DVD rental and online movie streaming company Netflix has reached an agreement with Warner Brothers, one of the biggest Hollywood movie studios, that focuses on two important points:
(i) Larger and cheaper catalog of Warner Brothers films available online (benefits Netflix)
As a result of the agreement, Netflix will have access to a larger portion of Warner Brothers’ movie catalog that it can stream online. DVDs from the studio will also be available at cheaper prices, which can help Netflix to avoid growing its content acquisition and revenue sharing costs which together currently cost Netflix nearly 30 cents for every $1 of revenue. As you can see here by modifying the Trefis forecast, a 1% reduction in content acquisition costs adds $100 million to the Trefis valuation for Netflix.
(ii) Length of DVD sell-through window (benefits Warner Brothers)
The agreement gives Warner Brothers a 28 day DVD sell-through window before new releases become available to Netflix subscribers, which we believe is positive for Warner Brothers’ DVD sales.
New releases from all studios comprise about 30% of Netflix’s DVD rentals and most of these rentals occur in the first four weeks after release. Since Netflix offers a subscription service and does not charge per DVD rental, we believe that a negative hit on Netflix revenues is less likely as few subscribers will change their usage as a result of the deal. Furthermore, competitors like Redbox are facing the same situation, thereby reducing incentives for customers to switch their film rental service.
