Erik Gruenwedel, senior editor Before joining Home Media Magazine in 2003, Gruenwedel was a reporter at Billboard, focusing on the legal issues. During his 15-year print career, Gruenwedel has written for the bicycling, homecare. advertising (Adweek), and spa and poolindustries. He has a degree in journalism from Cal-State Northridge, as well as an MBA from Pepperdine University.
SVOD's Slippery Slope
On Feb. 17 Sony Pictures Home Entertainment will release infamous ‘R’-rated political comedy The Interview on DVD and Blu-ray Disc.
If anybody still cares.
On street date, it will have been 56 days since the movie launched online and in select indie theaters — despite terrorist threats against the movie’s distribution in any form. The film from Seth Rogen co-stars James Franco as a bumbling TV journalist whose interview with North Korean leader Kim Jong-un is co-opted by the CIA into an assassination attempt.
If the Christmas Day capitulation of the nation’s largest theater chains to a murky group of cyber hackers allegedly operating on behalf of the North Korean government wasn’t bad enough, Sony Pictures — victim to the hackers’ IT attack — succumbed to an even bigger foe: SVOD.
That’s because Sony Pictures inexplicably made The Interview available to Netflix on Jan. 24 — about three-and-a-half weeks before the packaged media release!
Sony Pictures undermined much of its ability to generate incremental revenue from The Interview through packaged media, opting instead to enable Netflix’s 39 million domestic and 3 million U.K. subscribers to binge-view the movie for free.
While Sony Pictures likely extracted a large license fee from Netflix, the deal set a dangerous precedent putting subscription streaming ahead of packaged media in the distribution food chain. Sales of DVD and Blu-ray Disc titles may be slowing, but consumers still spent 80 cents of every home entertainment dollar on physical product in 2014, according to DEG: The Digital Entertainment Group.
Subscription streaming may be buzz worthy, but it endangers all home entertainment channels — notably retail and rental — if not regulated.
“Every move Sony made [with The Interview] was wrong ... it was all reactive,” said Ralph Tribbey, editor of industry tip sheet The DVD & Blu-ray Release Report.
He said studios — not just Sony Pictures — need to re-think their business models and approach toward SVOD. Unless they are willing to bypass a theatrical run, studios need to return to recognize that the theatrical window promotes higher-margin retail, followed by broadcast and streaming.
Netflix, which is seeking $1.5 billion in new debt-funding to underwrite content acquisitions, is pursuing content exclusivity by paying premium license fees. Indeed, it ended 2014 with $9.5 billion in content obligations.
Tribbey argues that studios must resist the temptation of exorbitant license fees by retaining the traditional distribution food chain (theatrical, retail, rental, streaming) — with SVOD at the end of the line.
Putting The Interview on SVOD ahead of packaged media exacerbates the mindset physical media sales are declining and digital distribution is the answer.
“It’s a self-fulfilling prophecy,” Tribbey said.
Good-Bye Mrs. Kotter
Back in the mid-1980s I managed a bike shop — Ernie’s Pro Bikes — on trendy San Vicente Blvd., in the swanky Brentwood suburb of West Los Angeles.
Actress Marcia Strassman, who died Oct. 24 at age 66 following a seven-year battle with breast cancer, parlayed a brief but mundane role at the end of each episode as Gabe Kaplan’s understanding wife on the hit ’70s sitcom “Welcome Back, Kotter,” to cult status.
Even at 5-10 with sparkling eyes and lean figure, Strassman didn’t necessarily stand out. She didn’t need to. Her air of normalcy in a town awash with manufactured vanity — a welcomed respite, especially at Ernie’s where she would pop in on occasion for no apparent reason. An unhappy marriage ventured during one visit.
Strassman had just caught lightning in a bottle for a second time with the Honey, I Shrunk the Kids movie franchise — again playing the wife character to lead actor Rick Moranis.
While she really wasn’t interested in cycling, the colorful bikes, Lycra clothing and related accessories intrigued her. She would pull up on a shop stool and ask oddball questions like why male cyclists shaved their legs? Or how do the gears on a bike work?
When I told her I could show her a few shaving tricks, she blushed and smiled. She once vented her frustration out loud on the pay inequalities with the 1992 sequel, Honey, I Blew Up the Kid. She also joked having “made it” in Hollywood by virtue of a “hunky” personal driver assigned during filming.
If Los Angeles is indeed a constellation of plastic, Strassman seemed an odd fit. Like a lot of LA stories, Ernie’s is no more — replaced by a trendy eatery du jour. But the memory of Ms. Strassman remains.
Home Entertainment’s 'Blu' Summer
At a time when subscription streaming and over-the-top video dominate the narrative in home entertainment, Blu-ray Disc remains an enduring format — despite media companies’ misguided efforts to embrace SVOD’s Trojan Horse.
Trans World Entertainment, which operates the 328-store f.y.e. retail chain nationwide, said double-digit sales increases of Blu-ray titles helped keep same-store sales declines to 1% in its most-recent fiscal quarter.
Hastings Entertainment, which operates 126 stores throughout the Southwest, saw revenue from new Blu-ray and DVD title sales increase 2% to 23% ($100 million) of total sales in 2013 from the same period in 2011, according to an April regulatory filing.
Industry wide, through the first half of the year, Blu-ray sales rose 10% in the second quarter alone, suggesting continued viability in a disc business many in the mainstream media have given up for dead. In fact, electronic sales of new releases — the format “du jour” — were less than 20% of total packaged-media sales in the quarter, according to DEG: The Digital Entertainment Group.
Alas, the DVD death spiral perception — perpetuated for years by the media — has now been embraced by media executives, many of whom openly gloat about the incremental revenue generated licensing content to SVOD stalwarts such as Netflix, Amazon Prime Instant Video and Hulu Plus.
Capitulation to streaming reached its zenith earlier this month when Time Warner CEO Jeff Bewkes — a perennial critic of SVOD — unabashedly lauded digital distribution.
“We're going to be up solid double-digits [this year]. And by that I don't mean 10% to 20%, I mean more,” Bewkes said.
Warner Bros. said it could expect to see a significant increase in the $400 million it generated in 2013 from licensing content to subscription streaming services. Nevermind that incremental revenue is dwarfed by the more than $1.1 billion the studio generated through June 30 this year selling movies and TV shows on disc, and to a lesser extent, digital platforms.
In the United Kingdom, a durable packaged-media market slowly but surely undermined by SVOD, Netflix now has more than 3 million subs. I have friends in Germany — a country with a strong economy that continues to support disc sales — who routinely ask about the latest American TV shows to buy on disc. Recent recommendation “Breaking Bad” was big hit. Now, its “Homeland.” I didn’t have the heart to tell them Netflix will open for business there next month.
To be sure, SVOD is a win for consumers, but it’s a loss to content holders and the home entertainment industry. Who makes a profit selling unlimited access for $9 a month? Just Netflix. Which is why its stock is in the stratosphere — valued nine times more than Microsoft; five times more than Walmart and Time Warner.
Lost among Wall Street’s brazen Netflix lovefest is the reality the service ended its most-recent fiscal period with $7.7 billion (!) in content liabilities, which some industry observers actually believe the SVOD service may outrun if it keeps adding subscribers.
Ever wonder why Netflix CEO Reed Hastings has that sheepish smile in photos? He’s laughing all the way to the bank.
Netflix is one of the most recognized brands in America, if not the world. The company, which began operations April 14, 1998, released its annual report Feb. 3, which gives a snapshot of the top producing publicly traded company in 2013, according to Standard & Poor’s.
Its stock price Feb. 3 opened at $411 a share with a market valuation around $24 billion. Notably, there were just 215 stockholders of record of Netflix common stock (as of Jan. 30, 2014), although that doesn’t include all shareholders working through investment groups.
And still the subscription streaming pioneer prefers to rent — not own — its 250,000 square-foot corporate headquarters in Los Gatos, Calif. Interestingly, Netflix is doubling the headquarters to 510,000 square feet, with construction slated to finish by 2015.
Netflix rents all of its business facilities, including the 57,000 square-foot packaged-media corporate headquarters in Fremont, Calif., and 79,000 square-foot office in Beverly Hills, Calif. (where chief content officer Ted Sarandos works).
It also operates a 23,000 square-foot global streaming customer service center in Santa Clara, 90,000 square-foot domestic disc processing, shipping and storage center in Columbus, Ohio; and 49,000 square-foot domestic streaming and disc customer service center in Hillsboro, Ore.
Netflix employs 2,020 full-time employees, and another 400+ part-time. It uses Amazon Web Services for its cloud-based computing, and prefers a proprietary Open Connect CDN, while still using third-party services such as Akamai and Level 3.
The company added 6.2 million domestic streaming subscribers in 2013, to end the year with 33.4 million, which was up 15% from 2012. Domestic streaming generated a contribution profit of $622 million, up 69% from 2012, on revenue of $2.7 billion. The revenue increase was largely due to a 26% increase in the average number of paid memberships.
Netflix added 4.8 million international subscribers, up 13% from 2012, to end the year with 9.7 million. It generated a contribution loss of $274 million, which was down from a contribution loss of $389 million in 2012.
The rental company lost almost 1.3 million disc subscribers in 2013, which was a 57% improvement from the 3 million disc subs lost in 2012. The segment generated a contribution profit of $439 million, which was down 18% from 2012, on revenue of $910 million (down 20% from 2012).
The $132.1 million decrease in domestic DVD cost of revenue was primarily due to a $63.2 million decrease in content acquisition expense and a $47.7 million decrease in content delivery expenses resulting from a 21% decrease in the number of DVDs mailed to paying members. All of which helped packaged media up contribution margin 1% to 48%.
Notably, Netflix generated $5.8 million selling previously viewed discs to third parties.
Digital Hype Off to Strong Start in 2014
Hollywood Reporter: “A steep increase on the digital side saved the day.”
L.A. Times: “Digital video sales’ rise breathes new life into home entertainment.”
Chicago Tribune: “Boosted by Digital, Hollywood Home Entertainment Sales Grow 5%”
Home Media Magazine: “Studio Presidents Tout Digital at CES”
The headlines are bold and unwavering. Digital dissemination of movies and TV shows is saving the home entertainment industry. According to DEG, consumers spent nearly $1.2 billion buying movies and TV shows digitally in 2013, up from $808 million in 2012.
$1.2 billion is a lot of money — $100 million monthly studios collectively generate selling content with expansive margins compared to disc. The industry generated another $2.1 billion renting digital content. Together, digital generated $3.3 billion — less than half that of increasingly disregarded packaged media.
Indeed, disc purchases reached $7.8 billion — which while down 8% from $8.5 billion in 2012 — trumped digital revenue by 136%. In fact, packaged-media sellthrough in the U.S. topped China’s red-hot (and another Hollywood favorite) theatrical market by 116%, despite the fact the communist country boasts more than 18,000 movie screens and the world's biggest population at 1.36 billion.
Blu-ray Disc saw revenue increase 5% — the same percentage uptick as the industry overall, but virtually ignored by studio executives. Too bad, considering the high-definition precursor to 4K enjoyed its best holiday sales ever. According to data compiled by Home Media Research, Blu-ray sales in December 2013 amounted to approximately $416 million, up from the $404 million in December 2012.
$416 million is a lot of money, too. In fact, it’s 51% more than what Digital HD and transactional VOD collectively generated in December if you average digital revenue over 12 months. And it's 316% more than what consumers spent on average buying digital content. In other words, for every $1 spent buying digital content, consumers spent $4.16 buying Blu-ray.
Yet, studios executives — in an effort to appear prescient — are all on the digital bandwagon. It's what Wall Street wants to hear (i.e. growth sector). It's streaming coolness. It’s a strategy Netflix’s brass has employed for years, despite the fact by-mail rental discs still generate half of the SVOD pioneer’s profit margin.
It's also a strategy that is shortsighted, as underscored in a new .
Heralding a Pyrrhic Savior
The home entertainment industry appears to be borrowing a page from Netflix’s playbook regarding digital revenue — lauding electronic sellthrough (EST), transactional VOD, and even subscription streaming, as market saviors.
But if you analyze the third-quarter data from DEG: The Digital Entertainment Group, EST and transactional VOD rental collectively (again) lagged packaged media’s $1.45 billion in revenue by a whopping 50%!
Transactional VOD and EST totaled $742 million, with widely heralded digital sellthrough generating a rather modest $274 million in standalone revenue. While EST is up 46% year-over-year and boasts significant margins (compared with disc), does the industry really want to crow about a sector that generated just $29 million more in revenue than the surviving ghosts of Blockbuster did renting discs over the counter? Packaged media sales, which are indeed declining, still generated 80% more in revenue than EST.
To put it another way, $29 million is approximately the amount Netflix CEO Reed Hastings, CCO Ted Sarandos and CFO David Wells collectively earned selling stock options in September. And why? Because SVOD’s $815 million “contribution” to the $1.55 billion in Q3 digital consumer spending is misleading.
SVOD revenue largely went to Netflix, Hulu Plus and Amazon Prime Instant Video — not studios and content holders. Content holders receive license fees from SVOD operators over a multi-year period. In fact, Netflix said a record 5 billion hours of content was streamed by its subscribers during the quarter. That’s a lot of content being consumed for just $7.99 a month. Had those hours been from transactional VOD or EST, the fiscal impact (and relevance) would be exponentially higher.
Indeed, when subtracting SVOD revenue from both the 2012 and 2013 Q3 tallies, this year’s total home entertainment consumer spending actually declined.
Netflix, which continues to turn a cold shoulder and pull back marketing dollars from its high-margin disc rental business, said it does so in order not to confuse an increasingly digital consumer.
Home entertainment would be wise not to emulate; and instead up marketing of packaged media with a few changes.
That’s because transactional VOD, which has been heralded by studios for 10 years as the preferred rental option, grew less than 3% year-over-year, suggesting that the hype surrounding SVOD (and kiosk rental) is undermining the $4.99/$5.99 VOD transaction — and packaged media.
The consumer has been in the throes of an economic recession for more than five years. Low cost (and low margin) entertainment sources such as SVOD and kiosks have gained traction (it’s hard to argue against $7.99 monthly and $1.20 nightly rentals) and improved their content offerings. Home entertainment has become a commodity.
Studios, as a result, do need to heed recent comments from Netflix’s Sarandos criticizing inane release windows that allow theater operators to control distribution of new movies for up to four months after launch. Studios should call theaters’ bluff and release $40 bundled Blu-ray Disc/DVD/digital titles (and $20 DVDs) simultaneously with the theatrical launch. Nearly every home has a DVD or Blu-ray player. Then release to digital channels and kiosks four months later. And let the market decide.
If the theaters refuse to screen movies being released simultaneously at retail (which they will), that’s their right. So is it the right of studios to move their theatrical releases and marketing budgets to home entertainment.
Sarandos says the consumer should have ubiquitous access to content on their terms (without pirating, of course). It’s time studios stop protecting low margin theaters and throw a lifeline to higher margin home entertainment, beginning with packaged media.
Who Loves Ya, Disc? Not Netflix
Netflix’s indifference towards its pioneering by-mail disc rental business turned another page Oct. 21 when it relegated mention of packaged media to just two sentences (67 words) in the third-quarter investor newsletter.
In the brief paragraph, CEO Reed Hastings and CFO David Wells spent half of it cautioning that the pending first class rate hike by the U.S. Postal Service would add upwards of $4 million in quarterly expenses, beginning in 2014.
Netflix has more than 7 million subscribers who rent discs (and also stream content), contributing an impressive $107 million in operating income on revenue of about $227 million to Netflix’s bottom line. Nonetheless, the segment was eliminated for the first time from the service’s summary fiscal results outlining domestic and international streaming. Disc rental was included in the overall totals with no breakdown of revenue or operating income.
Notably, disc rental's operating margin of more than 47% doubles domestic streaming's 23.7%.
Meanwhile, Netflix’s international segment, which continues to be heralded by management (as well as Hollywood) as the growth opportunity of today and tomorrow, again lost $74 million.
When questioned in the video webcast, Hastings reiterated his typical detached support for by-mail rental, which he said was operating largely as a stand alone business requiring little marketing.
“[The disc rental segment] is doing great work,” Hastings said, adding Netflix was “very excited” about the unit’s breadth of content selection, including availability of Showtime and HBO shows — content, it should be pointed out, is not available anytime soon on streaming.
Then, reality reared its ugly head. In reference to a question about British competitor LoveFilm Instant, the CEO revealed his true POV toward disc. Specifically, Hastings said Netflix clearly had the upper hand on LoveFilm Instant (and Redbox Instant) precisely due to its streaming-centric business model. Public perception of Redbox Instant and LoveFilm Instant, on the other hand, is confusing and bad for business, according to Hastings.
The culprit: discs. He said Netflix purposely does not market its disc rental business so as to minimize confusion among an increasingly streaming-educated consumer.
“The [streaming/disc] brand, fundamentally, is not correct because they can't deliver on that promise, as exciting as it sounds to consumers. So that's a big tension,” Hastings said.
In other words, Netflix’s lucrative disc and hybrid streaming cash cow — which is twice as profitable as domestic streaming — is actually a flaw in the digital world, according to the CEO. That it continues to drive earnings apparently is just an aberration.
A Question Too Far?
CNBC media reporter Julia Boorstin
Netflix named JP Morgan analyst Doug Anmuth to join BTIG Research analyst Richard Greenfield as co-moderators for streaming pioneer’s Oct. 21 third-quarter video fiscal call.
Anmuth replaces CNBC media and entertainment reporter Julia Boorstin, who along with Greenfield, hosted Netflix’s first-ever video call in July.
Netflix spokesperson Joris Evers said the switch was part of the company’s strategy to “keep trying new things.” He didn’t elaborate or indicate why Greenfield is returning and Boorstin isn’t.
From the outset, the streaming video format was typical for a pioneer like Netflix. Analysts and investors submitted questions in advance to Boorstin and Greenfield, who then organized them into theme questions presented to CEO Reed Hastings, CFO David Wells and CCO Ted Sarandos — the latter making his first appearance on a quarterly call.
The format, which represented a break in protocol from the traditional corporate webcast whereby analysts phone in or email questions to the CEO and CFO, generated its share of controversy. Notably, Wedbush Securities analyst Michael Pachter said the moderators would have an unfair advantage controlling the questions that some might consider deferential to Netflix.
Greenfield, in an email prior to the first video call, was adamant he would remain independent prior, during and after the event. And by all accounts he succeeded asking straight forward questions, including the impact “Arrested Development” had on new subscribers, clarification on “basis points,” margins, and related financial queries.
Boorstin, who clearly relished her role and was most at ease in front of the video cam, approached the Q&A as she would an interview with a newsmaker on CNBC — trying to find that one question that would result in a notable sound bite.
Indeed, Boorstin’s began the event questioning Hastings about the alleged controversy surrounding the third-party hosted video format — a query that appeared to irritate the CEO.
“I think we should process that after the interview and let's see if it's productive and useful for investors and see what they think,” Hastings responded.
Then she asked Sarandos how many people watch Netflix originals.
Viewer data, along with price hikes and churn, are subjects Netflix executives like to avoid. Netflix, a while ago stopped reporting churn , opting instead to focus on net adds. Boorstin knew this but asked anyway.
The SVOD service, per policy, also refuses to disclose how many people watch original programming like “House of Cards,” “Arrested Development,” “Hemlock Grove,” and “Orange is the New Black,” among others.
The non-disclosure is a sore spot within the TV industry since broadcast networks live and die by Nielsen ratings. Netflix argues that since it doesn’t have to appease advertising, viewer tallies are immaterial.
Price hikes is another matter. When Netflix in 2011 infamously increased by 60% the price of its popular hybrid streaming/disc rental plan, subscribers jettisoned in droves, the media pounced, and Hastings was left offering confusing explanations that sent the stock into a tailspin and had many questioning his leadership.
Undeterred, Boorstin again asked about a price hike and viewer data. And Hastings and Sarandos again denied the existence of any pending price hike or program ratings.
“We are going to keep on asking for numbers. Some day, Ted, you will give one to me,” she quipped.
Pachter said Boorstin’s departure is a negative.
“I thought that [she] gave an appearance of objectivity, which has been removed now,” he said.
Emmys Final Score: Cable 1 Netflix 0
In the end it wasn’t even close. Netflix came to the 65th Annual Primetime Emmy Awards with high expectations following 14 Emmy nominations — the first ever for an Internet-based subscription service.
With majority of those nominations (nine) for political drama reboot “House of Cards,” scuttlebutt suggested Netflix would score big in the high-profile categories, including Outstanding Drama, Lead Actor (Kevin Spacey) and Lead Actress (Robin Wright).
It didn’t. The subscription video-on-demand pioneer, which has marketed itself in part as an agent of change within the traditional TV landscape, took home just one Emmy during the Sept. 22 primetime awards telecast: Oscar-winning helmer David Fincher for Outstanding Directing for a Drama Series.
Clearly, with the monies invested in billboard and related national marketing, in addition to grassroots political-style lawn signs in greater Los Angeles, Netflix had hoped for more than a directorial nod.
And some might say the Emmy directing award should not be confused with similar accolades presented at the Oscars and Golden Globes. Indeed, Fincher only directed two of the 17 “Cards” episodes, including the pilot. “Cards” won two other Emmys for castings and cinematography, which were awarded during the separate Primetime Creative Arts Emmy Awards on Sept. 15.
HBO, which Netflix management has oft mentioned as both erstwhile mentor and foe, again took home the bulk of Emmy hardware, including a combined 27 trophies for “Veep,” “Boardwalk Empire,” ‘The Newsroom” and Liberace biopic Behind the Candelabra.
AMC Networks again scored big for perennial Emmy favorite “Breaking Bad,” which nabbed Outstanding Drama and Outstanding Supporting Actress (Anna Gunn). Notably, series creator Vince Gilligan attributed the show’s longevity in part to Netflix.
"I think Netflix kept us on the air," Gilligan told reporters back stage, alluding to streaming access to past seasons. He should have also mentioned packaged media since season boxed sets of “Bad” consistently rate high at retail. Amazon ranks seasons one through three among its top-selling DVDs.
Regardless, the Emmys once again underscored what cable has brought to TV in terms of quality serialized drama. And while Netflix invented binge viewing and isn’t afraid to spend big on original content, it’s still chasing the cable networks' creatively.
"It just seems like there's a real swing in the cable world," Bobby Cannavale, who edged favorite Aaron Paul (“Breaking Bad”) to win Outstanding Best Supporting Actor Award for HBO's "Boardwalk Empire," told Reuters.
"[Movie] studios don't make dramas, so the best place to do drama is you go to HBO or Showtime, or you go to AMC or FX, and I think that was sort of reflected today."
Margin’s Ugly Call
Outerwall said margins at subsidiary Redbox would fall below expectations in the second half of the year as consumers rent movies for fewer days, among other issues.
By definition, margin is the difference between the cost and the selling price of something. For Redbox, the selling price would be the number of nights it can charge $1.20 for a particular disc at a kiosk. Outerwall’s profit margin in the first half of 2013 shrunk to 6.2% from 8.2% in the same period of 2012. And it’s expected to fall further.
Culprits include Redbox promotions and a shorter rental period per disc, according to CEO Scott Di Valerio. He said the kiosk vendor would report increased revenue in the third quarter, including record rentals in July, but the profitability (margin) of those rentals is lower.
That’s because while more people are renting movies from kiosks, they're returning them the next day, instead of days later. With the margin on a nightly $1.20 rental razor thin, Redbox makes its money through volume (renters) and extended rental nights. Previously, the average kiosk rental generated more than $2 in revenue. When a consumer returns a disc in less than 24 hours, that revenue (and margin) falls.
Pitfalls of Teaser Pricing
Redbox (and streaming services such as Netflix) has shifted the rental paradigm, transforming the $3.99 video store transaction into a low margin commodity. Kiosks and subscription video-on-demand services have reduced the cost of the rental transaction, replacing it with a big-volume business model predicated on the belief that if a movie/TV show rental is priced at next to nothing, people will flock, rentals or subscribers will balloon and profit will follow based on increased volume.
If you’ve ever had someone ask you at McDonald’s, "Would you like a drink with that?," then you get the idea. Redbox is silently asking customers, "Would you like to keep that another night? It’s only $1.20 more." And Netflix every month is cajoling, “It’s only $8 a month. Isn’t the entertainment we provide each month worth that?”
This mindset has been a boon to the consumer, but it’s a delicate balancing act for Redbox and the home entertainment industry. Studios and media companies loudly herald the incremental revenue SVOD is generating via multimillion dollar license deals. Redbox, too, is paying select studios hundreds of millions to secure street date releases.
Yet, this business model is dependent upon SVOD and Redbox continually growing their subscriber bases and/or maximizing the time a disc is gone from the kiosk and in the home. Any deviation from these prerequisites, and the bubble bursts.
“Unfortunately, this demonstrates the leverage in the Redbox model, but on the negative side,” said B. Riley & Co. analyst Eric Wold. “The more you can push customers to multiple nights, larger baskets, etc., the more you leverage that cost.”
Analysts say Redbox needs to adjust its promotional strategies going forward to offset the single night shift and negative margin hit. Consensus suggests Redbox is not operating on the margin fringe as much as it is operating a business model that requires a certain level of risk predicting disc demand ahead of time, which doesn’t always pan out correctly.
“They make outsized profits when revenue is higher than budgeted and lower profit when revenue falls short. It’s a tough model to predict, but I think they need to manage a bit more conservatively,” said Wedbush Securities’ Michael Pachter.
As for Netflix, as long as they can grow their subscriber base and leverage their ballooning stock price, the party will continue. However, someday the music may stop,