Coinstar CFO: Redbox Open to 'Conversations' With Warner9 May, 2012 By: Erik Gruenwedel
Kiosk vendor considering transitioning acquired Blockbuster Express units to international markets
Redbox said it is willing to sit down with Warner Home Video and iron out differences regarding the studio’s 56-day embargo of new-release titles to the kiosk vendor, the CFO of parent Coinstar told an investor group.
Speaking May 9 at the D.A. Davidson Financial Services Conference in Bellevue, Wash., CFO Scott Di Valerio said Redbox would revisit the embargo issue surrounding Warner’s intent to double a previous 28-day delay of new-release titles on street date. Warner’s distribution agreement with Redbox expired earlier this year and renewal talks were abandoned after the studio said it wanted to lengthen the embargo — a move it did with physical rentals to Netflix.
Instead, Redbox initiated a workaround program for a planned 10 to 13 Warner titles this year. The strategy now finds Warner titles in a majority of Redbox’s 38,000 kiosks nationwide seven days after street date, with higher stock available thereafter, according to Di Valerio.
Redbox has day-and-date contracts with Lionsgate/Summit Entertainment, Sony Pictures Home Entertainment and Paramount Home Media Distribution. It has 28-day deals with 20th Century Fox Home Entertainment and Universal Studios Home Entertainment. The kiosk vendor remains on a title-by-title basis with Walt Disney Studios Home Entertainment, although the studio is now talking about going to a 28-day delay, according to Di Valerio.
“We always believe having good relationships and good distribution agreements with your partners is the right way to go,” Di Valerio said. “If Warner wanted to come back and talk we would have the conversation with them and see what it looks like.”
But the CFO reiterated that should Warner remain adamant on the 56-day delay, it would continue with the workaround program.
“We’re in it for the long haul doing the workaround for Warner product,” Di Valerio said. “We have an overall good relationship with Warner. We agree with them on 99% of the items for the most part. It’s really the length of delay that is the sticking point for us. It’s not like we are adversaries. We just have a disagreement on that one point.”
Eric Wold, analyst with B. Riley & Co. in Los Angeles, said Redbox would rather receive the discs directly from the studios as opposed to through a retail workaround program. He said the proposed 56-day delay was too long for Redbox even with the improved wholesale disc costs. The analyst said Redbox's most recent financial results underscore the reality that it can operate profitably with a workaround. The fact Redbox is willing to talk to Warner should be considered more than a goodwill gesture, according to Wold, who always believed Warner would be the real loser if Redbox decided to go with a workaround program as it would lose a major distribution channel for their direct-to-video productions as well as any movies that did not fare so well theatrically.
"Since Redbox would choose not to buy those lesser titles during a workaround, Warner would lose the guaranteed copy depth that was in the previous agreement," Wold wrote in an email.
The analyst contends Warner would emulate Fox and Universal and come back to the table to negotiate with Redbox and potentially move back to a 28-day delay.
"I believe Redbox will always do what’s right for its customers (earlier availability) and its income statement (lower DVD costs) and if Warner is willing to enter in a reasonable deal that incorporates fair terms on both, Redbox would listen," Wold wrote. But at least we know (and have always believed) that the studios do not hold all the cards in these negotiations."
Meanwhile, Redbox is considering expanding kiosk operations internationally in markets where piracy is impacting studios’ ability to drive sellthrough of movies. Di Valerio said foreign expansion would likely involve shipping shuttered Blockbuster Express kiosks to select markets instead of incurring costs of new kiosks.
Redbox last year acquired 10,000 Blockbuster Express kiosks from NCR Corp. for $100 million. It intends to re-locate Redbox kiosks in Express locations in select markets this year. It is part of a strategy to mine the remaining 15,000 key domestic rental kiosk locations available.
“We’ll probably be in places where the studios are having a problem generating revenue than places; not in places like Japan or the U.K. where they make pretty good money on [sellthrough],” Di Valerio said. “It’s a matter of strategy and looking out where we want to go.”
The CFO said market projections suggesting upwards of a 2% revenue decline in physical rentals in 2012 underscore Redbox’s growing dominance at the expense of high-cost brick-and-mortar rentals, in addition to more-expensive kiosk competitors. He said that should there be a crossover in four to five years between revenue generated by physical and streaming rental, Redbox would still be well positioned to drive physical rental due to its price points.
“Physical, even when that crossover point happens, will be around for quite some time,” Di Valerio said. “Certainly with streaming [and its joint venture with Verizon] we’re working to continue to move into the next evolution of delivering content.”
At the same time, the CFO said Redbox formed an internal team 14 months ago with the mandate of leveraging the brand, value and convenience to help launch new products, including coffee, photos, recycling, to consumers.
“We’ll be testing one of those concepts in the second half of the year that we think could be pretty interesting to extend the life of the kiosks,” Di Valerio said.