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Kiosk Wars Are Over!

16 Feb, 2010 By: Thomas K. Arnold

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The Kiosks Wars that have gripped our home entertainment industry for the better part of a year are effectively over.

Redbox has agreed to Warner Home Video's demand that it not carry Warner titles for rent until 28 days after street day (for more details, click here). The kiosk operator will most likely experience at least a short-term drop in revenue from not having new releases available for rent right when they come out, but after Netflix, a much larger rental competitor, agreed to similar terms, Redbox really had no choice but to cave — or else risk a costly legal fight that in light of the Netflix-Warner agreement it was probably destined to lose.

Several other studios are still doing battle with Redbox on the grounds that ubiquitous dollar rentals are hurting the sellthrough business, but I don't expect any of those cases to proceed now that a precedent has been set — particularly a precedent that appears workable for both parties. A Pali Capital analyst last week said a month-long delay in offering new releases to kiosk renters could lead to a rental revenue drop of as much as 50% (see the story here) as would-be renters buy the title instead, but I don't think the real impact will be anywhere near as much. In fact, I think this could be a boon for the entire business.

The studios will have a month-long window in which to sell their new releases, which is bound to lead to a surge in sales. And Redbox has a chance to make up this lost revenue — as does Netflix — by aggressively pushing other titles, the way retailers used to do in the days before copy-depth and widespread revenue-sharing. Factor in a sharply reduced cost for new releases and both Netflix and Redbox stand a good chance of at the very least maintaining their profits. Overall revenues may be a bit lower (sorry Pali, not by 50%), but so will expenses.

In any event, I don't think Redbox had much a choice. A nasty and expensive legal battle can be detrimental to any business, and at the same time the kiosk operator's cost of acquiring product "sideways" — sending people out to buy new releases at Wal-Mart and Costco and Best Buy — was spiralling upward with the big chains imposing limits on how many copies they would sell to a single person. Buying, say, 20,000 copies of Michael Jackson's This Is It, five copies at a time, would require 4,000 separate transactions — a logistical nightmare and a financial one as well, with a bloated work force of people entrusted solely with buying new DVDs, five at a time, over and over again on a single day, as at many different retailers as they could hit.

I can't help but chuckle at the irony, however. Studios say cheap rentals are hurting the sellthrough business so they declared war on kiosks in the hopes of giving people no choice but to buy. And yet one of the tools they used to bring Redbox to its knees was limiting the number of DVDs people could buy.

Only in Hollywood....

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