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Analyst: ‘Trigger Day’ Looms for Paramount, Redbox

29 Oct, 2009 By: Erik Gruenwedel

The long-term viability of Redbox will bear increased scrutiny in the coming weeks as at least one major studio decides whether to continue distributing titles to the $1-per-day movie DVD rental kiosk operator or opts out to pursue growing industry support for a “sales-only” window, according to an analyst.

Merriman Curhan Ford financial analyst Eric Wold said he believes Paramount Home Entertainment will by Dec. 15 decide whether to extend or opt out distributing new release DVDs via Redbox.

Paramount, whose three titles, Transformers: Revenge of the Fallen, G.I. Joe: The Rise of Cobra and Star Trek, rank among the top fourth quarter home entertainment releases, in August signed a five-year distribution deal with Redbox that calls for the kiosk operator to pay the studio $575 million in revenue through 2014.

Warner Home Video, Universal Studios Home Entertainment and 20th Century Fox Home Entertainment have collectively delayed distributing new releases to kiosks until at least 28 days after street date.

Sony Pictures Home Entertainment and Lionsgate have separate distribution deals with Redbox.

“We believe investors will be watching for that decision closely given that Paramount will have a significant level of information on rental trends and sales information at its fingertips ahead of time,” Wold wrote in a note. “Clearly, if Paramount believes that Redbox is negatively impacting sales trends and/or not positively impacting overall home video revenues, then they are unlikely to extend the deal.”

Paramount has the fifth-largest market share in the home video rental industry, with 10.6% of industry rental revenues during 2008 and 9.9% through the first half of 2009, according to Rentrak.

Indeed, Rob Moore, vice chairman of Paramount Pictures, recently reiterated the studio would carefully analyze kiosk distribution’s impact on its “overall revenue profile.”

As kiosks and Redbox, in particular, remain in the crosshairs, there is increased industry buzz about studios and rentailers, including Netflix and Blockbuster, hammering out a new release hierarchy spearheaded by a “sales only” window.

Reed Hastings, co-founder and CEO of Netflix, said he would be amenable to such an arrangement provided the economics (license fees and/or revenue sharing) were appealing, and studios appear to be listening.

“The studios might try to implement something like this to increase demand for sales,” SNL Kagan analyst Wade Holden told the Los Angeles Times.

Then again, the First Sale Doctrine allows that consumers of legally purchased intellectual property, including DVDs, have the right to resell them. It is exactly this provision in the law that has Redbox reportedly negotiating with Wal-Mart as a potential source for DVDs from Warner, Fox and Universal.

“Nothing would stop Netflix from renting titles under First Sale, other than the risk of losing the discount,” said Fred von Lohmann, senior staff attorney with the Electronic Frontier Foundation.

Lohmann said the value of new releases in the first two weeks can’t be understated, as they represent the bulk of kiosk’s appeal and revenue.

“If Redbox had to buy at Wal-Mart and truck titles to the kiosks, that slows down their process and reduces margins,” he said. “They can do it, but probably would rather not.”

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