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Lions Gate cuts a deal with Redbox on DVD rentals

The studio will supply films for the $1 vending machines on the same day they go on sale. Sony was the first to sign such an agreement, but others are opposed or still on the fence.

August 12, 2009|Ben Fritz

The battle lines over Redbox continue to be drawn in Hollywood, as Lions Gate Entertainment on Wednesday came down in favor of the controversial $1-per-night DVD rental kiosk company.

The independent studio, known for its low-budget Tyler Perry comedies and "Saw" horror pictures, has signed a five-year deal to provide movies to Redbox on the same day they go on sale. In a regulatory filing, Redbox's parent company, Coinstar Inc., estimated it will pay Lions Gate $158 million over the term of the deal.

Lions Gate President Steve Beeks, however, estimated that his company will earn more than $200 million, based on a more aggressive prediction of the performance of the studio's upcoming films and Redbox's growth.

The agreement is similar to one signed by Sony Pictures last month that Redbox estimated will be worth $460 million over five years.

Both companies won a guarantee from Redbox that it will offer a broad selection of their DVDs and destroy them when it is done renting them, a key provision to allay the studios' concerns that the market would otherwise be flooded with used discs.

Although Lions Gate and Sony have decided to cooperate with Redbox, others are trying to undermine the company, whose refrigerator-size kiosks are placed in grocery and convenience stores, including Wal-Mart. Universal is in the midst of a legal battle with Coinstar after ordering its wholesale distributors not to give Redbox its DVDs until 45 days after their release. Last week, 20th Century Fox ordered its wholesalers to do the same, but with a 30-day delay.

Both studios are worried that Redbox's cheap offerings will undercut more profitable rentals from Blockbuster and Netflix, as well as higher-margin DVD sales.

"We talked to retailers and looked as to the impact on sell-through as well as other rental outlets from the Redbox kiosks and came to the conclusion that the Redbox business actually increases the overall universe of revenue to us," Beeks said.

Now that two studios have lined up in favor of allowing Redbox to rent DVDs the day they come out and two have opposed the idea, all eyes are on those left on the fence.

Although Warner Bros. has yet to make a decision, Jeff Bewkes, chief executive of parent company Time Warner, said Redbox should "probably" have to wait a period of time before getting access to his company's discs. There hasn't yet been any indication of what Paramount Pictures will do. Walt Disney Pictures allows Redbox to rent its DVDs but doesn't have a formal agreement with the company.

There are nearly 18,000 Redbox kiosks around the country. By the end of the year, Coinstar plans to have a total of 21,000 to 22,000. Last quarter, Redbox revenue grew 110%, a sign of booming consumer interest.

Studios that choose to combat Redbox are taking a calculated risk. If Universal wins its court case, which would validate Fox's move, they would be able to dictate terms and protect more profitable businesses. But if they lose or decide in the future that they need to compromise with Redbox, they probably will have a more difficult time securing a portion of the space in its kiosks, much of which is now guaranteed to Sony and Lions Gate.

"You can either find issue with [Redbox's] model or you can make the assumption that it is here to stay and find a way to work with them to the benefit of both parties," Beeks said. "We chose the latter."

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ben.fritz@latimes.com

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