Redbox CEO: We have a negligible effect on DVD sales

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For the last few weeks, the hottest story in Hollywood has involved a company in suburban Chicago.

Redbox, a spin off of McDonalds that’s now owned by Coinstar Inc., is reshaping home entertainment, the must lucrative market for the movie industry, with its kiosks in grocery and convenience stores that rent movies for $1 per night. In a year when, so far, DVD sales are down 13.5% but rental revenue is up more than 8%, thanks in large part to Redbox. Sony Pictures and Lionsgate Entertainment have both concluded that it’s a key factor in the future of the business and signed five-year guaranteed distribution deals worth hundreds of millions of dollars.

Others see it as a threat that undermines the value of their products. Universal Pictures late last year ordered its distributors not to sell Redbox its DVDs until 45 days after they went on sale in stores and is in now in the midst of a legal battle with the company. Fox last week ordered its distributors to wait 30 days and was sued by Redbox this morning.

All this suddenly is making Redbox President Mitch Lowe, who came to the company from Netflix in 2005, a big player in Hollywood. He spoke to Company Town today about his view on the recent partnerships, the Fox lawsuit and Redbox’s relationship with the major studios.

Following are excerpts from the interview:

Company Town: It looks like you’re dividing Hollywood down the middle, with some studios eager to work with you and others fighting against you.

Mitch Lowe: The majority of the studios do work very closely with us [Sony and Lionsgate have made five-year deals with Redbox. Disney, Paramount and Warner Bros. all provide their movies but don’t have guaranteed agreements]. What they see is a real win-win-win agreement. It’s definitely a win from the consumer perspective in that they get exposed to more copies of hit titles.

From the studio perspective, the majority have created alliances with us to share information and share analysis. What they see is a couple of things: We’re attracting back to rental and purchasing a group of customers who were priced out of the business. They weren’t buying films, and they weren’t renting. That is a new revenue stream. A significant number of our customers end up buying the movie after renting it.

The bottom line is renting from Redbox does not diminish the interest or purchasing behavior of our customers.

Our customers use Redbox a little differently than other rental services. Because of the low cost, they rent a lot of movies that they wouldn’t have bought or rented if they were only available at a higher price. Some end up liking them and keeping the disc and paying us $25 or going out and buying it new.

CT: Time Warner CEO Jeff Bewkes recently compared Redbox to $1 movie theaters, which show theatrical releases several months after they first come out. Fox and Universal seem to essentially share that view. Why isn’t it legitimate to treat $1 DVDs like $1 movie tickets?

ML: What a lot of people don’t understand is what an amazingly efficient movie distribution model we’ve built. We have significantly reduced the cost of delivering movies to customers. A portion of that we have turned into higher spending for studios. We pay studios more per disc than our competitors.

But the majority, we have turned into value for our customer. That ends up increasing their volume of activity with us. It happens any time a company figured out a new and more efficient way to serve the market.

In 1997, the average cost of buying a movie dropped 50%. But the cost of rentals has stayed the same going back to the early ‘80s. Why hasn’t blockbuster reduced rental rate? Primarily because they have not built efficiencies into their model.

CT: How is it that you pay more per disc? Because you buy DVDs wholesale, while Netflix and Blockbuster do a revenue share with the studios?

ML: Yes, both our competitors buy on revenue share terms. That ends up resulting in lower spending per disc than our wholesale purchases.

CT: But wouldn’t that depend on how many times a disc is rented on average? Revenue share certainly can provide more money than a wholesale purchase.

ML: I think you’d find that isn’t the case. And our deals are guaranteed revenue.

CT: Do you have any sense of how much of the revenue you are generating is new to the home entertainment business, as opposed to how much you are just taking from competitors?

ML: We believe 20% of our volume is incremental business and that we are net neutral in our impact on sales. And if you think about it in locations where our kiosks exist, we have less than a 1% negative impact on sales. That’s based on a major study. A lot of times people are saying we have a higher impact. They’re just not doing the math correctly.

CT: A 1% impact on sales where? In the vicinity? The Best Buy down the street? Or just in the store where your kiosk is, if it sells DVDs?

ML: In the locations where we exist with sales.

CT: Tell me about the lawsuit today against Fox. What exactly do you think they are doing that’s illegal?

ML: We did this very reluctantly. In our view, Fox forced an ultimatum on us that gave us two choices: either [sue or] delay the product by 30 days, thus differentiating us from Blockbuster and saying our customers don’t deserve it at the same time as others.

The beauty of it is we do have alternative ways to acquire Fox and Universal products.

CT: But those alternative ways cost more than buying the discs wholesale, right?

ML: Yes, it is more expensive and presents a few challenges.

CT: You recently said in a conference call that you would be experimenting with prices. Does that mean you’d consider charging more than $1 per night in certain cases?

ML: Our customers are always telling us they want different products and services such as Blu-ray discs and video games and package deals. We did announce we will be experimenting with different price points.

CT: What about changing the $1 per night price for standard DVDs?

ML: We’re continually looking at different types of models to serve the customer.

CT: So you’re not ruling it out?

ML: Right.

CT: One final question: If the studios that are currently fighting you, like Fox and Universal, lose in court or ultimately decide they do want you to rent their new releases, will there be room left in your kiosks? You’re obviously guaranteeing space to Sony and Lionsgate already. How much might be left for other studios?

ML: The first one in and the next ones certainly get more advantages than the last one.

-- Ben Fritz

Photo (top): A Redbox outside a 7-11 store in the Silver Lake neighborhood of Los Angeles. Credit: Damian Dovarganes / Associated Press

Photo (bottom): Redbox Chief Executive Mitch Lowe. Credit: Redbox