Little Red(box) Riding Hood

Redbox, the in-store kiosk movie rental company has been blazing the news recently. Hollywood studios seem to hate Redbox or love it.

• Redbox is suing Universal studios (click here) and Fox (click here) for their attempts to instruct distributors not to supply Redbox for 30-45 days after a DVD is released.
• Meanwhile Sony (click here), Lionsgate (click here) and Paramount (click here) have signed multi-year contracts estimated to be worth hundreds of millions of dollars each, to get a share of the Redbox shelf and to ensure that used DVDs are not sold by Redbox

Its surprising to see Hollywood content owners vary so widely in their approach.

So I ask myself: Why are studios approaching this so differently? What is the right position a studio can take on this issue?

Redbox is taking revenue away from DVD sales for studios by offering daily rentals at $1. DVD sales are down 16% for the first half of the year according to Video Business Magazine (click here) whereas all other segments are growing. DVD sales account for more than 50% of all sales and rental revenue for the studios. Meanwhile Redbox quarterly revenues have grown to $189 MM (click here) and are doubling on an annual basis.

The real issue (other than rentals cannibalizing DVD sales) is that Redbox sells used DVDs at $7, often within a few weeks of the DVD being released. This has made price-sensitive customers buy recently-released used DVDs rather than shell out four times that amount for a new DVD. Electronics retailers like Best Buy are venturing into selling used DVDs and kiosk rentals (click here).

So Hollywood studios would like to limit the 'under-priced' sales of used DVDs and restrict the time when these are available to customers -- to be able to 'monetize' the time value of recently released content.

Sony seems to have played its cards well by getting a higher than representative share of the Redbox shelf and ensuring that its used DVDs are put out of circulation.

I personally think that Redbox can still rent Universal and Fox DVDs by sourcing them at retail prices and renting them at $2 instead of $1 (Note: this is not a legally informed opinion. Do not use this to make investment decisions) and selling used DVDs at higher prices. Consumers would still be attracted to the proposition.

Eventually though, I think the industry will be well-served if Universal and Fox can settle with Redbox out of court... and everyone can get back to the business of (profitably) providing compelling content to customers at the right-price in the right time window.