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Paramount to study Redbox effect before triggering $575 million deal

August 25, 2009 |  1:23 pm

Redboxbox As Hollywood lines up for and against Redbox, Paramount has decided to split the difference

The Viacom-owned studio has signed a first-of-its-kind trial deal with the $1-per-night DVD rental company, making its titles available through the end of the year. For the next four months, Paramount will study the effect on its total home-entertainment revenue, including any decrease in sales in Wal-Mart stores that house a Redbox kiosk and also sell DVDs.

Under the terms of the deal, Paramount will at the end of the year have the option to trigger a five-year agreement with Redbox similar to ones recently made with Sony Pictures and Lions Gate. The estimated value of the agreement is $575 million, substantially more than the $460 million Redbox's parent company, Coinstar Inc., estimated it will pay Sony Pictures over a five-year period.

Paramount's deal is understood to give the studio a revenue share on rentals, whereas Sony and Lions Gate are both selling their discs wholesale to the Redbox.

The trial program puts Paramount in a unique position among the major studios, as all the rest have either agreed to work with the company or are firmly against letting it rent their movies in the first month after the films go on sale. Sony and Lions Gate both have formal deals with Redbox, and Walt Disney Studios allows its wholesalers to sell discs to be rented in kiosks. Universal Pictures, Twentieth Century Fox and Warner Bros. have all attempted to restrict when Redbox can offer their movies, ranging from 28 to 45 days after launch. All three are now defending themselves against lawsuits as a result.

"There has been a lot of debate in the industry about the impact Redbox is having and will have, and we felt the best way to make a decision is by getting the information," said Paramount Vice Chairman Rob Moore. "Then we can make an informed decision based on what we will have learned over the next four months."

Moore said he hasn't reached any "definitive conclusions" as to what steps he will take if the data show that Redbox rentals do in fact reduce overall revenue. If the studio attempts to impose a window on kiosk rentals like Fox, Warner and Universal, it will undoubtedly also find itself on the receiving end of a lawsuit.

Paramount has shown a willingness to take non-traditional approaches to the home-entertainment market this year as it, like all studios, copes with declining revenue driven primarily by a 13.5% decline in disc sales. The studio previously announced that two poor performers at the box office, "Dance Flick" and "Imagine That," will only be available to buy in the Blu-ray high-definition format on the same day they are available to rent. In an effort to drive those who want to buy the movie to go to Blu-ray, which delivers higher profit margins to the studios, standard DVDs won't go on sale until four to eight weeks later.

Many studio executives have said they're not only concerned about the direct effect of Redbox rentals on their bottom line, but also a reduction in the perceived value of their products. "Having our [movies] rented at $1 in the rental window is grossly undervaluing our products," Chase Carey, president of Fox's parent company, News Corp., said on a recent conference call with Wall Street analysts.

However, Redbox's defenders point out that average revenue from a kiosk rental is more than $2, as consumers typically keep the discs for several days.

In addition, Redbox President Mitch Lowe recently said that the company will be experimenting with pricing structures. According to one industry source, it will start that process by the end of the year, and one point of experimentation will be charging a higher price for the first night's rental.

-- Ben Fritz

Related:

Redbox takes its case to public as it stays alive in court

Warner Bros. takes aim at Netflix along with Redbox

Blockbuster revenue plummets 22%, shares fall 16%

Redbox CEO: We have a negligible effect on DVD sales

Redbox sues 20th Century Fox over DVD releases

Lions Gate plays nice with Redbox for $158 million

Fox to Redbox: Hands off our movies for 30 days

Redbox revenue more than doubles, testing new pricing models

Hollywood hoping Redbox will be the DVD version of $1 movie theaters

Sony Pictures-Redbox deal underscores value of bargain DVD rentals

Photo: A Redbox kiosk in San Rafael, Calif. Credit: Justin Sullivan, Getty Images.

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