This story was written by Tameka Kee.
Low-cost DVD-rental service Redbox has brokered a new distribution deal with Lionsgate. The deal, which gives Redbox access to Lionsgate’s new releases the same day they go up for sale elsewhere, could net the studio an estimated $158 million over five years, according to an SEC filing by Redbox owner Coinstar. (Via Video Business). Redbox inked a similar deal with Sony Pictures Home Entertainment less than a month ago.
That deal was worth an estimated $460 million over five years; Sony (NYSE: SNE) got a roughly 20 percent share of space in the kiosks—and could also restrict Redbox from selling its used DVDs (the kiosk-maker had to promise to destroy them instead). Lionsgate has the same resale restrictions; the studio gets about 7.4 percent share of space in the kiosks, and can terminate the deal in 2011 for unsatisfactory performance.
Direct distribution deals like these are important if Redbox wants to keep its margins low, since it’s much cheaper to buy the DVDs directly from the studios than buy retail. But not all studio heads are happy to do business with Redbox, because they see the kiosk-maker as the enemy.
For example, Redbox has an ongoing anti-trust lawsuit against Universal Studios Home Entertainment, because the studio allegedly insisted on a distribution deal with unfavorable rev-sharing terms—including stocking a limited supply of new releases.
New COO Chase Carey called it a “real issue” during last week’s News Corp (NYSE: NWS) earnings call: “I think that our product rented at a dollar in the rental end is grossly under value and I think it’s a real issue. And we’re actively determining how to deal with it.” (The full exchange is in the transcript at SeekingAlpha.) A few hours later, the News Corp-owned WSJ reported, and the studio confirmed, that Twentieth Century Fox has told DVD distributors to withhold DVDs from vending machines, including Redbox, for 30 days after release.
Pali Capital analyst Rich Greenfield, who has become increasingly vocal about the threat he sees to the studios in notes to clients and during earnings calls, echoed those sentiments in an AP interview, saying that while he didn’t think Redbox would “destroy” the film business—the company’s business model could be a major problem “over the next few years, especially if it continues to grow at the rate it’s growing.”
By Tameka Kee