TiVo and Netflix face limited options as they work to turn their recently sanctioned partnership into a profitable on-demand movie service. A close look at movie windows and the rights held by pay television networks reveals a number of potential obstacles and provides clues as to what form their service might take.
The most likely scenario is a service that will deviate significantly from Netflix’s current subscription model of up to three DVDs at a time for $21.99 a month.
Netflix currently operates during the home video window for the mail delivery of its DVDs, but digital distribution is another matter entirely. The quickest way for the new allies to slide into business together would be through an a la carte movie model. They would have to offer films for broadband download into TiVo boxes during the same window as video-on-demand movies from cable operators and pay-per-view flicks from both cable and satellite, but not in the all-important home video window, which precedes the other windows.
No Netflix Clone
While the service won’t be available until late next year at the earliest, TiVo acknowledged that it will not be an Internet-delivered facsimile of what has already worked well for Netflix.
“We do understand there will be different rights that need to be observed and Netflix will be working on the gist of that,” said Kathryn Kelly, senior manager of public relations at TiVo.
“Even though we don’t have anything set yet, we do understand that, and all the deals they do will be different than they have right now because it will be digital distribution and not a hard-copy DVD, and that’s why it will take some time to agree on what the digital rights are,” she added.
Netflix spokeswoman Shernaz Daver said Netflix expects digital distribution to become critical in the future, but declined to discuss any specifics of the business model with TiVo.
Here’s what Netflix and TiVo are up against. After a movie’s theatrical release window comes the home video and DVD sales window, which is where the movie industry makes the lion’s share of its revenue. About 45 days later a film usually enters its electronic delivery life cycle, including pay-per-view and VOD. After another three to five months, the movie can air on pay TV.
That’s the first time a movie can be shown as part of a subscription package, which is how a pay TV service is classified, said Bob Greene, senior VP of advanced services at Starz Encore. During the pay TV window, Starz and other pay TV providers are the exclusive rights holders on a subscription basis.
“What [another entity] can’t do is offer it as part of a monthly subscription; the movies [we have the rights to] can only be part of our SVOD package,” Mr. Greene said.
Those subscription rights apply to a linear channel, an SVOD offering on TV and an Internet SVOD service. Starz offers Starz Ticket, an online movie-on-demand service with up to 150 movies a month for $12.95.
While neither HBO nor Showtime offers an Internet SVOD service, they still retain the rights to their films during that time frame as well. “We have the exclusive rights in our window,” said HBO spokesman Jeff Cusson.
That leaves Netflix and TiVo with the option either to offer subscription packages several years into the life of a film, when the subscription rights have expired, or to offer movies on an a la carte basis during the pay-per-view/VOD window and compete with cable operators. That’s the same window that existing broadband movie services such as Movielink and CinemaNow use.
“I can’t imagine at least at the start that the service they are promising could operate in anything other than the VOD or PPV window,” said Larry Gerbrandt, head of the media and entertainment practice at AlixPartners, a financial consulting firm in Los Angeles. “Doing a subscription-based business is a much more complex negotiation. Initially we will probably see movie by movie.”
Despite the affinity consumers have exhibited for the current Netflix model, TiVo’s Ms. Kelly contends that a pay-per-film premise is better. “I think a la carte is what people want anyway,” she said.
If that’s the direction Netflix and TiVo go, then Mr. Greene isn’t worried. The revenues for pay-per-view movies are dwarfed eight times over by subscription services like HBO, Showtime and Starz, he said.
Mr. Gerbrandt said TiVo’s reach isn’t great enough to be threatening. TiVo counted 1.9 million customers at the end of the second quarter of this year. Netflix has about 2.2 million customers. VOD is expected to reach about 18 million homes by the end of this year, according to Leichtman Research Group.
Rights issues for Internet content are going to play an increasingly important role as the Internet continues to develop as a viable distribution mechanism.
Internet VOD service Akimbo Systems, slated to launch later this month, has inked deals with 60 content providers to deliver content from the Internet to its Akimbo player, which is then viewed on TV. Most of the deals were relatively easy to secure rights for, since the content had not been shown on TV before, said Steve Shannon, executive VP of sales and marketing and founder of Akimbo.
Earlier this month Akimbo signed its first mainstream content partner in Turner Broadcasting System for Turner’s VOD content. That deal was possible because the content is viewed on TV and thus was negotiated as a VOD package of content rather than Internet content, said Dennis Quinn, executive VP of business development for Turner Broadcasting System. However, Mr. Quinn added that Turner is interesting in extending its brand to as many new platforms as consumers want, and new media rights will play a role in that.