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Redbox Analysis: Kiosks vs. Studios

Redbox Analysis: Kiosks vs. Studios

In the second of an ongoing series of guest columns, ex-LA Times and Variety writer Diane Garrett (now at Consumed by Media) analyzes the ongoing Redbox $1 kiosk wars with insight from years of home video industry-watching. Just how did the mighty studios find themselves in court with this upstart DVD rental outfit? Garrett explains.

Challenge always seems to come where you least expect it.

For years, the home video business has been bracing for a piracy attack similar to the one that kneecapped the music industry. To combat that threat, and the inevitable decline in DVD sales, studios carefully nurtured replacement technologies such as Blu-ray and video-on-demand, insisting Apple force of nature Steve Jobs charge at least $2.99 for iTunes movie rentals. The deal, announced to great fanfare in January 2008, was considered significant because Jobs had always insisted on a 99-cent pricepoint for music transactions.

Then a not so funny thing happened to the studios: a rival movie rental service began to make huge inroads at 99 cents apiece. These weren’t old movies nobody wanted either: Redbox was renting the biggest hits for that price. The method was decidedly old school: shiny red kiosks in grocery stores dispensed DVDs, not their fancy high-def counterparts.

Much to studio consternation, the recession only accelerated Redbox growth. The company has become, as Mark Cuban noted over the weekend, the most disruptive force in the video business.

Like me, Cuban didn’t see the potential for this business to succeed. Indeed, when Anne started telling me that her students loved Redbox during our Variety days, I was initially skeptical: Kiosks have been a part of the biz for many years, typically most popular in rural areas without many rental stores.

What I failed to see was the untapped need Redbox would meet or how the economy would accentuate that need. Redbox, it turns out, is an example of disruptive innovation, a theory coined by Clayton Christensen in the late ‘90s.

It is convenient, cheap and offers consumers what they most desire: the latest hits. It started at the bottom of the market and moved up.

The average renter does not care about deep catalog found in video stores or through Netflix; they want the latest hits. Such has always been the case. Nor does the average consumer really care about Blu-ray or high-def. Buying movies they may or may not ever watch again has also lost its luster. So more and more consumers are visiting the Redbox kiosks, which, it should also be noted, are shiny and clean. The same can’t always be said of videostores struggling to keep afloat.

Studios are divided about what to do about Redbox. Several have decided to play ball, but others have chosen a more combative tack, trying to institute a kiosk window that would bar product from that channel for at least a month after each DVD’s release.

Will this work? Should they risk turning off consumers who love the service? A court recently allowed Redbox to proceed on its antitrust case against Universal; the Fox and Warner cases have only recently been initiated. It’s the biggest legal challenge since the First Sale wrangle of the late 1970s, which studios lost.

Studios have always chafed at video rentals, viewing even VOD preferable because they get a cut of each transaction, instead of a one-time disc purchase. They got big chains like Blockbuster and Hollywood Video to sign up for revenue sharing deals that would enable them to get a cut from each rental in exchange for low cost goods upfront; Netflix also operates under such deals. Tellingly, the lawsuits grew out of failed studio efforts to foist revenue-sharing deals upon Redbox. When they couldn’t come to terms, studios tried to withhold movies and impose a de facto window.

So much for the ubiquity of product studio execs talked about only a year ago. Now that push has come to shove, that view has lost its luster for some. Fox and Warner both instituted their changes for big fourth quarter titles.

This battle has just begun. Studios won’t give up easily. The question is: Will it be resolved before the next big home entertainment thing takes over?

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