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Analysts Sour on Redbox Sellthrough Tests

19 Oct, 2009 By: Erik Gruenwedel

Analysts reacted negatively to news Redbox is quietly testing sellthrough of new-release DVDs and Blu-ray Discs at select locations in Southern California.

The No. 1 kiosk rental operator, owned by Coinstar Inc., last month began testing sellthrough under the Vidigo name at Westfield Fashion Square in Sherman Oaks, Westfield Culver City, Westfield Topanga Canyon, Westfield Promenade, and Westfield Santa Anita, according to a spokesperson.

The kiosks hold about 200 titles with prices ranging from $9.99 to $20.95 for DVD, and from $24.95 for Blu-ray.

“Redbox will evaluate the results of the test to make the best decisions for our customers moving forward,” said the spokesperson. “The tests [which do not include video games] will provide insight into consumer interest and demand.”

Redbox has become synonymous with the $1-per-day movie rental — a business model some studios and analysts contend devalues movies to near bubblegum card status.

Universal Studios Home Entertainment, Warner Home Video and 20th Century Fox Home Entertainment later this month will stop distributing new releases to rental kiosks directly and through third-parties until at least 28 days after street date.

Redbox, which sued all three studios, separately inked distribution deals with Sony Pictures Home Entertainment, Paramount Home Entertainment and Lionsgate worth more than $1.1 billion.

Michael Nathanson, analyst with Sanford Bernstein in New York, said the tests represent a goodwill gesture to the studios and not much else. He said the fact the sellthrough kiosks are located away from big box chains Wal-Mart and Target underscores their limited potential.

He queried: Who would buy a DVD from Redbox when it is known for the $1 rental?

“No one,” Nathanson said.

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, said unless Redbox begins undercutting Wal-Mart on sellthrough price, the concept will go nowhere.

“Redbox is successful because of the $1 per day rental, and unless they sell movies at a low enough value, they will remain just a DVD rental service,” Woo said.

Redbox said an end-date for the tests has not been determined.

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