Pali Research media analyst Rich Greenfield says today that Warner Bros throwing the next punch at Redbox — and hitting Netflix, too — now means 3 studios with over 55% of major studio DVD product will no longer be available to Redbox via traditional distribution sources. (VPD and Ingram.) “Given that Redbox has sued Universal (45 days) and Fox (30 days) over their windowing strategies, we would expect Redbox to sue Warner Bros (28 days) in short order, Greenfield predicts — maybe as soon as next week. “While Sony, Lionsgate, Disney (and likely Paramount) appear to be happy working with Redbox directly or via distributors, we have a hard time understanding how a studio would not feel threatened by Redbox’s current business model, as it sets an ultra-low price point for movie content that will impact consumers’ decision-making process about all forms of movie-related commerce (theater-going, DVD purchase, Video-on-Demand, electronic/online rental/sell-thru, etc…).”
Greenfield notes that the movie studios are increasingly concerned that the buy vs. rent pendulum is swinging far too quickly back to rental after over a decade of explosive retail sales growth, with the resurgence of rental led by mail-order subscription (Netflix) and kiosks (Redbox). “Studio profits are heavily weighted toward sales vs. rental, exacerbating the problem with a sales/rental mix shift. What makes the Warner Bros statement so intriguing is that it goes well beyond windowing Redbox. Warner Bros is looking to change its relationship with Netflix as well, by offering mail-order companies a choice of how they gain access to Warner Bros DVDs.”
He points out that Netflix will be allowed to have day-and-date DVD availability, if it agrees to revenue sharing terms that are far lengthier than what it has done before. (Netflix typically strikes six-month revenue sharing deals with studios). “We believe Warner is trying to limit Netflix’s impact on retail sales (by windowing Netflix), which primarily occur during the first several weeks after a DVD’s release or capture a far greater share of an individual DVD’s lifetime rental revenue via Netflix. (Netflix’s subscription service skews heavily towards catalog, with over 66% of its revenues from catalog DVDs in a given quarter, yet current studios revenue sharing deals do not enable them to participate in the revenues generated by catalog DVDs).”
Greenfield goes on, “We are fairly certain Redbox will sue Warner, but the bigger question is will Netflix sue Warner Bros over the windowing issue? Either choice offered to Netflix by Warner Bros, would appear to negatively impact Netflix’s profits to the benefit of Warner Bros.”
Warner Bros also informed its new-release DVD distributors (VPD and Ingram, Greenfield presumes) that they can no longer repurchase previously viewed WB DVDs to sell-off to other retailers that stock low-priced previously-viewed discs. “We suspect Redbox will find alternative distributors to off-load its previously viewed product, but we find it surprising that other studios did not utilize this tactic in dealing with the growing threat of previously viewed DVDs vs. acquiescing and striking formal agreements with Redbox.”
As for what to expect next in the escalating Redbox/Hollywood “Rental Industry Battle”, Greenfield predicts:
- — Formal agreement between Redbox and Disney in the near-future (Disney currently has an agreement with Redbox’s distributors only).
- — Formal agreement between Redbox and Paramount (Viacom) in the near-future
- — Redbox will sue Warner Bros within the next week.
- — Netflix must decide how it will deal with Warner Bros (choose one of the two options offered) or following Redbox’s strategy of suing.