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I ran into an interesting blog entry today from David over at Audioholics.com regarding the lawsuit between Redbox and Universal.

The post is quite comprehensive, but David’s main conclusion is similar to mine:

Everything that Universal is pushing not only hurts Redbox, but hurts consumers as well, forcing them to pay higher prices either for other rental options or for retail purchases. Most other rental options, physical and downloadable, cost at least three to four dollars. Redbox renting at $1 a night provides significantly more incentive for consumer to rent verses the $15-$20 retail sell through of DVDs. Then, with all of those rental discs released into the market as used it further redirects consumers from purchasing new DVDs; damn competition.

Read the full post here.

I will add one thing here that no one else is really saying. $1 DVD rentals are nothing new. They did not start with Redbox or even kiosk operators at all. Do you know where they started?

The answer: grocery stores.

Before Redbox, I rented most of my new releases from my local Albertsons. How much did I pay? $1/night for new releases, and like $1 for 5 days for older movies.

The way media is being viewed and purchased is changing. It’s time for movie studios to change, too, or be left in the dust of the future: innovation.

29 Responses to “Interesting Commentary on Redbox/Universal Lawsuit”

  1. Visitor [Join Now]
    tanyetta [visitor]

    yup, i started renting $1 videos from longs~

  2. Member [Join Now]
    Radman [radman]

    Page is gone.

    I like innovation. What kind of innovation do you think will work?

    If Universal wins the lawsuit it would level the playing field for the Albertsons, Netflix, Redbox, BB and Mom and Pop stores. Every single company would have to buy the movies instead of Rev sharing. No one rental company would have an advantage over any other and they could compete with the same material. Seems fair to me, but If someone has a better idea with a new innovation I’d like to hear it.

    I guess this would open the door for the Digital Delivery Systems to actually take more than a small percentage of the Movie Pie and hedge forward by lowering the prices.

    Too bad a huge portion of the population doesn’t want to watch movies on a computer or does not have the knowledge to get the movies to their big tvs.

    • Administrator
      Michael [administrator]

      @radman:

      Thanks for the heads-up on the broken link. Apparently the site I linked to moved the post. It is now fixed.

      I am not sure what you mean by no rev-sharing. That is one of the deals Universal wants – they want rev sharing, not to get rid of it.

      On the digital delivery front, tI think a lot of people will be getting set-top boxes this holiday season. Netflix is really ramping up their service, with the Roku box and the Xbox 360. Of course, there is Apple TV and others as well. Plus, must people are used to Pay-per-view and video-on-demand with their cable/satellite providers, so no major barrier there.

      Just imagine if a place like Comcast partnered with Netflix or Blockbuster on this digital service, that would really shake things up.

      Anyway, interesting thoughts. Take a look at the full article, as it has quite a bit of commentary on the lawsuit itself.

      • Member [Join Now]
        Radman [radman]

        I like all those digital outlets, but a lot has been tried and 100s of millions of dollars have been lost in the past and currently in trying to hedge these things to mainstream. The truth of the matter is that all of these companies are not making any money. Redbox is losing millions each month trying to acquire market share. Netflix spends $47/per new customer to acquire. Video on Demand has been around since the 80s and barely has a sliver of the rental pie.

        The consumer is very leary of all the new stuff. With a VCR,DVD and Blue-Ray player the customer automatically know what they are getting.

        Until there are only 1 to 3 choices with all of these new technologies there will be chaos. Chaos is what is good for Redbox, but Redbox cannot continue to lose millions of dollars each month. They will have to continue putting more Block Busters, Mom and Pop, Grocery Stores, etc out of business. And they will have to continue taking members away from Netflix and cable. Or, God forbid, they will have to raise their prices all the while trying to keep the next format from hedging forward and taking away their newly acquired rental pie.

        • Member [Join Now]
          BITTEN_BY_BILL [mellisa]

          Hey There R.man,
          What did you mean by “RB is loosing Millions…… to aquire
          market share.”
          How are they loosing Millions?
          As for the comment on RB taking members away from Netflix
          and Cable Co.’s I would have to disagree. I dont know anyone
          who is a member of Netflix that actualy rents from my beloved RB.
          I subscribe to Cable a Premium package and I would never cancel
          my service because I rent from RB and no I know has done that.
          The few people I know that have canceled their cable in the last
          couple of mo.’s had never rented from RB untill after they canceled
          their cable because they could no longer afford to pay the approx.
          $42 it costs in my area for BASIC CABLE.
          This MUST be said…. I dont rent from RB only because its cheap.
          RB is a very customer service friendly oriented company! Every
          time I have had a problem and I called the 800# they resolved my
          problem above and beyond what most companies do. An example
          of that is the email survey I recieved as a long time valued member.
          I apreciate your point of view but you seem very biasd. Why?
          BBB

          • Visitor [Join Now]
            CN [visitor]

            good point. in the recent earnings report from their parent company coinstar, RB made money for them – they can’t be losing money.

          • Member [Join Now]
            Radman [radman]

            I’ll post here since I tried replying to Michael.

            At March 31, 2008, Coinstar had federal and state cumulative net operating loss carryforwards of approximately $27.8 million and $28.5 million, respectively. In addition, there were foreign net operating loss carryforwards of approximately $17.8 million. Although Coinstar recorded $2.5 million in tax expense for the quarter, cash taxes paid during the quarter were $4.2 million. Taxes paid exceeded tax expense for the quarter due to the federal alternative minimum tax as well as higher state tax payments as a result of limitations on the utilization of state net operating losses.

            Complete link.

            http://findarticles.com/p/articles/mi_m0EIN/is_2008_May_1/ai_n25377273

            Just remember, not everything is explained. Accountants are pretty sneaky. I’ve ran the numbers. I think it states each machine averages $37,000 to $38,000/year. With an average of $50/machine day plus some previously viewed.

            Since each machine costs $20,000 and they put between $45,000 to $65,000 worth of movies in each machine. Pretty easy math.

            Redbox is going to have to continue to put another 1/3 of the businesses out of business to get the numbers to start to break even.

            I’m not against Redbox. I like their model. The convenience is great, but since when is convenience associated with a drastically lower price. They simply under priced their product. Movies are not bananas. Movies are a core business and should be treated as such. It is against the law in most states to get market share by use of Predatory Pricing. Dropping the core price from $3.50 to $1 is undeniably under cutting by a drastic amount. Some grocery stores have used movies as loss leaders in the past, but most have given up because they lost too much money. $1 is not profitable.
            I know that a lot of people relate to ITunes. ITunes at $0.99 is not profitable with piracy far outpacing even at a $0.99 price point. There are a lot of lost sales at these points and it should be easy to relate to why the makers of these movies are not fans of this model. I’ll go back to the well with this analogy. The Actors and Studios are not going to go on Tour as Plays to make up for lost revenues the way that Musicians can. Movies cost way more than music and should be priced accordingly to keep the industry moving. The industry will come to a screeching halt if the Studios do not stand up for their product. Movies will not have that niche market that music has since their isn’t an ability to go on tour and I think we all know what “YoustupidTube” is like.

            I do not like their tactics to get market share. They are seriously undercutting the competition and destroying the alternatives that have the ability to have more selection.

            They are so undercutting the business that Universal and the other Studios have to curb RB. Don’t think for a second that the other studios are not in Uninversal’s corner, and will follow suit.

          • Member [Join Now]
            Radman [radman]

            They can and they are.

          • Visitor [Join Now]
            Jim [visitor]

            I have a netflix membership and i also rent from redbox. Redbox for the new releases and Netflix for older movies or ones not carried by RB. I like the $1 rentals. The key to RB is to rent the movie online and pick-up later.

          • Visitor [Join Now]
            hegemon13 [visitor]

            “Since each machine costs $20,000 and they put between $45,000 to $65,000 worth of movies in each machine. Pretty easy math.”

            Radman: Not everything is explained in your post, either. First, Redbox has a buyback agreement with their vendors. That is stated in their lawsuit. So, they don’t put 45-65K in. They get a chunk of that back through the buyback agreement. Second, the machine is 20K once. After that, it is basic maintenance. They should easily be able to maintain the machines of a mid-size metro area with the staff of a single Blockbuster store, or less. I can also guarantee from the persistent lines at all the Redboxes in my area that they average a lot more than $50.00 a day. I’ve walked into Wal-mart and seen a line of ten or more people at a given moment.

            So, is a machine a loss the first year? Quite possibly. Beyond that? Highly doubtful. It is a vending machine, pure and simple. Vending machines make good money because they are an efficient, low-labor distribution method, and this is a machine where the stock is re-used. Their rate is also not exceptionally low per day. Their per-day rate is higher than Blockbuster’s. It’s just that Blockbuster forces you to pay in seven-day blocks.

        • Administrator
          Michael [administrator]

          For the record, according to Coinstar’s earnings call on Oct 30, Redbox is definitely making a profit, to the tune of $18.7 million just in the 3rd quarter.

          Here is a quote from the VideoBusiness article:

          Coinstar’s third-quarter revenue from kiosk chains Redbox and DVDXpress, factoring year-earlier sales when Redbox wasn’t majority owned by Coinstar, more than doubled to $104.2 million while operating profit surged eightfold to $18.7 million, Coinstar said in a statement. Redbox, which became majority owned by Coinstar during the first quarter, accounted for about 10,000 of the 11,800 kiosks owned or majority owned by Coinstar at the end of the third quarter.

          • Member [Join Now]
            Radman [radman]

            Just remember, not everything is explained. Accountants are pretty sneaky. I’ve ran the numbers. I think it states each machine averages $37,000 to $38,000 gross/year. With an average of $50/machine day plus some previously viewed.

            Since each machine costs $20,000 and they put between $45,000 to $65,000 worth of movies in each machine. Pretty easy math.

            Redbox is going to have to continue to put another 1/3 of the businesses out of business to get the numbers to start to break even.

            I’m not against Redbox. I like their model. The convenience is great, but since when is convenience associated with a drastically lower price. They simply under priced their product. Movies are not bananas. Movies are a core business and should be treated as such. It is against the law in most states to get market share by use of Predatory Pricing. Dropping the core price from $3.50 to $1 is undeniably under cutting by a drastic amount. Some grocery stores have used movies as loss leaders in the past, but most have given up because they lost too much money. $1 is not profitable.
            I know that a lot of people relate to ITunes. ITunes at $0.99 is not profitable with piracy far outpacing even at a $0.99 price point. There are a lot of lost sales at these points and it should be easy to relate to why the makers of these movies are not fans of this model. I’ll go back to the well with this analogy. The Actors and Studios are not going to go on Tour as Plays to make up for lost revenues the way that Musicians can. Movies cost way more than music and should be priced accordingly to keep the industry moving. The industry will come to a screeching halt if the Studios do not stand up for their product. Movies will not have that niche market that music has since their isn’t an ability to go on tour and I think we all know what “YoustupidTube” is like.

            I do not like their tactics to get market share. They are seriously undercutting the competition and destroying the alternatives that have the ability to have more selection.

            They are so undercutting the business that Universal and the other Studios have to curb RB. Don’t think for a second that the other studios are not in Uninversal’s corner, and will follow suit.

            Would $2 for the first night and $1 for each additional be too much for anyone? I’ve crunched the numbers with this scenario and it would not only eliminate a majority of the BB type stores, but would not cut into Netflix. This would also satisfy the studios. Plus this would make Redbox not only popular, but very, very profitable. So to the answer, “Am I biased?” NO.

          • Visitor [Join Now]
            SHAWNEE SHADOW [visitor]

            MICHAEL, YOU HAVE TO PUT IT IN PLAIN “ENGLISH” SO AS THE GENERAL LAY PEOPLE CAN UNDERSTAND ALL OF THESE TECHNICAL TERMS, THEN WE CAN GET THEM TO SEE WHAT ‘S GOING ON. O.K. !!!!!!!!!

  3. Member [Join Now]
    Radman [radman]

    $1/week for older movies where I’m at. Not very innovative, but I like it.

  4. Member [Join Now]
    bigpete

    same here

  5. Member [Join Now]
    Radman [radman]

    Say you want to lease a car. If you don’t like the lease, you buy it. The consumer does not have the ability to make up their own terms on the lease.

    Same here.

    The studios have every right to make up whatever deal they want when it comes to rev sharing. This same rev sharing deal is offered to all; BB, Netflix, Grocery and Mom and Pops. If you don’t like the terms, you buy them outright with all the protection of the First Sale Doctrine.

    Seems as Netflix has signed a deal Studio Wide similar to the one Redbox said no to and sued. You can no longer buy Previously Viewed from Netflix.

    I’m beginning to think that there will be a compromise and Redbox will sign something similar to Netflix’s Deal.

    • Member [Join Now]
      Radman [radman]

      Ingram and Walmart can sell to Redbox outright. Universal couldn’t do anything about it.

      • Member [Join Now]
        Radman [radman]

        Thus, no need for a lawsuit. I guarantee a lot of Video outlets wouldn’t sign any rev-sharing. Rev-sharing is like leasing and most of the time the lease is not in your favor.

        Just Buy Outright and quit wasting court time.

        • Member [Join Now]
          BITTEN_BY_BILL [mellisa]

          Heres a quest. for you.
          If you are so against RB because its too cheap and puts their comp. out of bus. then What do you think about THE PUBLIC LIBRARY? I know Way More people who rent from there then any movie store like BB, VU, HWV ect. and as you prob know those rentals are free from the public library and they get the same New Releases as any of the stores and kiosks.

          • Member [Join Now]
            Radman [radman]

            The library does not stock multiple copies of the Newest Movies.

            This is where all the major rental players make their money.

            The library is a non factor and always will unless you want your tax dollars to go to the library putting out 20 to 50 copies of Dark knight when it first comes out.

            Gosh that would be innovative though. Your tax dollars going into the system so all can have free movies.

          • Member [Join Now]
            Radman [radman]

            Sorry Michael, they all of the sudden appeared.

          • Administrator
            Michael [administrator]

            @Radman:

            Not sure why, but they all got marked as spam by the system. I left one and deleted the rest of the duplicates.

          • Member [Join Now]
            Radman [radman]

            Thanks,

            Especially since you are allowing a complete opposite point of view.

  6. Member [Join Now]
    Radman [radman]

    I posted this in a different spot from an older post, but I brought it here for questions?

    Looks like the studios may have pressured Netflix to get rid of previously viewed.

    I’m reading between the lines and think that Netflix really didn’t want to get rid of previously viewed sales. I think they came up with a compromise to avoid a legal battle similar to RB.

    http://www.gearlog.com/2008/11/netflix_will_no_longer_sell_pr.php

    I know that Netflix is trying to calm it’s renters down by stating that are going a different way, but the timing of the change in correspondence with timing of the Redbox lawsuit makes bulbs blink in my head.

    Previously viewed had to be a pretty good kick back for them, why get rid of it when you already have the infrastructure set up? Or is Netflix trying to leverage the Studios to slow down RB’s growth by accepting the terms that RB refuses.

    Would you be unhappy if RB got rid of previously viewed to avoid your rental prices going up?

  7. Visitor [Join Now]
    Rod bennett. [visitor]

    I think all of this is interesting. My Blockbuster now has over a thousand older movies for $.99 for a 5 day rental. Alot of these movies aren’t all that old.
    Way to go Blockbuster.
    Rod

  8. Member [Join Now]
    Radman [radman]

    $1 Movie Rentals are great for the consumer, however it doesn’t take long for your costs of business eating that $1.

    Reporting 18.7 Million in Profits in the 3rd quarter without explaining expenses is reckless.

    I think that we are in agreement that each machine is averaging $37,000 to $38,000/gross per year currently and it’s going up with each customer it takes from the competition. Since each machine costs $20,000 they are covering the cost of these machines in the first year, but there is way more to this equation than that.

    All these math calculations will be based off $38,000 gross per year and will be assuming the LOW END of costs.

    What about the other costs? Redbox definitely has the advantage with fewer costs than a brick and mortar store, however they cannot avoid them all.

    Credit card fees. Most credit card companies charge between 15 and 25 cents per swipe plus 1 to 2 percent. For simplicity let’s just say 12 percent. Since we have an easy $1 scale to work with we can safely say that the credit card company is taking $4,560/machine per year.

    Foot Note: The credit card company is taking the swiping fee for all the freebies that are given out. In effect Redbox is paying 15 cents for every freebie they give out. I will not factor this into my equation though.

    Insurance for each machine. No idea what this would cost but I’m sure it is over $250/year so I’ll use that.

    Electricity – $100/year.

    Cost per square foot retail – $20/per square foot. These machines take very little space, but not every store jams them into a corner, some actually leave a lot space for the consumer. Let’s just say $100/month. $1200/year. May have to disregard this since a lot of McDonald Franchisee doesn’t have an option, they have to put these machines in their stores and they do not get the revenues.

    Business Phone and Business rate Internet. Granted these are shared fees, however most would be surprised how much more businesses pay for landline phones and Internet. Internet would be around $80/month and the phone would be around $100. I’ll just average it to $100 total. $100/month x 12 month = $1200/year.

    Stocking of Movies – These machines do not fill themselves and there are over 10,000 of them. Let’s assume there is one worker per 40 machines working an average of 8 hours/week. That would leave 250 workers. Figure $12/hour with gas. 250 workers x 8 hours x 12 dollars/hour x 52 weeks. That would be $1,248,000 for those wages.

    Maintenance of these machines. From what I’ve read in numerous blogs, this seems to be a very big issue. Maintenance is probably on the same grounds as the stockers except they would be paid more, but used less. I’m going to add another $1,248,000 but I’m sure it would be way more.

    Rental Cases – Every Movie gets one and everyone costs them over $0.25/per. 10,000 machines, 500 movies per machine. $1,250,000 as a start up cost. I’ll come back to this one later since we have to figure out how many movies they put in each machine every week. 500 x .25 for startup each machine = $125.

    Call Centers – These are very expensive to run, but since there is no clerk to help you out you will need these. Each call center has wages, rent, heat, insurance, maintenance, Internet, phone, office supplies, etc… These call centers work 24/7 365 days/year. You will need 4 workers per 200 machines to adequately cover the calls coming in. That would be 200 full time employees working for $10/hour. That would be $4,160,000 year. I’ll bump it to $5,000,000 factoring in insurance, vacation and temp service. This would equal $500/year per machine. Not going to add up all the costs of running the call center with all of it’s running expenses, I’m just going to give a very low estimate of $1 million to rent and run the call center. That averages out to $100 per machine.

    Legal Department – This number appears to very large and getting larger with all the lawsuits. At 25 million that would equal a cost of $2500/year per machine in legal costs.

    Advertising – Not sure what it is, but I guarantee it’s over $100 million/year. That’s a staggering $10,000/per machine a year.

    Website and all the servers – I do not have the slightest idea. Is 5 Million a good number? I’ll go with it. Another $500/per machine.

    Accountants – I think 5 million may be too low, but I’ll go with it. $500/per machine.

    Membership fees for VSDA and other organizations. Not even going to factor that. Probably would cost around $25/machine though.

    Travel,food and Airfare for representatives of Redbox. Go with a low estimate of $1 million for $100/per machine.

    38,000 Gross/year per machine

    – $4,560 credit card cost
    – $250 insurance cost
    – $100 electrical
    – $1,200 rental fee for retail space
    – $1,200 for internet and phone
    – $124.80 for stocking
    – $124.80 for maintenance
    – $500 call center wages
    – $100 call center expenses
    – $2,500 legal
    – $10,000 advertising
    – $500 for website
    – $500 for accountants
    – $100 for travel
    – For simplicity I’m going to add $3,241.40 for expenses that I’m obviously missing.

    For a total cost of $25,000 before putting movies into the machines and this is a very low estimate.

    $38,000 minus $25000 = $13,000.

    Now we have to add movies. The expense of each movie is between $13 and $15 per.

    There are 52 weeks of new movies. In order for Redbox to break even they cannot spend more than $13,000/year on movies. For that to happen I will divide 13,000 by $13/per movie and then divide that by 52 for number of weeks a year. That would only equal 19 new movies installed in each machine every week.

    Now if Redbox’s report that they made 18.9 million in profit in the 3rd quarter alone that would mean each machine Netted $1890 in 3 months or $630 month. Even if I’m wrong this is an embarrassing number. Now apply my math from above and my calculator exploded with a negative number.

    We can assume Redbox actually averages 50 to 75 new movies put in each machine every week. This would be a yearly cost of 33,800 and $50,700 and the entire math I did above would be pointless since it’s easy to see that grossing $38,000/machine and paying that much for the movies is not profitable.

    Can Redbox eventually be profitable at $1 rentals? YES. But it comes at a very large cost to the industry in the form of lost sales and undervaluing the movie experience.

    Every customer who quits buying because they can rent for nothing or next to nothing hits the industry at the core; The Studios. No Studios, No Movies. Get ready for the worst slate of movies to hit theaters ever. The studios are putting out less and keeping a lot of movies in the can. Rental outlets that offer more variety will be forced to close.

    • Visitor [Join Now]
      Joe [visitor]

      Problems with some of the assumptions. You were doing good till the end.

      Legal Department – This depends on how many things actually go to court, most things are just letter writing, this would be one employee, and divide that by how many machines they have out there and it’s not a big cost.

      Advertising – They don’t do much, I haven’t seen anything on TV yet. Advertising happens automatically because they are placed in locations with high traffic, in most stores they are right in the entrance. The promo codes are great free advertising.

      Website and all the servers – Hardly nothing, pay some outside guy to create it and minimum to maintain. Server, maybe two or three max at $200 a month ea.

      Accountants – All computerized so just two full time employees max taking care of all business accounting.

      Add in $13,500 = Profit $26,500 yr

      Not bad since you have all your overhead covered, employees are getting paid and now you have enough to spend on expansion and bonuses.

      I bet BB doesn’t come out that far ahead at the end of the year. They have to pay much more location rent and employee overhead.

      It looked like at the end you started inflating things to make your point.

      This business is way profitable, go start your own today!

  9. Visitor [Join Now]
    LA [visitor]

    Well I rent from Redbox because so many movies are not worth my time to watch.
    Even if they have A list stars they can be terrible, so for $1 I can watch the first 10 minutes and if it is lame or too foul mouthed I just return it. Then I actually rent movies I would not pay $3.50 to rent and sometimes discover good films and occaisionally buy them. This is also good for renting the kid movies first, and if there is some hidden BS agenda in the film, or catty mean characters, I won’t buy it for the kid. But if it checks out as okay (kids watch them over and over so it is like brainwashing,.. parents need to be careful)…so if it is a decent agenda free movie then maybe I will buy it.