Top 10 Film Industry Stories of 2010: #6
Studios to Redbox/Netflix: You'll Wait a Month and You'll Like It
By David Mumpower
January 27, 2011

Call me crazy, but I think I'll go with the one that's not double or triple the price.

2010 represented a series of huge events for Redbox. The unique vending machines have all but destroyed conventional video stores such Hollywood Video and Blockbuster. In fact, the latter chain was forced to file for bankruptcy late in the year with the end of their days seemingly nigh. With the news of major competition near collapse, Redbox seems like 2010 was a perfect year for them, but one contract dispute they experienced garnered our attention more than the rest.

We should point out that 2010 was a banner year on the whole for Redbox. The company vended their billionth rental in September, an amazing feat. Then, they expanded their presence by including Blu-Ray titles for rental for a relatively modest charge of $1.50 relative to the dollar people have come to expect for DVD rentals. Similarly, a videogame distribution system was also revealed. For the same cost as a Blu-Ray, i.e. twice as much as a regular video, people can rent the latest videogame titles as well. That’s only about 25% of the cost of most major competitors, although their lending practices ordinarily involve five to seven days rather than just one.

Redbox also announced an intention to take on their major remaining competitor, Netflix. Recognizing that the future of the industry is through streaming and digital downloads, Redbox has determined that they must prevent Netflix’s current dominance in this market from becoming a permanent monopoly. Whether they are too late remains to be seen. For that matter, details of the plan were not revealed in October as previously indicated. The reason for this is presumably that Redbox has little online presence at the moment. Going from none to Netflix challenger is quite a big step. The beauty of Redbox in its current format is ease of use. Anyone with a major credit card and the ability to intuit a vending machine, something they should have learned in childhood, can rent movies. Creating an online account then utilizing Redbox rather than Netflix to peruse and rent movies is an entirely different step. But tracking their development in this regard is a Film Industry Story for a later year.

Keeping in mind the underlying competition between Netflix and Redbox, the 2010 issue that captivated us was Redbox’s willingness to swallow new and unfair rental terms from several major movie studios. On January 6, 2010, Warner Bros. and Netflix came to an agreement wherein the latter party would be instituting a 28 day waiting period for video rentals in exchange for a larger catalog of streaming titles from the studio.

The reason for this was explained as follows. DVD sales were deplorable for two major reasons. The first is that the back catalog of DVD titles was largely depleted, leaving new releases as the primary source of DVD sales revenue. If people used their rental plans from Netflix or vended a title from Redbox, they were statistically much less likely to purchase the DVD. The second is that the economy had crashed, creating a more cautious style of consumer spending. Even purchases as modest as DVDs were called into question. With the studios in desperate need of a scapegoat for flagging sales, they turned to Redbox and Netflix and painted them as the enemy.

Netflix’s options were not strong and the upshot of such a decision was surprisingly positive. After all, their product doesn’t exist if they do not have the consent of the major movie studios to sell their movies. With their streaming service their new imperative, the physical rental of discs was not that important. Plus, there existed the strong possibility that if they signed the agreement, Redbox would have to follow suit. That part of it makes sense. Netflix would state later in the year that they have become primarily an online movie streaming service that also rents DVDs. With Redbox the primary competition in terms of video rental marketshare, a deal that didn’t impact Netflix while dramatically damaging Redbox could be described win/win. Netflix had more titles to stream from their online service, their primary focus now and for the immediate future. Simultaneously, Netflix’s primary competition would be cut at the knees as new releases are a primary source of revenue for Redbox.

Redbox’s ceding to the demand is the strange part. Without the possession of a streaming service as of yet, video rentals are their bread and butter, their only service up until videogames were introduced in the Fall. An additional month of waiting to dispense these DVDs hurts them much more than Netflix, whose subscription plans charge the same independent of the actual discs rented. My best guess is that the decision makers at Redbox made the determination that the current and potential legal fees exceeded the revenue lost by the studio demands. Whatever the reason, Universal and Fox quickly followed suit in making the same demands of Redbox (and Netflix). Worst of all, Warner Bros. has indicated an interest in pushing the window BACK even further from 28 days. Given how little resistance they met with their last decision, their thought process is understandable financially even as the movie lover (and Redbox user) in me dies a bit.

The fallout for Redbox has not been momentous thus far. Still, early warning indicators are emerging. Redbox missed their fourth quarter estimates by $25-$40 million. The company stressed in its quarterly announcement that revenue was up 38% year over year from the fourth quarter of 2009. The ubiquity and awareness of Redbox itself has more to do with those increase, though. In describing the state of the company, CEO Paul Davis acknowledged the following: "This was Redbox's first holiday season with 28-day delayed titles, and we underestimated the impact that the delay would have on demand during the fourth quarter.” In short, even the CEO realizes in hindsight that this was a significant miscalculation.

The causality for this is readily apparent. Our society has become shorter in terms of attention span and more demanding in terms of WANT NOW mentality with each technological advance. Since the advent of video rentals, we have witnessed the release window for home video rental shrink from a year to a quarter. This is the first major instance in which a studio has pushed said window back a month. While some onlookers are inclined to say, “Big deal, it’s just 28 days”, a certain portion of early adopter consumers had grown spoiled by their ability to watch a movie for a dollar on the date of its video release. In lieu of that ability, they have collectively punished Redbox a bit for their choice to meekly cede to the demands of the major studios. Meanwhile, Netflix added over three million new subscribers in the fourth quarter of 2010. At this point, they appear well positioned to control home video exhibition over the next decade, just as Blockbuster did before them.

Speaking of Blockbuster, perhaps the strangest aspect of the 28 days delay window is that none of the major studios enforced this with the fallen video rental company. Over the past 12 months, debate has centered upon why this happened. A possible explanation is that they were shown deference due to prior relationships and respect Blockbuster had developed with various studios. Alternately, Blockbuster may have become just that irrelevant as we face the future of home video rental. Whether Redbox suffers a similar fate or not is one of the primary stories we will track in 2011.