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Redbox: Friend or Foe to Studios?

28 Jul, 2009 By: Erik Gruenwedel

On the eve of financial reports this week from Warner Bros. and Walt Disney, one analyst is asking studios to justify their sudden affection towards kiosks, notably Redbox.

Sony Pictures Home Entertainment and Redbox last week inked a five-year $460 million distribution agreement. Viacom CEO Philippe Dauman July 28 said Paramount Home Entertainment was in talks with Redbox and other kiosks.

Richard Greenfield, media analyst with Pali Capital, July 28 said the surge in DVD rentals due to the recession has empowered Redbox and other kiosk brands, as well as Netflix, thereby threatening long-term consumer behavior toward packaged-media sellthrough.

“While there is a collectability aspect to DVD purchases that rental does not satisfy, we worry convenience is far more important than collectability to most consumers,” Greenfield wrote in a research note.

Specifically, Greenfield questioned the wisdom of allowing Redbox kiosks in front of Wal-Mart, heretofore the largest individual retailer of DVD movies. The analyst said Redbox, which offers new-release movie rentals for $1 per day, has also begun offering previously viewed titles for $7, thereby catering toward the impulse consumer and directly impacting sellthrough at Wal-Mart.

Greenfield said the average Redbox kiosk rents 50 DVDs per day, with the average title renting a number of times in the low teens. He said a Redbox kiosk generates $30,000 in revenue in its first year, $40,000 in its second and $50,000 in its third year.

The company plans to have 20,000 kiosks in operation by the end of the year and thinks the market can handle upwards of 90,000 kiosks.

Indeed, from May 31 through July 12, Greenfield said the top-renting weekly new release correlated to the top-selling title, including Paul Blart: Mall Cop, He’s Just Not That Into You, Gran Torino, Confessions of a Shopaholic (each No. 1 for successive weeks) and Knowing.

In addition Greenfield said that while availability of used DVD sellthrough at Blockbuster stores has been around for a while, Redbox has ratcheted up the market for used product to a new level by flooding kiosks with used DVDs, which he said threaten sales of new releases.

Greenfield said Redbox is offering new-release titles for sellthrough within a few weeks of rental, a major linchpin of its ongoing lawsuit with Universal Studios. Redbox continues to offer Universal titles by acquiring them through third-party retailers and distributors, according to the analyst.

“While this works with the current number of kiosks and only one studio not working with Redbox, we wonder whether it is a sustainable model if other studios follow suit [with Universal] and the number of kiosks continues to grow rapidly,” he said.

In its deal with Sony, Redbox, in exchange for a lower wholesale price, agreed to acquire a greater number of Sony titles and destroy them (no used sellthrough) after 26 weeks.

The analyst said the increase in used DVDs has resulted in a notable reduction in value realized for each Redbox DVD sold off (to its distributors) following the new-release rental window. 

“We suspect value to Redbox from previously viewed has dropped from $6-$8 to $4-$5 over the past 12-18 months,” Greenfield said.

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