The Big Picture

Patrick Goldstein and James Rainey
on entertainment and media

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Redbox: Is the movie biz doomed to relive the Napster nightmare?

August 17, 2009 |  6:00 am

Redbox

As Yogi Berra would say: Yikes, it's deja vu all over again.

In recent days, my newspaper has been chock-full of stories about the the latest round of legal battles between the Hollywood studios and Redbox, the upstart $1-per-night DVD rental kiosk company. My colleague Ben Fritz has done a wonderful job of chronicling all the fussing and fighting, having reported on how three of Hollywood's biggest studios -- 20th Century Fox, Warner Bros. and Universal -- are refusing to provide DVDs to Redbox until at least 28 days after they go on sale.

Warners has even gone further, saying it would impose the same restrictions on Netflix and other DVD by-mail subscription providers unless they agreed to a "day-and-date revenue sharing option." Since Netflix already has a revenue sharing deal in place with Warners, the translation of that restriction threat is pretty simple: You're making boatloads of dough on DVD rentals while our DVD sales are plummeting, so unless you cut us a better deal, buster, we're going to freeze you out.  

Two of the industry's other studios, Sony and maverick indie Lionsgate, recently agreed to long-term distribution deals with Redbox, netting the studios hundreds of millions in revenues in exchange for guaranteeing Redbox a free flow of DVD product. But the other studios have been doing a lot of saber rattling. Universal has already ordered its distributors not to sell Redbox any DVDs until 45 days after store sales began. Fox has a 30-day edict that goes into effect in October, right after the DVD release of the studio's "Ice Age: Dawn of the Dinosaurs" hit film. Redbox has filed suit against Universal and Fox, accusing the studios of using their clout to "unlawfully coerce" distributors from allowing Redbox access to DVD product, calling it "a naked restraint of trade." 

Napster I'll let the legal experts weigh in on the lawsuits. But I know what the real story is here. There's no way of getting around the fact that the studios who are trying to put the muscle on Redbox are making the same mistakes the music business made nearly a decade ago when it attempted -- and failed, quite spectacularly -- to squash unauthorized downloading of music by destroying the dreaded Napster Web file-sharing service.

Whether the studios like it or not, Redbox is a brilliant, consumer friendly product. In a few short years, it has enjoyed spectacular growth, allowing moviegoers to cheaply rent DVDs from thousands of kiosks around the country, located at McDonald's (where the company got its start), grocery stores, pharmacies and Wal-Mart outlets. There are now 18,000 Redbox kiosks around the country. But the key, most telling statistic is this: The company's revenues grew by 110% last quarter while Blockbuster, the nation's leading retail DVD chain, saw its second-quarter revenues plummet by 22%.

By trying to keep their product away from Redbox for as long as possible, the studios are doing what all businesses do when threatened by dramatic change -- they're trying to hang on to their business model for as long as possible. But once you get past all the legal mumbo jumbo, it's impossible to ignore the obvious: The DVD market is undergoing a seismic shift where many of the same people who once wanted to buy every DVD in sight are now far more eager to rent movies, and rent them cheaply at that.

At some point we'll have a longer, perhaps more intriguing discussion about why so many people have gone from buyers to renters. Is it the rotten economy? The rotten quality of movies? The growing awareness that DVDs are a dying format? The poorly timed arrival of Blu-ray, which for many consumers simply signaled a steep hike in the cost of DVDs?

But the shift has happened and it has happened fast, almost as fast as the sudden arrival of unauthorized file sharing in the late 1990s, which undermined the music industry's lucrative CD model almost overnight. The studios are deluding themselves if they believe they can hold off the widespread embrace of $1-per-day DVD rentals, since if you can learn anything from the tumult of the Internet era, it's that you can't fight the power of consumer choice. You can delay the inevitable with threats and lawsuits, but as everyone in the music business discovered, much to their chagrin, you will only tick off your most loyal consumers. Once people embrace something they want, you can't stop them -- the customer is always right.

This fight is really about profit margins. The studios still make money from DVD rentals, just not anywhere nearly as much as they make from DVD sales. The music business had a similar dilemma. Napster was a dire threat, since it allowed fans to listen to music for free. But the record companies had years to assemble an authorized and easy to use downloading service -- and they dawdled, burdening their few hapless experiments (remember Pressplay?) with so many restrictions that no one wanted to go near them.

It was all about delaying the inevitable and trying to wring a few more years of CD sales out of consumers, since the CD profit margin was clearly far superior to anything the Web could ever offer. Of course, the end result was that a much savvier entrepreneur from outside the business came along -- Apple's Steve Jobs - -who created iTunes, a lucrative authorized downloading business that served Jobs' interests (helping him make zillions selling iPods) while leaving the record labels on the outside looking in.

The same thing will happen to the movie studios if they continue to try to slow consumer choice while squeezing a few more years of windfall profits out of their DVD sales format. But they delay at their own peril. In this era, where disruptive technology rules the Earth, if you don't give the customers what they want, you will find yourself on one side of the river, while the person who's embraced the new business model is on the other side, where all the action is.

Once DVD sales decline even further, someone will bite the bullet and eventually try to buy Redbox, figuring it's probably better to overpay and at least own the company that's trying to put you out of business. It's essentially what Rupert Murdoch did by acquiring MySpace, even if it turns out that he probably bought the wrong company. But at least he got one foot across the river when the ground on his side was crumbling under his feet. My bet is that Redbox will have a lot of suitors in the coming days.

In Hollywood, a town that always chases what's hot, Redbox is hot new face, the new A-list movie star who will make the studios pay dearly for ignoring its irresistible mainstream appeal.  

Photo of Anja Murphy returning videos at a Redbox kiosk in an Albertson's in Santa Monica by Lawrence K. Ho / Los Angeles Times.

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