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Analyst: Sales Window Could Drop Redbox Revenue 50%

12 Feb, 2010 By: Erik Gruenwedel

The specter of a possible retail window for new-release packaged media could significantly impact DVD rental kiosk market leader Redbox’s revenue by 50%, an analyst said.

The day after Coinstar Inc., parent of Redbox, disclosed that the kiosk vendor in the most recent quarter had weathered select studio challenges bruised but not beaten, Richard Greenfield, analyst with Pali Capital in New York, issued a note predicting growing storm clouds for the kiosk vendor.

It should be noted that Greenfield remains a staunch critic (and one of the few) of the $1 DVD rental, spearheaded by Redbox — a market-changing price the analyst suggests could send the movie business into the abyss.

Greenfield said Redbox’s business model devalues home entertainment to near penny status and makes alternative distribution formats such as DVD/Blu-ray sellthrough, in-store and subscription rental, video-on-demand, and even theatrical appear overpriced.

“All of the companies we cover in the movie industry will suffer,” he wrote in a note.

Indeed, Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment last year imposed embargoes on new releases to kiosks of 28 days or more. Redbox, in turn, filed litigation against the studios.

Despite assurances from Redbox management that its workaround program obtaining embargoed titles from third-party retailers is working, and that consumers unable to find a title easily switch to another choice, Greenfield believes that over time consumers will become disenchanted and opt for alternative distribution.

“If titles 1, 2, and 3 are not available after a few trips to a Redbox, and [consumers] are exposed to commercials on TV for VOD and on the Internet (streaming), we believe their perception of Redbox will change,” he wrote.

Indeed, the analyst believes more retailers should follow the lead taken by Wal-Mart and Target that limit the quantity purchases to five copies for new releases.

He scoffed at indications by Redbox management that a possible retail window for new-release packaged media would impact its revenue only by 10%.

“Redbox relies on the new-release business, if it did not, it would not be suing three studios,” Greenfield wrote. “We suspect the impact is closer to 35% to 50%.”

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