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DVD revenues and high profit margins were the movie industry's cash cow...but not anymore. DVD sales are declining and creating a real problem for the studios. Looking to offer its own alternative to Netflix (NFLX) and piracy, Warner Bros. (TWX) is tapping into its giant library, trying to turn old movies into a new revenue stream. The company is allowing consumers to access its Warner Archive Collection using a new model that prints DVDs on-demand. Cutting out the middle man, Warner Bros will make higher margins by going directly to consumers. This is exactly the experimentation and innovation the studios need right now to supplement their declining DVD revenue.

Movie buffs will be able to order previously unreleased films from Warners' library — starting with 150 titles, from 1940s Cary Grant films to 80s movies starring Demi Moore. At www.warnerarchive.com you pay $14.95 for an internet download or $19.95 for a DVD that's printed on demand and reaches your mailbox in five days. The studio expects most of its business to be devoted film buffs, dying to get their hands on a copy of an obscure Joan Crawford film. Needless to say it isn't a huge market, but it's zero risk and could provide nearly pure profits. And it's tapping into an existing library that had just been sitting there.

Cutting out the retailer is a dramatic move for home video execs, who used to live in fear of the studios' biggest customers, Wal-Mart (WMT) and Best Buy (BBY) Home video departments previously made decisions based largely on what these retail giants would let them do. Now that retail DVD sales are on the wane, studios are starting to think independently, willing to do whatever it takes to gin up a profit.

In this new venture Warner Bros. isn't cannibalizing any potential Wal-Mart revenue. It's not worth it to offer these DVDs at retail, they're too niche and not worth the cost of printing and shipping to the stores. Plus, are Wal-Mart shoppers dying to watch Cary Grant's Once Upon a Honeymoon? These devoted film fans won't mind doing their shopping online.

I'm not surprised that Warner Bros. is experimenting with new technology; the studio's home video department, with its leading market share, has long been one of the leaders in the space. It was Warner Bros. decision to go exclusively with the BluRay high def DVD format that pushed the industry to end the high def format wars and go exclusively with BluRay.

Source: Warner Brothers Fights DVD Decline with Old Movies and New Distribution Model