as a second SKU, go ahead. Knock yourselves out. Maybe you could get that for the Blu-ray, too. But a $10 base price would triple (or greater the size of the retail base for DVDs and make it easier for consumers to spend their money on packaged movies than on other entertainment options.

OMGZ! OUR MARGINS, I can hear the cries from Century City to Burbank. But what’s the point of protecting your margins if  you’re driving consumers out of the category? Why would you assume, at a time when aggregate consumer spending on DVDs is in free-fall, that you could convert any large number of Redbox renters into buyers at $15 – $25 a pop by actively frustrating their ability to rent?

The studios have been mis-pricing DVDs for a long time — from long before consumer spending started to decline — just as they’ve completely mismanaged the Blu-ray roll out (to say nothing of the high-def format battle that preceded it). They’re now paying the price for that mismanagement. Doubling-down on the same strategy isn’t going to fix the problem.

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