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CFO: No Redbox-Warner Distribution Deal Yet

10 Mar, 2015 By: Erik Gruenwedel

Outerwall CFO Galen Smith

Galen Smith says disc decline slower than projected, but days of kiosk expansion are over

Approaching the end of the first-quarter, Redbox continues to operate without a distribution agreement with Warner Bros. Home Entertainment, according to Galen Smith, CFO of parent company Outerwall, while speaking to an investor group.

Redbox’s agreement with Warner expired Dec. 31, 2014.

Speaking March 10 at Piper Jaffray Technology, Media and Telecommunications confab in New York, Smith said Redbox would prefer to have distribution agreements with studios when appropriate. In the interim, Redbox is acquiring Warner titles through alternative (i.e. retail) channels — a scenario that requires greater output of cash upfront but can generate higher margins depending on the title, according to Smith.

“We’re having active conversations with Warner Bros.," Smith said. "They’ve been a good partner over the last few years. We’ve just got to get to a deal that that is the right terms for both parties."

He said being in contract with a studio ensures having adequate copies of new releases in kiosks as opposed to buying content at retail. At the same time, Galen reiterated that Redbox has operated for the past three years out of contract for Walt Disney Studios Home Entertainment releases.

In addition, as the physical market shrinks, Redbox has emerged as the third largest purchaser of home entertainment content, a reality the kiosk vendor — under the direction of former Warner executive Mark Horak — isn’t ignoring during studio negotiations.

“We are very important to [the studios],” Smith said. “We’ve never had a compelling reason to have a contract with [Disney]. We think we can drive more value (i.e. margin) by being out of contract with them."

Smith said, noting the decision to exit the Canadian market, the days of kiosk expansion at Redbox are over. Instead, the company is focusing on driving “throughput” via the existing kiosk retail footprint.

The CFO said December’s price hikes for DVD (up 25% to $1.50), Blu-ray Disc (33% to $2) and video game (50%to $3) rentals have provided some fiscal benefit — with some of the incremental uptick being reinvested back into the business. Some of that investment includes establishing stronger ties to rental consumers through social media.

Every Tuesday, Redbox sends emails to more than 27 million renters weekly informing them of the latest new releases, including 6 million of its most frequent renters. The company has more than 39 million unique consumer email addresses.

He said Redbox continues to expect an impact on rental volume due to the price hikes — more so on catalog and direct-to-video titles than on major new releases. At the same time, consumers are renting titles for shorter periods of time.

“Again, that’s muting the value [of titles], but also on the average [rental] check,” Smith said.

Regardless, the executive reiterated that Redbox’s success ultimately is dependent on the quality of the studio release slate. Following a depressed 2014 box office, Redbox tempered expectations in 2015. The kiosk vendor has projected double-digit box office declines in the first half of 2015, with a single-digit decline in the second half.

“We’re beholden to whatever the new releases are,” Smith said. “That has a much bigger impact on rentals and what’s happening year-over-year.”

At the same time, Redbox remains bullish on packaged media.

“We’ve always remained confident that the decline in the physical business will be a lot slower than others think it will be. There’s resiliency in [disc] and attractiveness based on the value proposition we provide,” Smith said, adding that 35 million consumers rented at least once from Redbox in the fourth quarter.

Finally, the search for a new CEO to replace departed chief executive Scott Di Valerio continues with the board making it a top priority.

“When it’s time to have an update, we’ll provide that to investors,” Smith said.

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