Half a Billion Reasons Why Studios Are Threatened by Redbox

You wouldn't know it to look at them, but those red vending machines full of DVDs -- you know, the ones sitting outside McDonalds -- may be the biggest threat to the big box video stores since Netflix.

Redbox has announced that they'll be renting their half billionth DVD this week, just five years after they debuted with 12 kiosks in Denver, Colorado. Now boasting over 15,000 locations in 48 states, the convenience and low prices -- Redbox charges a flat $1 per day fee per disc -- have made them a major player in the video rental industry.

And the studios that produce the DVDs are split on whether or not that's a good thing.

Back in October 2008, Redbox, which is jointly owned by Coinstar and a subsidiary of McDonalds, filed a lawsuit against Universal Studios, alleging that the entertainment giant was abusing copyright and engaging in anti-competitive behavior. Universal had tried to force Redbox, who buy their discs from wholesalers, to sign the same sort of revenue-sharing deal that the big studios have with Blockbuster and Netflix. The deal would have limited Redbox's ability to resell used discs, decreased the number of DVDs available for rent, and taken a cut of their profits, to boot. Redbox understandably said no.

When Redbox declined to sign, Universal threatened to cut off the wholesalers who sell to Redbox, and to place a 45-day wait on the availability of new titles. This is, simply put, illegal. It's a violation of antitrust laws. So Redbox sued.



Jump forward almost a year. As reported here by Peter Martin, 20th Century Fox joined Universal and attempted to force the same sort of deal on Redbox and, again, Redbox sued.

On the surface, it would seem that the studios are threatened by the easy, cheap vending of DVDs, perhaps thinking that it cuts into their retail sales when consumers can pick up a disc for $1 with their Happy Meal instead of spending $20 at Best Buy. Industry experts say that Redbox's low price point could force other retailers to lower their own prices to the point of wiping out profits, just to stay competitive.

But Redbox's CEO has said that their company has only a negligible effect on DVD sales, and not all studios are in alignment with Universal and Fox. On the same day that Redbox filed suit against Fox, they signed a five-year deal with Lionsgate to distribute their DVDs on the street date, an arrangement that Lionsgate estimates will net them $158 million. Sony and Disney also have deals with Redbox, without any apparent enmity.

So what's the deal with Universal and Fox? Partly, it could be that they're so entrenched in the old ways of doing business -- and panicked as they watch new media supplant DVDs -- that they're attempting to maintain a death grip on distribution through the traditional strong-arm tactics.

In Universal's case, it could also have something to do with them launching their own vending operation. In a partnership with Sony, their PoP Entertainment vending machines will rent video games, Blu-ray dics and DVDs, and even offer content downloaded directly to your PMP or SD card. Initially to be available in the UK, the company said that they'd be expanding to the U.S., as well.

So ... is it fear of revenue loss from DVD sales? Or an attempt to maintain tight control of home video distribution while launching their own vending company? Most likely, it's some of both, along with a whole lot that's going on behind the scenes. One thing's certain -- with Redbox hitting the half-billion mark in rentals, this is a financial battlefield that may get very bloody, indeed.