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Film studios are working pretty hard to make sure that new online rental services don't steal all their profits. But outside of movie theaters, they aren't entirely in control of the distribution of their content. And if the studios aren't careful, in the process of negotiating revenue deals, they might further choke off their own revenue streams.

This week, Warner Bros., Universal Pictures and 20th Century Fox announced they would withhold new releases from RedBox for 28 days or more after videos go on sale. In addition to delayed access to the video kiosk service, Warner is now seeking new deals with Netflix and will impose the same restrictions on the online rental site unless they give the studio "a day-and-date revenue-sharing option."

Warner is trying to tap into Netflix's increasing revenue potential. If Netflix gives in to Warner's demands, other studios will follow suit. And if the studios are too greedy in their demands, they might lose out on even more money.

Warner Bros. currently has a revenue-sharing agreement for some of the movies it rents through Netflix, but is hoping to negotiate a more lucrative deal as Netflix's growth continues.

Redbox and Netflix saw their revenue last quarter grow 110% and 20%, respectively, and the studios think those profits are coming at their expense. 

Outside of box office sales at the theater, studios make a good deal of income on DVD sales and through exclusive distribution contracts with rental companies and television networks. For DVD sales, many purchases happen in the first 30 days after release.

Nikki Finke explains Pali Research media analyst Rich Greenfield's take on the matter:

"Greenfield notes that the movie studios are increasingly concerned that the buy vs. rent pendulum is swinging far too quickly back to rental after over a decade of explosive retail sales growth, with the resurgence of rental led by mail-order subscription (Netflix) and kiosks (Redbox)."

But here's the other problem. The market for hard copy DVDs is shrinking. The growth of digital is proving to be a huge scavenger of DVD sales. Even if consumers want to own a film rather than rent it, they don't really need a physical copy anymore.

In regards to Redbox, Warner says that it could see a place for $1 rentals, just not with new releases. Time Warner CEO Jeff Bewkes says: "In general, we think there may well be a role for $1 rental kiosks, just like $1 movie theaters."

But this new proposal is likely to result in a lawsuit from Redbox. Greenfield says "We are fairly certain Redbox will sue Warner, but the bigger question is will Netflix sue Warner Bros over the windowing issue? Either choice offered to Netflix by Warner Bros, would appear to negatively impact Netflix’s profits to the benefit of Warner Bros."

The three studios threatening to withhold their new content comprise 55% of major studio DVD products that Netflix and Redbox would not have access to. Netflix makes most of its profits from backlog films, but having new, premium content is important for retaining customers.

Throughout the negotiation process, studios should remember one thing — many consumers currently skip this whole dilemma by getting films illegally and for free online. While they might be entitled to a larger cut of the revenue from video sales online, they are not completely in control of how their content gets distributed. And if they aren't smart about the roll out, they could cut into their own profits further.

For example, the Wall Street Journal cites one way that RedBox might fix this problem if the studios prove stubborn:

"Redbox can work around the studio's restrictions by stocking its kiosks with DVDs purchased at retailers such as Wal-Mart, as it has done for months with other titles from studios that have tried to stymie its business, say people familiar with the situation."

Meghan Keane

Published 14 August, 2009 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

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