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Analyst: Transactional VOD Not Replacing Disc Rental Any Time Soon

30 Jun, 2014 By: Erik Gruenwedel, Chris Tribbey

Digital’s presumed ascendance atop home entertainment’s throne will continue to be a pipe dream so long as studios greenlight packaged-media production, said Wedbush Securities’ Michael Pachter.

In a June 30 note, Pachter said the reality that Redbox controls more than 50% of the disc rental market underscores packaged media’s resilience in the face of burgeoning digital alternatives such as transactional VOD and streaming.

“We believe that the bear thesis that DVD rentals will decline due to the increasing availability and popularity of VOD is going to prove wrong,” Pachter wrote.

Specifically, the analyst contends Redbox’s ongoing $1.20 nightly DVD rental price trumps transactional VOD’s $4.99 to $5.99 price point. An insurmountable price gap given that transactional VOD has not lowered prices since its inception in the 1990s.

"It is clear to us that the movie renting public falls into two distinct groupings: Those who are price sensitive and those who are not. And we believe that the price-sensitive customer is going to favor a Redbox rental over VOD for many years to come,” Pachter wrote.

Rental kiosks generated an estimated $469.5 million in the first quarter, down 5.5% from the same period a year ago, accordiong to DEG: THe Digital Entertainment Group. Disc subscription rentals, mostly from Netflix, fell nearly 17% to an estimated $224.6 million.

Pachter believes that Redbox’s disc rental fortunes will mirror the box office, since the majority of kiosk rentals are new releases and not catalog. At the same time, Pachter agrees that this year’s theatrical revenue outlook remains fickle, which will affect disc release slates.

Indeed, box office is down about 5% year-over-year through June 29, with the summer theatrical tally down 13%, according to boxofficemojo.com.

“We remain confident that the Redbox business will be stable for many years, but given that Redbox has saturated the market with kiosk installations, we expect some volatility from quarter to quarter reflecting seasonality and differences in the DVD release slate,” he said.

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