TV has license to kill movies at iTunes, Netflix

CBS was one of the first TV broadcasters to lock up a lucrative broadcast license for the Wizard of Oz.

(Credit: Metro-Goldwyn Mayer)

Apple is an Internet retailer and Netflix is a Web video rental service, but Hollywood treats them as if they are potential competitors to TV broadcasters.

In the past two weeks, customers of iTunes and Netflix's streaming digital-movie service have noticed that a growing number of titles are disappearing from the sites or are scheduled to be removed. MacWorld wrote a story last week about how one of the site's contributors noticed that of the 15 films he bookmarked for future viewing at iTunes, 9 were no longer available. Among the movies that vanished were Charlie Wilson's War, Eastern Promises, and Michael Clayton.

"One would presume that there is some sort of licensing issue at stake here," wrote MacWorld's Dan Moren. "But it's a little odd that these movies just vanished into thin air. Man, it's like a bad horror movie."

Yes, Dan, it is. And the culprit here is a system that for decades has pumped billions of dollars into the coffers of Hollywood studios and the television industry. What has happened is Apple and Netflix have crashed into windows. "Release windows" is the term used to describe periods of time a certain type of media is allowed to show a movie. Typically, a feature film is first released in theaters, then on DVD, followed by pay-per-view channels and finally on broadcast TV.

Normally, release windows don't affect retailers or video-rental services after they've begun selling or renting films. Warner Bros. doesn't go into Best Buy and pull DVDs off the shelf when Comcast airs Casablanca. The corner Mom and Pop video store doesn't surrender copies of Gladiator to Universal Studios when the film appears on ABC. But Internet stores are being treated differently. What this means for iTunes and Netflix customers is that movies will pop in and out of the services.

Spokesmen for Netflix and Apple confirmed that they pulled titles due to these licensing requirements.

The big question many Apple and Netflix fans will have is why are Web stores being treated as though they are entertainment companies instead of merchants?

The answer, of course, is because broadcasters say they are.

You have to go back decades to understand how entrenched these release windows are in the film industry. The major movie studios were once afraid of television until they realized TV represented a big new revenue stream. CBS (now the parent company of CNET News) scored a major hit in 1959 by purchasing exclusive broadcast rights for The Wizard of Oz. The classic movie, starring Judy Garland, aired exclusively on the network for years.

More money from TV deals
The cash really started to roll in with the rise of premium cable and pay-per-view channels. These outlets often pay big money for exclusive rights. If they say they don't want Apple, Netflix, or any other Internet retailer selling or renting films inside their window, then that's the way it is, according to two high-level studio execs.

The situation comes down to basic dollars and cents. At this point, the revenue from TV deals dwarfs the money Netflix and iTunes generate.

One recent study found that movie downloads make up only 0.06 percent of studio revenue, said Jan Saxton, an analyst with Adams Media Research. She said her firm estimates that the return is a little higher but is still tiny.

Saxton said the studios can't be expected to dump these very lucrative release windows until the Internet sees much wider adoption.

"The challenge for the studios is that the business is changing," Saxton said. "As these licensing deals come up for renewal it's possible that Hollywood will alter them to fit the new reality of digital distribution. Digital definitely has enormous amount of buzz right now and the studios understand that if you don't get control of the Internet consumers will rip the content and share it.

"On the other hand they do have series of exploitation windows that keeps the profits coming in and helps the business stay viable," Saxton continued. "(The studios) aren't going to rush out to shut those windows and shift to digital distribution without carefully planning a strategy and finding some kind of reasonable return."

The big media companies aren't sitting on their hands when it comes to Web. Several of the largest studios now offer catalog titles on Hulu, and Metro-Goldwyn Mayer recently posted a few films to YouTube. Warner Bros. has offered a digital copy of the hit Batman film The Dark Knight with every purchase of the movie on Blu-ray disc.

One studio exec said Hollywood is trying to manage the transition to digital but is trying to do it in a way that doesn't kill their biggest money makers. "It wouldn't make any business sense to do it any other way," said the source.

To be fair, he has a point. Look at the music industry. Atlantic Records just became the first label to see Internet sales equal that of CD sales and that benchmark took almost a decade to reach. It took that long even though it was easier 10 years ago to download music than to download the huge digital movie files now. As far as quality, the Web appears to be a long way from delivering true high-definition images.

All this would indicate that it might be a while before digital film sales rival DVD sales.

Hollywood will only be persuaded to give better terms to Internet stores when large number of consumers show them that they prefer this to traditional TV viewing.

[dbargen]

"The revenue from TV deals dwarfs the money Netflix and iTunes generate..."

The same was true of CDs and other media for quite some time. Apple and Netflix might just corner another market before the industry execs catch up. Not that it's completely apples to apples, but with music, lables didn't care much about online music sales, then they had the pirating mess cutting into their revenues, and now it is the previously-belittled online stores that have killed their business model- fewer sales, higher costs, and require the customer to buy more than what they actually want.

With the rise of streaming video, user generated video, and extensive video-ripping, we may see a similar scenario, unless studios are willing to drop prices on their high definition media.

Some differences like huge file sizes and single work purchases (films compared to audio files), along with there benig an actual interest in stopping file sharing, make the situation a bit different. Unless the freeing up of the broadcast TV spectrum suddenly yields a lot of bandwidth on the cheap, or some scenario with a simialr effect, we're not going to see a ramping up of pirating films. Storage for large libraries hi-def video files is a barrier for most people. As of right now, films in to dozens of GBs are really only viable on a solid media. And with the push for bigger and bigger TVs (and higher resolutions, better hardware- call it escalation, like the Untouchables) the 50GB and 100GB Blu Ray discs will actually chalked full of media.

If you wanted to look at a deciding player in who determines which media will be the prominent factor in the future of film media, I think it's going to be the display manufacturers. With 36" and up display dropping in prices by the hundreds every month, which ever resolution comes to dominate the market, or however high they can finally push it, is going to drive sales.

The global economic slowdown, especially with factories pulling out of places like China, is going slow the building of new manufacturing plants because of slower growth in demand and higher taxation, so we may not see a surge in resolutions.

There are a lot factors to consider if you're going to look to the manufacturers and consumer demand for the signal of media continuation. The inclusion of Netflix on the X-box (is PS3 coming?) the Apple computer, and set top boxes will entice a lot of the current youtube generation (kids being perfectly fine with lower quality video on a regular basis- yet another consumer factor) defeats the local storage issue, so I think they're going to have a very big stick to use in the future.

I'll just end this stream of consciousness saying that we don't know enough to be certain, but we can find indicators to watch to invest accordingly.

[mpitogo]

I'm canceling my cable TV and will only watch primetime shows on my dual tuner HD eyetv DVR with commercials edited out.

[sandor_f]

you should check out SageTV - http://www.sagetv.com

much better television functionality than EyeTV (such as being able to record favorites, ad infinitum) and runs quite well on Macintosh.

I have been running SageTV for 2+ years with ATSC tuners, and could never see giving money to cable companies anymore. I tried EyeTV for a day or three, but EyeTV is obviously setup for media management more so than television recording, so it just didnt work for me.

[streamOG]

The rise of DRM. Great news Greg! Keep these DRM success stories coming. This is the kind of journalism your readers and CBS deserve from you.

Regards,

Christopher

[sandonet]

Chris,

Anytime you're happy, I'm happy. All the best in the holidays,

GS

[dpetrosky]

I don't understand their thinking. If Wallmart can sell a DVD for $10 that had to be pressed, packaged, shipped, stored, stocked and finally purchased. The same video should be available for $7 online with the studios getting the same amount of money. This assumes that purchasing a movie is the same regardless of if it is physical or digital.

The same logic should hold true for Rentals. Obviously Apple pays per rental for it's videos....And it pays a lot!!! Netflix on the other hand must pay only to own enough virtual copies to satisfy demand like a true virtual rental store.

This again is bizarre. The movie industry needs to figure out how much they want to make on a video rental regardless of the distribution method. My only hope is that iTunes will open some eyes. When ever apple does a promotion with $1 movie rentals, or $5 movies sales those movies move to the top of the charts immediately. Some bean counter will figure out that selling 10k copies of a 10 year old movie for $5 in a week is better than selling 2-3K of them over the course of a year for $15.

They have a HUGE back catalog that iTunes could convert into big money sales if they would just price them to move. The beautiful thing for them is that we will all pay again in a couple years for HD versions.

[Maccess]

It's jsut bizarre. Hollywood hasn't yet realized the value of downloads or even store DVD sales versus TV shows. TV is people watching what the programs think they will like. Downloads and DVD is people finding delight in an old obscure movie that will never see a TV, much less a movie, screen because of commercial realities.

[baerjammin]

Actually this point is a very important one and is really not that bizarre at all. The "Movie Companies" you're referring to are not content companies. That's a distinction that's lost in this article! The "Movie Companies" are nothing more than distribution and marketing companies.

This means that low cost distribution mechanisms disaggregate their only value -- sales and marketing. If the Production Companies -- who are the real content developers -- can sell their content to a distribution company such as NetFlix or Apple and cut out the middleman they'd be very happy with the additiional margin. Today the big studios take a huge cut for distribution: cinema, dvd, electronic distribution etc.

This is EXACTLY why the big music distribution companies were so loath on electronic music distribution as well. The net result is that the musicians have found ways to circumvent the distribution "tax" by distributing their own music online.

[charodon]

Does the broadcast window still exist? When was the last time something other than a children's movie was broadcast in primetime?

[Zomic13]

They are likely including cable channels (ex TBS, TNT, FX, etc.) when they say "broadcast" channels.

[paulsecic]

1976.

[brian.lee]

Also don't forget that iTunes download quality doesn't come close to the quality of traditional mediums such as CD, DVD, Blue Ray etc... I still see more value in traditional mediums, it's easy to take a DVD to a friends place and just watch is because most people have DVD players, no wires to connect or adapaters to bring another advantage is you can resell your old DVD/CD.

[kelmon]

While I disagree about the quality (iTunes HD is better than DVD), I do agree that "traditional mediums" do have advantages over their digital cousins. However, it also has to be accepted that digital downloads offer advantages over disks and therefore the consumer needs to decide what is best for them. Since I find download quality to be perfectly acceptable and I neither sell my old disks or tend to swap them with people, the convenience of an on-demand service is much more desirable.

There is absolutely no question that digital downloads will replace traditional media. The only question is, how long will it take?

[chrisx1]

Downloads are only .06% of their revenue because the selection is poor and it is still very early for this method of accessing content.
With AppleTV and now Netflix on XBox and Tivo, the download audience is coming. They need to add better selection of movies for streaming instead of mostly 5 to 10 year old movies that were flops that no one really is interested in downloading.

Great --- how's that for anti-green. Now instead of downloading from home, I hop in my SUV and drive 10 miles each way to buy a petroleum-product-based disk that's been shipped via truck from mexico. great fargin' idea...

[murbo]

if you are thinking green why are you driving an SUV? don't get me wrong, i agree with you about the idea.. just not the suv

[theused22]

You ever think of maybe he lives in an area of snow? have kids or like to go offroad driving? Theres plenty of reasons to have a suv man..

[ddesy]

I live in an area that gets plenty of snow, and I have never needed an SUV. I also know people with kids, and they don't need SUVs. I also don't see the point in tearing up the little remaining undeveloped land. Those vehicles were created to fill a non-existent need.

[Xtoo]

SUVs are ugly and very 90s. Glad to see they are finally going away.

[jrg--2008]

(I understood your point, even if everyone else fixated on a figurative SUV.)

And as other posters have said - whilst the pricing matches the product on the "petroleum-product-based" disks, many will continue doing this.

[kelmon]

This news is highly disappointing but it does explain what I've seen in the past few months on iTunes. I was very keen on adopting digital downloads via an Apple TV but I am now going to shelve this until this situation is resolved. It is absolutely ludicrous that the virtual equivalent of a video store will have content for only a period of time and that you won't be able to depend on getting what you want, when you want it, which was precisely what the service was supposed to offer.

Somehow, I suspect that this is exactly what the movie companies wanted in the first place.

[aodonnell]

Maybe it took the music industry a decade because they fought tooth and nail against it for 8 of those years.

[ddesy]

If the studios keep playing this game and not making TV networks actually try to make money, two things will happen. One is that they won't give the consumer a chance to choose their medium, and the other is that the lack of decent TV programming will continue to grow.

[bogerl]

Here's an idea: after showing any film in the theater, offer the ability to purchase a code to download the digital version of the film you just saw for an additional $10, or the Blu-ray for $20. For movies that people liked, impulse purchases would be through the roof. For a crappy movie...well, people that didn't like it probably wouldn't consider buying the movie, anyway. But seriously, take a movie I really liked, but have yet to buy---Iron Man or Dark Knight. If I'd been given that opportunity as I left the theater, I would've totally been suckered in.

Just a pipe dream....

[fokkwp]

So, because the internet doesn't generate much viewing revenue (that is, few viewers), therefore movies don't want to license to Netflix. But, they want to keep Netflix from showing the movies, otherwise it would take this inconsequentially small number of people away from TV viewership??? Whaaaa??

[halsue2]

Another shot in the arm for bit torrents

[TV James]

And it wasn't as a result of no one caring? I've only heard of two of those three movies and have no interest in any of them.

(And as the saying goes on the internet... "What? Doesn't everyone think like me and like what I like and hate what I hate? Don't I represent the majority?")

[pbg3445]

This is a rear-guard action, with the intent on keeping dying forms alive. The only reason that I wouldn't replace my cable TV with an AppleTV is selection. What would I rather have: 132 channels of streaming useless crap or a store where I buy only the shows and movies I like?
They realize this, and it is vitally important that they keep the selection down--without actually killing lit, like the music biz tried to do.
Broadcast is doomed and they know it. They're just trying to preserve the old model as long as they can.

[dwmcneil]

So we should allow unfair business practices to turn the Television industry into a non-competitive market (similar to limiting imports for auto manufacturers to limit their ability to compete)...
Makes perfect sense to Avoid Innovation of a Market at the cost of Ability to Compete...

Go America Go!

Buy American, because.

:)

[rapier1]

"Apple is an Internet retailer and Netflix is a Web video rental service, but Hollywood treats them as if they were potential competitors to TV broadcasters."

I can't understand why they would think that... unless it's from everyone telling them that iTunes, YouTube, Hulu, and NetFlix is going to completely replace broadcast TV. I'm sure that doesn't have anything to do with it though and this seeming defense of their entire business model is just petty spitefulness.

[Vegaman_Dan]

The difference between Hulu and Netflix is that Hulu is owned by a broadcast company / network and gets the ad revnue generated by their site. They make nothing from Netflix streaming content and probably want a piece of that pie- or better yet, keep all the pie to themselves.

[Vegaman_Dan]

I wonder if the issue is that a DVD movie is a physical product that the studios have a channel for distribution through retail outlets while television networks do not. so there is no competition. Now that you can stream/download content from iTunes/Netflix, then could that be interpreted as broadcasting the content? Even on a one to one basis, it could be looked at in that manner, in which case these providers are most definitely competing with and violating the studio agreements with television networks.

If this is the case, then all online streaming of content would have to obey this rule including that from Comcast and others. Only those services provided by the networks (see Hulu/NBC/CBS) would be allowed.

Now that I think about it, that very well may be the case. If networks have ultimate control over how a program is 'broadcast' over the air or the internet, then they control the ad revenue as well. Selling a DVD won't compete, but selling it through iTunes directly competes with that broadcaster.

[honorable1]

"the revenue from TV deals dwarfs the money Netflix and iTunes generate. "

Shouldn't that read "the revenue from Netflix and iTunes dwarfs the money TV deals generate. " ?

If the intention is to say that TV gets the higest revenues, then I would think the author's statement is backwards. Just my 2c.

[ewestby]

No, the author has it right. You're misunderstanding the phrase "dwarfs," which means to loom larger than something or someone else. (e.g., "Yao Ming dwarfs even most of his fellow NBA players.")