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Movie Rentals for $1? Redbox Has Hollywood Boiling Mad

LOS ANGELES — In 1982, just as the VHS tape was taking off, a “Star Wars” buff named Mitch Lowe had a radical idea. What about building a vending machine that could rent movies? He called his invention Video Droid.

It failed. People were not yet comfortable using credit cards for casual transactions, the tapes broke easily and the technology involved with manipulating their bulk proved too expensive.

But Mr. Lowe did not give up, and his moment seems to have finally come.

HD DVD player and HD DVD-ROM
AP
HD DVD player and HD DVD-ROM

Mr. Lowe, 56, is now the president of Redbox, a fast-growing company in Illinois that rents movies for $1 a day via kiosks. By December, there will be 22,000 Redbox machines in spots like supermarkets, Wal-Mart Stores and fast-food restaurants.

Redbox’s growth — it started with 12 kiosks in 2004 and now processes about 80 transactions a second on Friday nights — has Hollywood’s blood boiling.

Furious about a potential cannibalization of DVD sales and a broader price devaluation of their product, three studios (20th Century Fox, Warner Brothers and Universal) are refusing to sell DVDs to Redbox until at least 28 days after they arrive in stores.

Redbox is suing them on antitrust grounds. Leery of waging their own battles, two other studios, Sony Pictures and Paramount Pictures, have signed distribution deals with the vending company. Walt Disney permits third-party distributors to sell to Redbox but has so far shunned a direct relationship.

Redbox and its vending rivals now have 19 percent of the rental market, compared with 36 percent for rent-by-mail services (Netflix) and 45 percent for traditional stores, according to the NPD Group, a market research company. NPD estimates that vending will grow to a 30 percent share by the end of next year, at the expense of traditional stores.

Studios, aware that consumers are unlikely to pity their plight and muzzled by the lawsuits, are keeping quiet. Fox, Universal, Warner and Disney each declined to comment for this article. But Hollywood’s powerful public relations machinery is in motion behind the scenes to connect the news media with a group that is equally threatened by Redbox but much more relatable: mom and pop rental store owners.

“These machines are to the video industry what the Internet was to the music business — disaster,” said Ted Engen, president of the Video Buyers Group, a trade organization for 1,700 local rental stores.

Mr. Engen is enlisting lawmakers to attack Redbox for renting R-rated movies to underage viewers — the machines simply ask customers to confirm that they are 18 or older by pressing a button — and trying to rally the Screen Actors Guild and other unions.

“It’s going to kill the industry,” said Gary Cook, business manager for UA Local 78, which represents studio plumbers.

Mr. Lowe, meanwhile, is portraying the studios as greedy giants scheming to trample the little guy. “Don’t let a few movie studios prevent you from seeing the latest DVDs for an affordable price,” reads a headline on a new Redbox Web site, savelowcostdvds.com.

Redbox, formerly owned by McDonald’s and now part of Coinstar, is only the biggest of a host of DVD vending companies. DVDPlay, whose kiosks are also red, has been aggressive in California, while MovieCube is big in Canada.

Blockbuster is scrambling to introduce its own rental kiosks. There are now about 500 Blockbuster Express machines, and plans call for 2,500 more by the end of the year; the company expects to open 7,000 in 2010, a spokesman said.

The kiosk boom is fed by several consumer and business currents, all related to the recession.

For starters, the dismal economy has made people think twice about buying DVDs, especially as the likes of Redbox have made renting easier. Consumers are also tiring of the clutter: The average American household with a DVD player now has a library of 70 DVDs, according to Adams Media Research.

Over all, DVD sales are down 13.5 percent for the first half of 2009 compared to the first half of 2008, according to the Digital Entertainment Group, a trade organization. Studios say some new titles are selling 25 percent fewer copies than expected. Rental revenue is up about 8 percent over the same period, according to the group.

Retailers, struggling to keep people shopping, have realized that having a DVD kiosk in a store creates foot traffic, making it easier for companies like Redbox to sign wide-ranging installation agreements. Some partners, like Walgreens, have offered discounts that essentially make rentals free.

Redbox is also getting a hand because of Hollywood’s troubles. Analysts say Sony and Paramount signed agreements with the company in part because their home entertainment units are under pressure to meet financial targets, set before the DVD decline.

Sony’s five-year deal is worth about $460 million in DVD sales to Redbox. Paramount’s deal starts with a four-month test; if the studio decides Redbox represents a net gain to its home entertainment business, it can extend its relationship for five years and a guaranteed $575 million.

Paramount’s deal involves revenue-sharing, a rarity for Redbox. The kiosk operator primarily follows the mom and pop model: it seeks to buy discs wholesale and makes a profit with repeat rentals. (Revenue-sharing deals typically allow a rental store to buy discs for half the wholesale cost or less.) Redbox can price rentals at $1 and still make money because its machines eliminate so much overhead.

The $1 price is not the main issue for the studios, although they do not like that, either; it is the timing. New DVDs sell for about $25. Video-on-demand services price them at about $5. Multiday rentals of new titles cost $4.99 at Blockbuster.

Now there is a $1 option at the same time. That could put downward pressure on the industry’s price structure.

“Anyone whose business involves selling movies should be enormously concerned,” said Richard Greenfield, an analyst at Pali Research.

Analysts also see a threat to studios in Redbox’s practice of selling about half of its DVDs into the used market (after renting them about 15 times at an average of $2 a transaction). By signing deals with Redbox, Paramount and Sony got the kiosk operator to agree to destroy their discs rather than resell them.

“Our position is that this is a strong consumer trend, and we figured out a way to minimize the negative aspects and maximize the positive ones,” said David Bishop, president of Sony Pictures Home Entertainment.

Rob Moore, vice chairman of Paramount Pictures, said, “This trial gives us access to information that will allow us to make an informed decision about Redbox’s impact on our home entertainment business.”

Mr. Lowe dismissed worries about the cannibalization of sales. He cited internal research indicating that 20 percent of Redbox’s volume is additive — people who did not previously buy or rent DVDs — and that partners like Wal-Mart have had only a 1 percent decline in sales after Redbox machines have been installed at their entrances.

The kiosks hold about 500 DVDs and focus on new mainstream releases.

Customers follow a series of touch-screen prompts to use the kiosks, which vend from slots on the side. Once a selection is made, the customer swipes a credit card through the reader. The card is charged a dollar (and tax) for each DVD rented; the charges for additional days, if any, are added when discs are returned. The charge for lost DVDs is $25.

“If you make renting affordable and fun, people are going to watch a whole lot more movies than they did before,” Mr. Lowe said.

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