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$1 Redbox DVD rentals could pinch Internet video services, study finds

September 4, 2009 |  9:00 am

Apparently there's more to fear in Redbox's $1 DVD rentals than meets the eye.

The leading DVD kiosk vendor has done deals with half of the Hollywood studios (Lions Gate Entertainment, Sony Corp. and Paramount Pictures), while the other half (News Corp's 20th Century Fox, Warner Bros. and NBC Universal) have sought a waiting period to protect sales of movies new on DVD.

A study from SNL Kagan finds that online video-on-demand services like Apple Inc.'s iTunes could suffer if consumers start to think $1 is the right price for a movie rental.

Kagan examined the cost of delivering online video at six levels of quality, based on assumptions about the average Internet speed, movie length and delivery cost.

Only in the two lowest-quality instances (known as standard definition) did Internet on-demand services come out ahead when rentals cost $1. After subtracting delivery costs and the studio's cut of 70 cents, the profit could be measured in pennies: 8 to 19 cents.

But at $3.99, every flavor of Internet video, including high-definition, delivers a profit, Kagan found.

The implications of the rental-for-a-buck are ominous.

"It could just have earth-shattering consequences to these services hoping to reach people through the Internet," said Wade Holden, the Kagan entertainment industry analyst who crunched the numbers.

Holden said Internet delivery costs could take years to come down enough (through more-efficient video compression and higher bandwidth rates) to make 1-dollar on-demand rentals economically feasible.

A going rate of $1 would gut the rental market, which Kagan projects at about $8 billion this year for 1.74 billion rentals.

"It would be a colossal shift for the rental market to go from $8.03 billion to $1.74 billion — a change studios are likely not to get on board with," Holden wrote in a report issued Aug. 31. "If that were to happen, revenue sharing would most likely not be an option and VOD providers would have to pay massive licensing fees to studios looking to maintain their revenue streams."

--Dawn C. Chmielewski

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