Analyst: Lionsgate Pushing Redbox for Better Terms

22 Sep, 2014 By: Erik Gruenwedel

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In a switch, Lionsgate apparently is pressuring Redbox for better terms to rent its movies via the latter’s network of more than 42,000 kiosks. The mini-major’s distribution agreement with Redbox expired at the end of August with no renewal announced, according to B. Riley & Co. analyst Eric Wold.

Redbox elevated its profile in 2008 and helped drive a nail through brick-and-mortar video stores when it signed landmark distribution agreements with Sony Pictures Home Entertainment, Paramount Pictures Home Entertainment and Lionsgate, among others, that afforded the kiosk vendor street-date access to new-release titles.

Warner Home Video, Universal Studios Home Entertainment and 20th Century Fox Home Entertainment refused to play ball, and instead filed lawsuits against Redbox claiming it was undermining the packaged-media sellthrough market. The studios subsequently struck deals with Redbox in 2010, which included delaying access to new releases 28 days after street date.

Many of those licensing deals are now set to expire by April 21, 2015. With subscription streaming proliferating and digital sellthrough of movies not compensating for declining disc sales, rental leader Redbox appears to be in the crosshairs.

Analyst Wold contends the lack of a renewal indicates Lionsgate is seeking higher disc fees, unit orders or both.

“With three weeks passed and no renewal, we can only imagine that Lionsgate is pushing for better terms,” he wrote in a Sept. 22 note.

If true, the move would be a reversal from the situation studios find themselves in with Amazon, which reportedly has applied pressure for improved disc pricing and withheld consumer preordering as leverage.

Regardless, Wold said the current home entertainment retail and physical market environment is not conducive to price inflation as subscription streaming proliferates. The analyst believes studios may use this opportunity to extract better terms from Redbox, including delaying access to new releases and/or withholding content altogether.

“We believe our concerns may not be so far-fetched,” Wold wrote.

Meanwhile, the analyst said Redbox continues to undermine its ability to raise rental prices in the future by engaging in ongoing promotions that include free rentals. Over a 48-hour period this past weekend, Wold rented 10 movies for free simply by using codes emailed to him following each rental.

“[We] would actually not be surprised if we are emailed more free codes when the final movies are returned,” he wrote.

As a result, Wold said question marks about studio license agreements and proliferation of free rentals elevates Redbox’s margin risks in the current fiscal year.

“The combination of seemingly unrestrained promotional activity, studio pressure and a customer base unlikely to be receptive to rental price hikes … we are downgrading [parent] Outerwall from “neutral” to “sell.”

Separately, Piper Jaffray & Co. analyst Michael Olson Sept. 22 disclosed results from a survey of Redbox users that found 23% of respondents planned on reducing their kiosk rental activity in 2015.

 

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