Do Netflix, Redbox, and Blockbuster Think We're Stupid?

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Time Warner (NYS: TWX) is playing interior decorator again, and this time it wants even more window coverings.

It's been two years since the media giant brokered a deal with Netflix (NAS: NFLX) for a new distribution window. If Netflix would hold off on making Time Warner movies available to its subscribers for the title's first 28 days on the market, Time Warner would provide the company with cheaper discs.

Time Warner pushed for the window, pointing out how 75% of its retail DVD and Blu-ray sales take place during the first four weeks that a movie's on the market. If it could stop Netflix from practically giving it away as part of its unlimited rentals plan, surely sales would spike.

A month later, Time Warner brokered a similar deal with Coinstar's (NAS: CSTR) Redbox, making sure that folks weren't renting new releases from cheap disc-spewing kiosks until a new title had sold most of its copies through retail distributors.

Blockbuster -- before being acquired last year by DISH Network (NAS: DISH) -- did the right thing. It didn't take a bite out of Time Warner's apple. It not only continued to offer Warner Bros. releases the moment they came out, but it even publicly taunted Netflix and Redbox by pointing out how the DVD rental pioneer could offer movies not available through its cheaper adversaries.

Well, that's all changing now.

According to AllThingsD's Peter Kafka, Time Warner will announce next week that all three DVD rental giants will refrain from offering Warner Bros. releases during the first 56 days on the market.

Another squandered opportunity
Shame on you Netflix, Redbox, and Blockbuster.

Is selling your soul for bulk pricing really worth the eight-week freeze?

What were you thinking, Netflix? You argue that your subscribers don't care about new releases, but it's funny how it's always the latest releases that aren't available on my queue. You raised prices on subscribers with dual plans by as much as 60% in September. The least you could do is tell Time Warner to beat it, and buy fewer copies at retail pricing to offer them when they come out.

What were you thinking, Redbox? Instead of learning Netflix's lesson about a poorly timed rate hike, you went ahead and jacked up your prices by 20% this past Halloween. Trick or treat? Surely Time Warner is going to be offering even sweeter bulk pricing terms in exchange for doubling the release window. How dare you lower your content costs while increasing the price of your kiosk rentals? Happy gouging, you lifeless automatons!

What were you thinking, Blockbuster? You had the competition where you wanted them. Your website's home page continues to promote a "Why Wait" icon that promises "many new releases available 28 days before Netflix and Redbox." Is that going away, or is this Time Warner dance a one-shot deal?

Time Warner was cocky in demanding a 56-day window. All three of you were greedy to accept.

Actions speak louder than words
Rhetoric is cheap. Netflix knows that its subscribers do care about new releases. It's the only time that studios actively advertise a flick outside of its original theatrical release. If Netflix members didn't care -- and I'm sure that many don't care, but a lot do -- why would Time Warner be extending this window? The only reason Time Warner is doing this is because it thinks Netflix subscribers are so impatient for new content that they will go out and physically buy it. Think about it.

At the very least, Blockbuster, Netflix, and Redbox have to concede that their product becomes inferior the moment they begin holding back content just so a studio can sell DVDs. Redbox and Blockbuster in particular are retail formats that thrive on fresh releases.

Besides, we really know what happened here. Time Warner's 28-day window didn't work. It didn't sell more optical discs. Folks just aren't buying DVDs and Blu-rays the way they used to, and it has nothing to do with rental availability. Lengthening the release window to 56 days isn't going to boost sales either. All that will do is make couch potatoes forget that they ever wanted to see some of these laggards.

Digital purchases are a compelling market for studios to help offset the sting of sluggish DVD sales, but the product is priced out of whack. The perceived value of bulky digital files isn't there. The lack of portability -- unlike music -- is a problem, but this isn't something that's as easy a fix as Tinseltown's imperfect UltraViolet initiative would have viewers believe.

The original 28-day window was a win-win for the studio and rental company, but a losing proposition for the consumer. This new deal is a lose-lose-lose situation. The studios won't sell more movies. The services will further alienate their customers. Shut-out consumers will grow more detached from the release cycles that studios wanted them to be more cognizant about.

Hooray for Hollywood! You blew it.

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At the time this article was published Motley Fool newsletter services have recommended buying shares of Netflix and Coinstar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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