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Warner Brothers Starts to Collapse Movie Distribution Windows

Warner Brothers
CNBC.com
Warner Brothers

The movie industry has been ruled by very specific rules about how and when different home video formats are released. The idea is that home video -- DVDs and video-on-demand -- has to come out long enough after a theatrical film release to keep moviegoers driving to movie theaters and paying for tickets.

Now as DVD sales growth has started to slow, retail giants like Wal-Mart and Target have lost some of the power that allowed them to insist that their DVD releases were given priority, allowing the major studios to experiment with the "windows" within which they release their films in home video.

Warner Brothers , released two of its movies on video-on-demand through Comcast *before* releasing them on DVD, the first time a major Hollywood studio experimented with releasing a film on video-on-demand before DVD. When Warner Brothers tries something new the industry watches and takes careful note.

Warner Brothers have the largest home video library in Hollywood and has proven an industry-leader: it's decision to release its high-definition DVDs exclusively in the BluRay was the final straw that led that format to win the high-def format battle and when it began releasing films simultaneously on DVD and VOD it was the first major studio to do so.

This is just a small test, premiering "Observe and Report" and "Ghosts of Girlfriends Past" on VOD through Comcast in the Atlanta area the Thursday before their Tuesday release. But it could certainly have a big impact. Studios get a bigger cut of rental revenue with video-on-demand than DVD -- there are none of the physical printing or distribution costs. The test aims to position the VOD release as a way to drive DVD sales, with the tagline: 'Watch on VOD now and buy it Tuesday."

It's unclear if those VOD sales can be incremental, but in this day and age when consumers are less likely to want to build their DVD library there seems to be no reason not to get make a sale when you can. Warner Brothers tells me they won't have the results of the test for a while, hedging that it was a pretty limited test. But I'll be following up gauging the potential impact on the marketplace as soon as results are out.

I think the future lies in a tiered pricing system. Why not release a movie to video-on-demand the week, or week after it hits theaters for $30. Die-hard movie fans will still turn out in theaters, but the older demographic that may not want to fight the lines could opt to pay up to watch from the comfort of their home. Why not charge more the earlier a movie is available on VOD? Then the studios can hedge their bets, and protect the theatrical business while also growing their VOD revenues.

Warner Brothers is still cautious about protecting its DVD business and its relationship with retailers for those biggest releases: Warners will delay "Harry Potter and the Half-Blood Prince" on VOD until a week after its DVD debut in December. The potential for people to head to Best Buy and pick up a copy of the DVD is *so* huge for this type of title, it's not worth potentially under-cutting it with a VOD release.

Of course this news comes as Warner Brothers and other studios including Universal and 20th Century Fox face off with RedBox . The issue at hand is how early the video-kiosk company that rents DVDs for a dollar can access their movies. The studios are once again trying to protect their revenue and they're worried that pricing their films at a dollar undercuts their value.

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