Why Redbox Terrifies Hollywood
Dorothy Pomerantz, 10.26.09, 4:15 PM ET
LOS ANGELES -
It's rare that a new business comes along and freaks Hollywood out quite as much as Redbox has. The video kiosk was born out of McDonald's' new business development project, which launched such unsuccessful ventures as Ticktok Easy Shop, a convenience store in a vending machine.
But in 2004, Redbox took off. The kiosks are incredibly easy to use and movies cost just $1 per night, less than a rental at Blockbuster or a video on demand. Redbox is now owned by Washington-based Coinstar.
At first, Hollywood seemed happy to indulge the little start-up, but as Redbox has exploded (there are 21,000 kiosks at 7-11s and supermarkets across the country), studios have taken evasive actions. Universal, Fox and Warner Bros. now refuse to distribute DVDs to Redbox when they are first released. Redbox employees have been reduced to raiding local Target and Wal-Mart stores to stock kiosks. (See "Red Menace.")
President Mitch Lowe insists Redbox can keep buying at retail for as long as it takes the studios to understand that with DVD sales continuing to plummet (down 14% for the third quarter of 2009), Redbox might actually be able to help studios. Lowe sat down with Forbes to talk about Hollywood's fears, lawsuits and Redbox's plans for growth.
Forbes: What's your relationship with Hollywood like right now?
Lowe: It's misunderstood. Half of the studios love us and get the opportunity. We do a lot for our partner studios. We promote theatrical releases at no extra charge to the studios. There's a group who get that we're not cannibalistic. Our users are also film buyers. Studios that don't get it aren't basing their feelings on facts. We're trying to be patient. At some point they'll turn around.
But it's understandable that the studios would prefer someone buy a DVD rather than rent it for $1.
The studios say Redbox is hurting sales, but we're just a convenient scapegoat. People's shelves are full of movies. They're being more selective about what they're purchasing. And with our huge presence we can help promote films. For example: Management [staring Jennifer Aniston]. It didn't do well in theaters, but we promoted it heavily, and it made more in the first week in rental than it did during its entire theatrical run.
Do you offer the studios revenue sharing if they work with you?
Yes and copy depth, which means there is a minimum number of DVDs we will buy. Also, we only sell used copies of movies from studios that don't work with us. We destroy old copies from our partner studios.
And you're buying movies at retail from three studios right now?
We have a huge workforce out there acquiring product. We've perfected our methods with Universal titles so that by Friday we have machines that are fully stocked.
Isn't that kind of inefficient?
It is. We'd rather be paying the studios. We just want the same deal Blockbuster gets. We're prepared to continue doing this as long as it takes. We have the ability to open one kiosk per hour. The only way the studios can stop us is if they don't stock stores like Target and Wal-Mart.
Why not just charge a little more and give the studios more money per rental?
We pay the same money for the movies as Blockbuster--sometimes even more. So why shouldn't we charge less to rent? Maybe the question should be: Why doesn't Blockbuster charge less? The most amazing way to deliver movies to people is where they shop. We cut out real estate costs, and we've come up with a much more effective model.
So you think the studios are being emotional and irrational?
Historically, they have been. I dare them to show that we're cannibalizing their sales. Not one studio has gone public with any proof of that. They just assume that renting at a low cost hurts their sales.
What will you do when movie distribution moves to the Internet?
We survey our customers all the time to find out what they want. They're telling us they want more stuff like Blu-ray, catalog films and digital downloads. We are testing Blu-ray discs at different price points. In two markets we're testing games.
But isn't there a limit to how many discs a machine can hold? How much stuff can you add?
Each machine holds about 700 discs. We're trying to maximize space. In many locations we have two or three machines. It's a great way to improve service. One of the biggest challenges we have is lines. And when we have more machines, we can have more inventory. Initially we were thrilled to have lines, but now it's become something we have to figure out.