Redbox has Hollywood worried

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Postby Zahveed » Mon Apr 06, 2009 2:21 pm

Eh, I don't rent anyways unless it is On Demand. I'll either buy it, see it in theaters, or sometimes ask my brother's friend's mailman about it. I'm contemplating Netflix though.
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Postby Sonic Youth » Mon Apr 06, 2009 12:55 pm

Cheap DVD-rental option has Hollywood worried
By Dawn C. Chmielewski
Los Angeles Times

The hottest thing in movie rentals is the humble vending machine.

Redbox movie kiosks, which stock DVDs that rent for $1 a day, are popping up by the thousands in supermarkets, drugstores, restaurants and convenience stores.

For all the talk about movie-watching on the Internet, Wi-Fi and cellphones wiping out the corner Blockbuster, a ubiquitous vending machine the size of a refrigerator has Hollywood worried.

Consumers are pulling DVDs out of Redbox kiosks in record numbers, undermining longtime economics that have propped up the movie business — and triggering a backlash from a major studio that has sought to cut off Redbox's supply of hot new DVDs.

"We have grown at a phenomenal pace over the last six years, and that growth is continuing, even in the midst of the recession," said Gregg Kaplan, chief executive of Redbox Automated Retail. "We're not seeing anything that's slowing it down."

Redbox, based in Oakbrook Terrace, Ill., is owned by Bellevue-based Coinstar, which operates coin-counting machines found in supermarkets across the country. In February, Coinstar announced a deal to buy all of Redbox for up to $175.9 million in a cash and stock transaction.

Today, Redbox operates nearly 12,900 kiosks throughout the United States — four times as many locations as Blockbuster — and plans to introduce 7,100 more by the end of the year. Each machine holds as many as 700 DVDs and 200 movie titles.

ATM card used

Consumers rent a DVD from the machine using an ATM card, which enables Redbox to charge an additional day's rental if the DVD is not returned within 24 hours. A typical kiosk can earn significant coin: about $50,000 annually in revenue per machine in operation after three years.

Dallas-based Blockbuster started rolling out its own DVD-vending kiosks last summer and is testing dollar-a-night rentals at 600 stores, with plans to roll out the new pricing to 4,000 outlets.

The discount DVD-rental business worries Hollywood studios because they fear it is undercutting DVD sales, which dropped 13 percent in the fourth quarter and were projected to fall at least 6 percent more in the first quarter, according to analysts.

In recent years, DVD sales have been the means for studios to earn a profit on movies, because ticket sales are barely enough to offset production and marketing costs. Some studios believe consumers will forgo buying DVDs if they have a cheap rental option.

"You could make a bit of an argument that rental is cannibalizing (DVD purchases) in 2008, especially in a recession year, where everyone is watching their nickels," said Tom Adams, a video-industry analyst.

Fighting back

Last year, Universal Studios sought to withhold DVDs from Redbox until 45 days after release to prevent competition with sales. When Redbox rejected the deal, Universal ordered wholesalers to cut off supplies.

Redbox then sued Universal, alleging restraint of trade.

Universal has responded in court filings that it has the right to direct wholesalers to conform with the studio's marketing plans and determine when a motion picture ought to be made available to the public.

In the early part of the decade, when DVD sales were booming, Hollywood paid little attention to Redbox. The company at the time was owned by McDonald's, which saw in the fragmented vending-machine industry an opportunity to bring the consolidation and conformity it brought to burgers, fries and shakes.

Market testing by McDonald's in 2004 showed that consumers were willing to use the vending machines, which crossed the look of a London phone booth with the retro functionality of a cafeteria automat, as a cheap and quick alternative to the video store. The kiosks caught on, especially in supermarkets.

Growing business

The consistent flow of customers, and the convenience of renting a movie while shopping to fill the cupboards, proved advantageous: By the end of 2005, Redbox reported it was renting more than a million DVDs a month out of 1,200 locations.

"It's a regularity of traffic, and the biggest single place people are going after the supermarket is to their homes," Redbox's Kaplan said. "Consumers tend not to rent DVDs when they're not going home."

McDonald's ultimately sold control of Redbox to Coinstar, and the latter's strong relationships with supermarket operators soon had the Redbox kiosks springing up in chains such as Albertsons, Walgreens and even Wal-Mart, which accounts for 40 percent of DVD sales.

Coinstar does not disclose earnings for Redbox. But its automated DVD-rental business, which includes the smaller DVDXpress kiosk operation, reported operating income of $73 million on revenue of $388.5 million in 2008. The company expects sales to nearly double this year to between $690 million and $750 million.

Video-industry analyst Adams estimates that the kiosk-rental market, which totaled $519 million last year, will reach $1.4 billion in five years — or about one-fourth of Blockbuster's 2008 revenue.
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