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Analyst: Redbox Has Leverage Against Warner

19 Dec, 2011 By: Erik Gruenwedel

B. Riley & Co. analyst Eric Wold says Redbox is better prepared to implement a workaround strategy if Warner imposes extended delays of new-release titles

In a twist, Redbox holds the cards in renegotiations with Warner Home Video, should the studio follow through with a speculated extension (upwards of 17 days) on the current 28-day embargo on new-release DVDs and Blu-ray Discs, an analyst said.

Redbox’s disc distribution deal with Warner expires in January — an agreement to which the kiosk vendor acquiesced in early 2010, following a hastily implemented workaround strategy in late 2009 that included Universal and 20th Century Fox titles, and spooked investors and negatively impacted the bottom line.

Throughout the past two years, Redbox management has devised a workaround retail strategy combining wholesale and retail access to Warner titles (about 15% of the rental market) that would enable the kiosk vendor to cherry pick titles (avoiding box office duds), stock them within days — not weeks — of release and resell them in the used market, instead of destroying them as mandated in the current agreement, according to B. Riley & Co. analyst Eric Wold.

In a Dec. 19 note, Wold said the improved workaround strategy could actually generate a net return (despite higher disc costs), due to increased rental revenue from earlier access to Warner’s new releases, and reduced disc volumes, among other benefits.

“We do not believe that Warner Bros. (or Universal Studios Home Entertainment and 20th Century Fox Home Entertainment) holds all the cards in the DVD agreement negotiations,” Wold wrote. “While Redbox was forced into a workaround two years ago on minimal notice, the workaround plan developed since that time has been developed as a long-term replacement to a studio agreement (with copyright law in the company’s corner).”

The First Sale Doctrine allows Redbox to not only rent — but sell — legally purchased discs from retail and wholesale sources. With many studios bowing high-profile titles in Blu-ray Disc/DVD combos, kiosk vendors can rent the discs separately. Indeed, Family Video recently sold the BD copy of Pirates of the Caribbean: On Stranger Tides for $9.99 on street date while renting the DVD.

Wold believes such a workaround strategy could make Warner rethink plans to lengthen the new-release embargo, considering he believes the current embargo has had “negligible” impact on disc sales and transactional video-on-demand.

“We are not concerned if a workaround plan is implemented,” he wrote.

Separately, Wold believes Redbox is well-positioned to absorb interchange fees imposed by debit card processors (banks) Oct. 1 through its recent 20% daily rental price increase. The analyst says Redbox generates about 44 cents in incremental revenue from the average kiosk rental transaction — or about $13 annually per customer. Wold says Redbox could expect to see an estimated 8 cents in incremental (added) gross profit per rental transaction after deducting increased interchange fees, retail and studio revenue sharing agreements (where applicable).

“We believe this potential annual boost to [pre-tax] gross profit is not fully understood by investors,” Wold wrote.


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