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Shades of Red

20 May, 2009 By: Thomas K. Arnold

From the get-go, studios never much cared for rental, since there’s no direct benefit to their revenue stream. In the early days of home video the studios even tried to stop rental dealers from renting movies they had purchased. The First Sale Doctrine put an end to that, ushering in an era of grudging acceptance—made more palatable through the introduction of revenue-sharing, which at last gave the studios a bite of the action.
These days, the attitude in Hollywood toward rental has taken a decided nosedive. Part of it, no doubt, is the fact that rental is enjoying something of a resurgence due to the down economy, while sales have sunk. But of all the rental dealers out there, perhaps none has raised the ire of the studios so much as Redbox, a once-little company that puts kiosks in retail stores where consumers can rent movies for a dollar a night.
Over the last six years Redbox has set up nearly 13,000 kiosks in supermarkets, discount stores, drugstores and restaurants, with plans to open another 7,100 by the end of this year. What has the studios seeing red is not just the low rental rate, which they feel devalues their product, but also the fact that Redbox kiosks have begun popping up at Wal-Mart, the nation’s No. 1 seller of DVD. “It’s cannibalization, pure and simple,” one studio executive told me.
Universal Studios Home Entertainment last year began withholding DVDs from Redbox until 45 days after their release to lessen competition with sales and later ordered distributors to cut off supplies. The two parties are now squaring off in court over a lawsuit Redbox has filed against Universal, alleging restraint of trade.
Through it all, Redbox has continued to grow. Just this morning, I received word that Redbox has cut a deal with Circle K to expand its kiosks to more locations throughout the convenience store chain’s network. Currently, Redbox kiosks are limited to select Circle K stores in Arizona, California and Ohio.
I have mixed feeling about the Redbox phenomenon. I can see how dollar rentals could be perceived as devaluing DVDs in the consumer’s mind, but is this really any more damaging than, say, those ubiquitous $5 dump bins at Wal-Mart? And while I, too, believe there is a risk of cannibalization by having Redbox kiosks, with dollar rentals, inside a Wal-Mart, where movies traditionally have only been sold, isn’t this sort of in keeping with the broad “entertainment emporium” concept we’ve all supported at one point or another? You know, a place where consumers can buy or rent movies and video games and buy music?
On the one hand, Redbox certainly satisfies consumer demand. If the demand for dollar rentals at Wal-Mart, McDonald’s, Circle K and elsewhere wasn’t there, Redbox wouldn’t be in a business. And yet our industry can’t rely solely on consumer demand — otherwise, there would be unlimited free downloading, which is what consumers really want, as evidenced by the music industry’s experience with Napster and other illegal file-swapping services a decade ago.
These are tough times for the studios, folks. As always, they have to manage distribution and the supply chain. In these turbulent economic times, they also have to manage their own, and their shareholders’, expectations. And now, on top of all that, they have to manage consumer demand.
No wonder so many faces in Hollywood are seeing red over Redbox.

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