Under the deal announced Wednesday with Time Warner Inc's Warner Brothers, new releases on DVD and Blu-ray will be available to Netflix members after a 28-day window, giving Warner a chance to maximize sales of those titles and Netflix reduced product costs and more units after the waiting period.
The companies also renewed and expanded licenses for Warner Bros streaming content that would allow Netflix to offer members more movies they can watch instantly.
We agreed to waive the 28 days and are taking those savings and expanding our investment in streaming, said Ted Sarandos, chief content officer at Netflix, in an interview.
Netflix shares closed up 3.5 percent to $53.32 on Nasdaq on Wednesday.
Sarandos declined to comment specifically on the economics of the deal but said it represents meaningful savings in terms of what it spent on Warner's physical discs in 2009. He said, however, Netflix was reinvesting those savings in streaming.
On a net basis in 2010, we're growing our spending on the studios even if we are saving on physical DVDs, he said, adding he expects this trend to continue as more and more customers seek movies through its streaming service.
In 2010, Netflix will spend $600 million on postage, said Sarandos who envisions moving that entire bucket of spending to Hollywood and out of the post office.
Sarandos noted that 70 percent of the discs that Netflix currently ships are catalog or older movies. I don't think most people join Netflix specifically to get DVDs on the street release date, he said.
Back in August, Warner said it might delay availability of titles at kiosks and mail-order rental companies, over concerns these outlets were depressing sell-through profits.
In October, Netflix Chief Executive Reed Hastings said all studios were wrestling with declines in DVD sales while the rental market was modestly growing. He said then that various studios were considering introducing a DVD retail sales-only window for a few weeks.
Analysts described the deal as a long-term bet by Netflix on the future of streaming.
I don't see this is a positive for Netflix today but as a positive down the road for streaming, said Michael Pachter, analyst with Wedbush Morgan Securities.
Caris & Co analyst David Miller welcomed the deal for ending uncertainty about Netflix' relationship with Warner. Now we can all move on to focus on unit growth at Netflix.
(Reporting by Susan Zeidler; Editing by Tim Dobbyn)