Report: $1 DVD Rentals Could Cost Industry $1 Billion7 Dec, 2009 By: Chris Tribbey
Dollar-a-night DVD rentals could end up costing the movie industry more than 9,200 jobs and as much as $2.2 billion in revenue, according to an economic report released Dec. 7. The report also projects an additional $500 million in reduced economic activity.
Depending on how retailers, kiosk competitors and consumers respond in the coming months, industry revenue losses due to $1-a-night DVD rentals could be as little as $200 million and as high as $2.2 billion, according to the report from the Los Angeles Economic Development Corp. (LAEDC).
“There is a high probability of losses in excess of $1 billion,” the report reads.
Redbox president Mitch Lowe called the report a “flawed analysis” that “draws assumptions from problematic data.”
“Redbox is an engine for industry growth, increasing consumer interest in film and providing new revenue streams to studios,” he said. “In fact research shows Redbox will reinvest 50% of our revenue back into the studios providing revenue to market new titles and support new production. We’d prefer to work with the LAEDC to help them to understand Redbox, create factual models based on objective, credible data and to provide insight on the benefit Redbox has on the industry and on their community.”
The loss of revenue is shared among producers, wholesalers, retailers, distributors and rental outlets, according to the report, with the loss of jobs hitting the information (publishing, broadcasting, telecommunications and ISP) industry the hardest (nearly half of all estimated jobs lost).
The report suggests that kiosk operators Redbox and others are offering cheap rental DVDs at the worst possible time for packaged media — and the film industry as a whole — with consumers still hurting from the recession and new, Internet-based models of movie delivery popping up regularly.
“The economics of the motion picture industry are based on exclusive release windows which allow price differentiation — that is — some earlier transactions take place at higher price points,” said Gregory Freeman, study author and VP of consulting and economic policy for the LAEDC. “Redbox, or any other distributor that weakens the release window model, could reduce overall industry revenues. Lower revenue will likely lead to lower production activity, hurting the Southern California economy.”
The study suggests that Redbox competitors such as Blockbuster may be forced to lower their prices to keep customers away from the kiosks, further cutting into overall industry revenue. “If incumbents could profitably increase overall revenue by reducing their rental rates, they would already have done so, particularly in response to more convenient options available to consumers, such as Netflix and VOD,” the report reads. In turn, sell-through retailers may be forced to further lower DVD prices.
“For every 5% fall in unit sales, overall industry revenue will decline by $643 million,” the report reads.
Based on internal data, and reports from The NPD Group and SNL Kagan, LAEDC forecasts Redbox to have a 30% rental market share in 2010, resulting in $1.1 billion in revenue. “Incumbents’ rental turns are expected to decline by 125 million turns, while Redbox turns will increase by 220 million,” the report reads. “However, overall rental revenue of incumbents will increase marginally given the increased average rental rate. This increase is expected due to the transition to Blu-ray.”
The chain reaction of lower rental revenue affects every corner of the Southern California economy, the report concludes, with 1,780 total jobs lost for every $100 million drop in revenue, and “at least 450 [jobs] lost in motion picture and sound recording industries for every $100 million in lost revenue.”