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Studios fight the red peril on DVD rentals

As $1 Redbox kiosks cut into business, executives seek to restrict releases to older films.

July 30, 2009|Ben Fritz and Dawn C. Chmielewski

Movie studio executives don't hate Redbox -- they just think it's the equivalent of that dingy movie theater where you can catch 4-month-old movies for a buck.

That's the widening consensus among executives in Hollywood as they search for a strategy to deal with the fast-growing DVD kiosk company that rents movies for $1 per night. Redbox has proved extremely popular among consumers, but studios are wary of it because they don't receive a cut of the revenue as they do with rentals from Blockbuster or Netflix, and they worry that the discount rental price cannibalizes higher-margin sales.

And even if they make a deal with Redbox -- as Sony Pictures recently became the first to do -- a share of a smaller rental fee won't bring in nearly as much revenue as they get from other rental services.

Universal Pictures, in fact, is in the midst a lawsuit trying to prevent Redbox from renting its movies. Last year, the studio sought to withhold DVDs from Redbox until 45 days after release to prevent undercutting sales.

When Redbox rejected the deal, Universal ordered wholesalers to cut off supplies. Redbox sued Universal, alleging restraint of trade.

Redbox buys other studios' DVDs wholesale, although its deal with Sony will see it cutting that studio in on the action rather than working around it.

In a conference call Wednesday with analysts after the conglomerate released its earnings, Time Warner CEO Jeff Bewkes made it clear where he sees Redbox fitting in the lifeblood of a movie:

"In general, we think there may well be a role for $1 rental kiosks just like $1 movie theaters," he said.

Pressed by an analyst as to whether that means movies shouldn't be available to rent from Redbox until well after they go on sale and are available for rent from more expensive services, he responded, "Probably."

Redbox responded that its service is identical to that offered by rivals Blockbuster or movies-by-mail service, Netflix.

"Redbox offers consumers the convenience of new-release DVDs the day of release at more than 17,000 Redbox kiosks nationwide," said Gary Cohen, vice president of customer experience.

"The release schedule mirrors that of other major brick-and-mortar and mail-order DVD rental providers."

In the early part of the decade, when DVD sales were booming, Hollywood paid little attention to Redbox. At the time, the red kiosks that resemble a Coke machine barely registered a blip on Hollywood's radar.

Each machine holds as many as 700 DVDs and 200 movie titles.

The company's galloping expansion, coming at a time when the recession is helping accelerate the decline in DVD sales, has been raising increasing alarms in Hollywood.

The idea that Redbox should essentially be a last step in the DVD release process, much like discount movie theaters, has been echoed by several home-entertainment executives, who declined to be identified.

Most, it seems, don't share Sony's eagerness to cut a deal with Redbox.

Instead, they're waiting for a decision in the Redbox-Universal lawsuit.

If Universal wins, the studio will be able to prevent Redbox from buying its DVDs and renting them without permission, and perhaps embolden other studios to do the same.

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ben.fritz@latimes.com

dawn.chmielewski@latimes.com

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