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THE BIG PICTURE

Studios play hardball with Redbox at their own risk

They're making the same mistake the music industry did with Napster.

August 18, 2009|PATRICK GOLDSTEIN

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 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 gone even 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 to Redbox any DVDs until 45 days after store sales begin. 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."

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 that the studios that 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, enabling movie fans 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 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 after 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 enabled 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.

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