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Coinstar CEO: Warner Workaround for Redbox ‘A Success’

28 Feb, 2012 By: Chris Tribbey

Redbox’s workaround program to acquire Warner Home Video DVDs and Blu-ray Discs directly from retail has been a success thus far, according to Paul Davis, CEO of Redbox parent Coinstar.

Speaking Feb. 28 at an investor’s conference, Davis said the workaround program, which has Redbox buying titles directly at retail, is meant to last years, in case the studio and kiosk operator aren’t able to reach an agreement. The Warner agreement, which called for a 28-day delay on new releases, ended Jan. 31. Warner now is seeking a 56-day delay.

“Thus far we’re very pleased,” Davis said of the workaround program. “We’re getting the content out there, good national coverage, we’re meeting consumer demands. I would call it a success. You always prefer to have a direct deal, and of course we’d like to figure out a way to do that. We’ve got to get it to a place where it’s a win-win, and hopefully we’ll get there some day. But we asked the team when they started the workaround to put together a plan that would last not just for a few weeks but for many years.”

He said the first major title released after the agreement with Warner ended (A Very Harold & Kumar Christmas, Feb. 7) was in most kiosks a week after street date.

Currently every studio except Warner Bros. has a direct deal with Redbox for disc. Agreements with Universal (April) and Sony (August) are coming up for review soon.

“We only buy around one studio, and that’s Warner,” Davis said. “We have direct deals with everyone else, and that has worked well. We think that we can bring a lot to the party when we work with our studio partners on helping them sell product. Obviously we buy a lot of product. If you look at it on an annual basis, we’re buying $800 million-plus in physical content.

“In general in a 28-day delay, you’re paying [less than you do] for day-and-date,” Davis said of the costs associated with 28-day delay titles versus day-and-date. “In the case of workarounds, we’re paying closer to retail [prices for discs]. So we are paying more for content. We’re not buying as much, because we’re not going to buy every single title; we’re only going to buy select titles. It is creating more operating costs. The positive would be, instead of 28 days, now we’re getting it in the box much sooner, sometimes seven days [after street date], sometimes 10 or 14.”

Davis said that Redbox is willing to “work through that 28-day delay” but would prefer day-and-date with every DVD release.

Davis also spoke about the subscription, digital video venture that Redbox will launch with Verizon later this year, saying it has the potential to take away customer share from Netflix.

“We believe that by broadening our offering to not just be physical but to also have a digital offering, it’s the best of both worlds, and we believe we’re positioned to grow share there,” he said at the Morgan Stanley Technology, Media & Telecom Conference, adding that an estimated 20% to 25% of Redbox customers also use Netflix. “We think it will drive additional traffic to our kiosks.”

The joint venture, announced earlier in February, should launch in August, according to Verizon, with Coinstar having 35% ownership, Verizon 65%. Branding information and subscription price have not been announced.

“This is a true over-the-top, national, coast-to-coast [offering]. Anyone that has Internet access will have availability to this offering,” Davis said. “It will be a subscription offering. We believe it will be the best of both worlds, both physical and digital. We’ll fill the physical part of it. Verizon will be the front person negotiating digital rights. We think it will be a nice, seamless consumer offering.”

Verizon’s FiOS video service product will be the springboard for the digital content offered in the new joint venture.

Davis said the joint venture with Verizon has the potential to help with Redbox’s negotiations with the studios for physical DVD.

“The key part of us moving to digital is giving us access and reach to multiple platforms,” he said.

Davis also noted in his presentation that Redbox aims to have 45,000 to 60,000 kiosk locations in the United States and that after its first-ever price increase during the fourth quarter of 2011.

“We’re not thinking about pricing now,” he said. “We made that move. It should last for a good while.”

Regarding the potential of UltraViolet being tied into Redbox’s fortunes, Davis said his company is open to the idea. UltraViolet is the buy-once, play-anywhere, cloud-based digital video offering backed by most major studios.

“We’re really open-minded on providing access to entertainment for our consumers,” Davis said. “If the consumer need and their voice is loud and clear that they want to move to UltraViolet, I think we can help play a role. So we’re staying close to our studio partners and figuring out what are some win-win options.”

Regarding Blu-ray, Davis said high-def currently accounts for around 7.5% of rentals at Redbox kiosks, but with the U.S. household penetration of Blu-ray players much higher (one third, according to the Blu-ray Disc Association), Redbox is hoping that number will rise.

“We view that as white space,” he said of the difference. 

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