An economic study recently released by the Los Angeles County Economic Development Corporation (LAEDC) claims that Redbox’s low cost new release rental model could have an enormously detrimental impact on the entertainment industry, as well as the economy of Southern California.
The study, available in its entirety here, is entitled “The Economic Implications of Low Cost DVD Rentals”. It states that Redbox’s $1 per night pricing model on street date new releases, “shows the ripple effect of $1 billion in lost revenues to the domestic home video industry in the Southern California region”. The study goes on to say that these lost revenues would translate into $500 million in reduced economic activity and the loss of more than 9,280 jobs in the industry. The (LAEDC) study summarizes its findings thus:
“In the event that new releases are available at Redbox kiosks at street date, there will be erosion of retail revenues. . . We estimate overall industry revenues of billion or more will be foregone.
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Gregory Freeman, Vice President of Consulting and Economic Policy for the LAEDC, had the following to say about the study’s results:
“The economics of the motion picture industry are based on exclusive release windows which allow price differentiation – that is – some earlier transactions take place at higher price points. . . Redbox, or any other distributor that weakens the release window model, could reduce overall industry revenues. Lower revenues will likely lead to lower production activity, hurting the Southern California economy.”
Insiders, are the study’s findings preposterous or prescient? Leave a comment and let us know what you think.
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Serves them right for releasing crap.
I hate witch-hunts
Directly from the study…
“The Economic Implications of Low Cost DVD Rentals”
The current recession has adversely affected consumer purchases of discretionary
items.
Technology is enabling the digital delivery of content through internet providers,
broadcast and cable providers, and telecom providers.
Households are opting for other forms of entertainments, such as gaming and social
networking.
Economic impact of the spread of low-cost new release DVD rentals is uncertain
The report vindicates kiosk rentals! Read it yourself!
The stooge is right.
There is no direct causal correlation.
Just found this article…interesting if it’s indeed true.
http://www.cinematical.com/2009/12/07/wal-mart-redbox-scandal-heats-up/
I do not doubt their findings one bit,
but to lay it all to blame on low prices; e.g.
($1) for DVD rentals,
is way out of line; yes, it does have an effect, but, this is a causal effect
which is related to the times of this recession.
Lets face it, the majority of the people out there have less items
to buy per dollar that they make. The prices of goods as
well as real estate should be a good indication as to where we
are all at presently here in the States. A home that used to
sell for $500,000 is going now for around $300,000;
and it is the same with most goods and groceries.
Retailers are forced to lower prices to get people to BUY!
The Motion Picture Industry as well as the DVD makers it
seems have not caught on to this fact, and wish to put
their hands in front of their eyes and ears (like a spoiled child)
and yell:
“I’m not listening or hearing anything you are saying, na, na, na, na”
But the simple fact is, the dollar is buying less and the people
are feeling it!
If the article had the phrasing that Redbox low-cost rentals “devalue” the industry, I’d swear John Small wrote it! Just not convinced low-cost rentals would/could/might be costing the industry billions. As usual, trying to gain supporters by suggesting the little guys–like the lighting and sound crew– will be losing jobs because the studios won’t be able to afford to pay them WHEN all the studios need to do is rethink/redistribute where they are paying out their big bucks. Quit paying actors ten or twenty million dollars for a month or two of work and the studios would have plenty of money to pay the ‘little guys’ AND the domestic ‘brick and mortar’ video stores could afford to lower their rental prices and still make a living!
I wonder what types of companies might be members of the members of Los Angeles County Economic Development Corporation (LAEDC).
http://www.laedc.org/membership/companies.html
The same LAEDC report could be used to prove that if redbox did not exist, that the losses would be *twice* what was reported.
Complete HOGWASH! These must be the same people pushing global warming! If I rent a movie for $1, that I would NEVER BUY, and our friends at Redbox bought 1000 of them….then the net win is a sale of 1000 movies for Hollywood. There are so many lame movies out there that I would NEVER, EVER pay $20 to buy that there claims of a billion “lost” is BS. Also….I BUY movies that I have first RENTED on Redbox all the time. If I like a movie, I buy a NEW copy of it for my library. The only result of delaying releases to Redbox (and others) is going to be less sales to me. I am not going to run out and spend $20 to buy a bunch of B rated loser movies just to see them a week (or a month) sooner. Frigging Hollywood is so damn stupid!
What about Netflix & Blockbuster??? Were they hurting the industry before RedBox & other $1 DVD Kiosk came to town? The more DVD’s they sell the more money they get. When a kiosk franchise rents a DVD, they purchase the movie one time then rent it out. I don’t see where it hurts the industry. If anything, it helps. More people can rent it at a low cost & then buy it from the store if they like it! JMO!
$1 billion dollars!? That’s like one and a half Michael Bay movies!
What if they stop making Micahel Bay movies!? Redbox! Stop operations NOW before it’s too late!
I guess Walmart decimated our manufacturing base and workforce. Hey Walmart still around..
They said the same crap back when the VCR came out!
Stop making crap movies and you won’t lose money.
It’s like reading farts here sometimes. You all complain that you cant’s get it for free with a code, or will only pay $1 or you’ll never watch it, or I wont pay $20 for a movie. No one ever said you have to, $2 or $3 to watch a High quailty hollywood movie in the comfort of your own home is more than a fair price considering it would cost $10 in the theater per person – family of 4 – $40 to $50. In comparison $2 – $3 is one hell of a value. Did you all ever stop to think just for a second that when redbox puts BB & all the independent video stores out of business that you’ll be paying them (redbox) a hell of allot more than $1 per day because you wont have a choice. Maybe you should all stop going to sporting events too…. ya know they pay those guy’s 10’s of millions too..
And as far as crappy movies, your the one that chose to watch it so stop renting stupid movies, and maybe they’ll stop making them!
T.
In the economics of a freedom, the fair price for a commodity is determined by what robust competition settles to on a level playing field; fair has nothing to do with what something else costs, or what you think is fair. In fact, I would argue that your concept of setting retail prices at an arbitrary price point based on what you think is fair is ridiculous, fundamentally flawed and unfair in itself.
To wit – using your logic: I think selling soda at $0.35 per 12 ounce can undervalues the product. Getting a soda for $0.85 is a great deal when you consider that if you go to a restaurant, they will charge you $1.50 for the same thing. So the fair price for a can of soda is $0.85.
Ludicrous? Yup!
The fair price can only be determined by a level playing field in a competitive environment. Right now the studios are tilting the market using the anti-competitive practice of selling DVDs at a significantly lower price to their revenue sharing partners in the retail market than they are selling them to independent retailers. They are doing this in order to tilt the retail market in favor of their retail partners. Redbox is a threat because they have an order of magnitude (or more) lower operating costs than the studios retail partners, so the studios are losing retail market share. If they really think that $3.00 is the right rental price point, they could triple the cost of the wholesale product. The downside for this is that more people would stop buying their own copy and resort to renting and their retail partners (if they are stopped from illegally subsidizing their inventory costs) would have to triple their rental fees (or more, seeing that they are losing money at their current rate structure). If Blockbuster tripled their rental price to $12.00, and redbox tripled their rental price to $3.00 and Walmart tripled their sale price to $45.00 in response to an increase in wholesale price, what would you do? Of course, you would probably continue renting from redbox.
The problem is that the studios are trying to strangle redbox in order to protect its retail market share that it derives from revenue sharing agreements with retailers (like Blockbuster) that cannot compete with Redbox’s lean operational model.
Tough. Technology has always enable new and more efficient ways of delivering goods and services. The innovative, in a “FAIR” world should always win market share; and efforts to hold them back are, in a word, anticompetitive.
I’m sorry, I guess you can tell if a movie sucks before you watch it,
I don’t have that gift.
Oh and as far as the Walmart comment your an idiot, Its companies like that that outsource to china and every other country for goods but our own. The small business that Walmart destroyed made up a huge part of this country’s economy.
Maybe you should ask one of their employees what a great help to our country they are. Or better yet maybe somebody in the unemployment lines.
No T,
I’ve studied Walmart and the conventional wisdom about them is wrong. Walmart’s real competitive advantage was due to innovation. Sam Walton developed a remarkable automated inventory control system as a software application. This allowed him to keep lean inventories. If you know anything about business, you should know that warehousing unsold inventory is a HUUUUGGGGEE drain on revenue. Walmart used technology to create a lean retail business model that was unprecedented. Your typical local business couldn’t compete because their supply chain management systems frankly were non-existent.
Walmart didn’t kill any local business. What kills local business is the inability to adapt, to innovate and change. Hell, Walmart used to be just a single independent local business. It is just that Sam Walton innovated while the others around him wanted to remain in the past.
You need to go read “the world is flat” by Friedman. Besides, what makes you think that your neighbor is more valuable than a mexican laborer in Juarez, or a chinese mother in Beijing? If they are willing to compete against a labor union fatcat who dropped out of high school but expects to make$85000/year with a huge pension; why should I send my hard-earned money to the local? I work hard for my money – what gives you the right to impose some arbitrary moral framework that favors someone who refuses to compete with ambitious hungry souls who are willing to do their job for less?
Besides T,
I’ll bet you were the kid who, when graded on a curve got D’s and then blamed the kid who set the high score. That is essentially what you do when you blame Walmart for the failure of a local business. The fact that they can’t make the grade doesn’t mean it is the fault of those who do.
True that Walmart was innovative and they have an unrivaled business model. What makes them despicable are their other practices; strong-arming vendors, poor wages, limited or expensive health benefits, anti-union policies and practices, local political bullying, anti-environmental practices, etc..
It was an unfortunate side-effect that they killed many small businesses, but the only people that are to blame are the ones shopping at Walmart. Ironically, they are usually the ones hurt most by the fallout.
tsk tsk tsk. It is not Walmart that strong arms – that is a union tactic. My son works at walmart and loves it. Though part time, he gets benefits and profit sharing (they match a portion of his stock purchases too). Walmart pays as good or better than other local businesses.
Anti-union? The employees don’t want to unionize.
Strong arming suppliers? you don’t know what you are talking about. Suppliers jump at the change to get prime shelf space at walmart. Walmart treats them well and accounts for a huge percentage of their sales (P&G, for example).
Local businesses hate walmart and the unions hate walmart, but the vendors most definitely do not. In other words, the kids in the class that underperform hate the kid that sets the curve; but those who are looking for a high performing employee LOVE the kid that outperforms. Don’t buy into the Union rhetoric. It is the unions themselves that are anticompetitive.
I’ve done the math. The lean competitive model offered by the tech-enabled Walmart saves me, literally, 30% to 40% on my grocery bills. How exactly does that “ironically” hurt me?
Your wording is so eloquent however, you belittle things so quickly like their strong arming, they don’t pay suppliers until product sells, and if it doesn’t they send it back and don’t pay for it, that’s unheard of. They monopolize the because nobody can compete. I am all for their intelligent way of running the business but there are laws against monopolies and predatory pricing. Feel free to insult on, that tends to make your political way of answering even more evident.
Hey T. I know how Walmart is characterized by the unions.
But, I do enterprise architectures for a living and have studied Walmart in fine detail. Unions and other organizations, that don’t want to compete with efficient and effective people and organizations, misrepresent the truth.
You can’t understand walmart if you keep thinking about them as a retailer who buys stuff from a wholesaler, takes possession of it, and then sells it to a consumer at a markup. Au contraire, They are a logistics shell for product developers.
This may surprise you, but it is true – go research it out if you don’t believe me: Large Product developers with established relationships with Walmart, like Procter and Gamble, control the shelf space assigned to them by Walmart.
Walmart doesn’t do inventory control on Procter and Gambles’ products – Procter and Gamble does it. Procter and Gamble monitors sales data from Walmart in real time and does predictive supply management INSIDE of Walmart’s logistics process. Procter and Gamble calculates the inventory requirements and adjusts their production rates accordingly.
Procter and Gamble’s high margins on Walmart sales are obviously acceptable to them, and in fact, because they control the inventory flow, they control the inventory risk. This approach puts the product manufacturer in close proximity to consumer sales data which is a critical governing metric for their production rate: enabling them to achieve the long-held dream of just in time production.
The reason that large smart suppliers like the Walmart model is because it allows them to eliminate warehousing costs. Again, not obvious to a casual observer, but housing inventory and dealing with warehoused inventory is huge inefficiency that drastically affects the bottom line: a company’s profit margin. In fact, the truth is that non-optimized supply management is the single largest inefficiency in most wholesale and retail enterprise processes. In lay terms, this means that too much inventory COSTS the supplier a lot of money. Of course, not having enough has opportunity costs. You want your production rate to be the same as the retail sale rate.
In classic distribution models the lag between delivery of the wholesale product into a retailer’s inventory and then to a subsequent sale is both untimely and uncertain – usually, even if their retailers were to share sales data with them, it is so far removed in time from the production rate decisions that trying to using it as a production rate control variable is infeasible.
Because Walmart has created a system that allows suppliers to use sales data as a production rate control feedback variable, the IMMENSE COSTS associated with warehousing product is eliminated and they can sell the product at a lower price and simultaneously increase profit. IT WORKS very well for suppliers that “get it”, like Procter and Gamble, and you’ve been deceived if you’ve bought into the union’s rhetoric. Walmart is a HIGH TECH Supply Chain Management enterprise.
Name one company that Walmart forced into a business arrangement against that company’s will. Name one wholesaler that is losing money by selling to Walmart.
Please stop believe the union’s desperate misrepresentations.
It is true that the Studios and their agents in the retail DVD sector (those who share retail revenue streams with the studios) are losing market share to technology-enabled upstarts like Redbox who have ingeniously minimized the cost of delivery for new-release DVD rentals. Technology is the key here.
I imagine a similar complaint was raised by buggy manufacturers when Ford invented the automobile production line; or by Scribes when Guttenberg invented the printing press; or by the pony express when edison invented the telegraph.
Since the movie studios dominate the movie production market (implicit in the successful Sony Betamax antitrust suit against the studios as dispositioned by the US Supreme court), they must not be allowed to establish a retail presence (through revenue sharing agents like Blockbuster Video) and give access to DVD’s at a lower (subsidized) prices to these tacit retail partners than they give to independent retailers (those who refuse to share retail revenue with the commodity provider).
Right now, the studios are attempting to force anybody who refuses to sign up as tacit retail partners via revenue sharing agreements to pay higher prices for access to wholesale product. This studio practice is anticompetitive, and is designed to handicap business like Redbox who are so lean and efficient that they are grabbing up retail market share from the studio’s revenue sharing partners. To make it clear: consider if AT&T were to give its retail market partners access to its telecommunication line at a fraction of the cost it charged to MCI. To compete, MCI would have to be that much more efficient than the AT&T retail side of the house. Such would not be allowed, such is unethical, and in my opinion, is in violation of antitrust rules. But that is exactly what the studios are doing in order to preserve their retail market share against a lean, mean competitor.
Sure, the studios stand to lose a big fraction of their retail market share because of a leaner business model from an independent retailer. SO WHAT!!!! If they want to raise the retail pricepoint, they are free to raise the wholesale price point (but then some people would stop renting/buying) – what they are not free to do (but what they are doing and redbox is suing them over) is give different product pricing to independents than they give to their retail partners.
You keep saying that the studios give preferential pricing to Blockbuster without backing it up anywhere. I am sure that due to their size, there are some volume pricing discounts, but nothing that Redbox wouldn’t be able to duplicate it they ordered as many copies.
The studios when dealing with the rental channel give you two options, you are free to choose either one that fits your particular needs. The studios certainly don’t tell you that you have to enter into any type of revenue share agreement with them in order to be in business.
1. The wholesale cost of a DVD, typically in the $15 to $20 range. You are free to rent at any price and dispose of the copies in any manner you decide which is usually selling them previously viewed to customers.
2. Enter into a revenue sharing agreement with the studio, you pay a small upfront cost and then revenue share a portion of your rental fees to the studios. You are usually limited in the manner you are able to dispose of these DVDS. Some studios require that you destroy a certain amount of product, some studios take a percentage of the sale price.
Redbox, to my understanding is not happy with either of those options and wants an even better than wholesale price. They are certainly getting that when they buy the title on the day of release from Wal-Mart, as they use DVDs as a loss leader in order to draw other customers into the store. Unfortunately that results in delays in getting the titles to their machines as well as higher labour costs associated with getting employees to buy the titles at the store rather than having them shipped in.
Honestly, I think revenue sharing is a bad model for a video store and is probably half of Blockbuster’s problem. When you are giving such a large percentage of your revenue stream to the studios, then not charging late charges, you have a recipe for disaster and that is the situation that Blockbuster found themselves in.
At least they have smartened up and started charging late fees again.
Mike,
Though not officially extracted from the details of any particular revenue sharing agreement and somewhat dated (the wholesale cost for an independent to buy a video has dropped over time), the following gives a good description of the the history of the video rental business and outlines within it the motivation (studio and retail business) for entering into such an agreement; together with high level description of the strategic terms of such a contract. Don’t stop reading after the first reference to revenue sharing…there is more later in the article. http://www.answers.com/topic/videotape-rental
http://www.rentrak.com/section/corporate/newsroom/press_release_detail.html?release_no=541 is a press release that explicity says that rentrak’s interest in signing up as a retail rental partner with MGM was to get access to discounted wholesale pricing.
Finally, do a google search for an article titles, “How Blockbuster changed the rules” in Time magazine from August 1998. My experience has been that the studios and their revenue sharing retail agents tend to hold their revenue sharing agreements closely held, but this article is dated back at the beginning of the practice.
I’m not alone in holding a legal opinion that revenue sharing was the studio’s answer to shortcircuit the antitrust lawsuit (Sony vs. Universal) in that resulted in the supreme courts ruling termed the “First sale doctrine” that put a legal wall between the studios and the retail sector.
Anyway, the Times article (which I assert would have been more properly titled, “How the Studios Changed the rules in favor of their retail agent Blockbuster” clearly indicates the 1998 Blockbuster Deal gave Blockbuster access to videos at the extremely discounted price of $6 apiece (much much lower than the wholesale volume pricing available to any high volume independent retailer) in exchange for 40% of the rental revenues. That times article cites this practice as the means by which Blockbuster (and it’s studio partners) grabbed the lion’s share of the video rental market.
Think about it, if you were a video rental business, would you enter into a deal with the studios to just GIVE them 40% of your rental revenues without getting something in return? What these prostituted retail agents got in return was a market advantage…and the studios got their foot in the retail rental market. Then along comes redbox, a feisty little innovative vendor whose low, low overheads allow them to rent product at 25% of the price of the studios’ rental partner outlets and pull a profit even though they don’t have access to the discounted prices the studios, in effect, sell the video’s to themselves via their partners. If redbox had wholesale access at the same rate the the studios sell product to their rental agents (like Blockbuster), their profit margin would at least double (I think it would triple).
Now, it is interesting. In spite of shortcircuiting the restraints placed on it by the supreme court, this studio goliath in the retail sector is bleeding and losing its market share to a lean little guy: blockbuster is spiralling toward bankruptcy, losing market share and the Studios are trying to kill David by forcing him to suit up in the heavy armor worn by its goliath and to fight with sword instead of stones.
I’m confident that the courts will recognize the studios’ anticompetitive actions for what they are and restrain them the same way they’ve restrained other wholesale dominates who try to compete in the retail sector by subsidizing its retail units.
Mike,
Looking at just option #1, it is my understanding that the studios are not allowing redbox to buy at wholesale anymore, by telling their distributors (such as Ingram) to not to sell to them or face being cut off. This is what sparked the lawsuits.
For #2, redbox has been able to come to an agreement with Paramount, Sony and Lionsgate, but not others such Universal, Fox and Warner. While we don’t know the exact details of the deal redbox or studios want here, clearly they have just not reached an agreement that both are happy with.
Personally, I think the simplest situation would be to do away with #2, and just have everyone buy at wholesale if they want the movies. That levels the playing field, and would cause all of this anti-trust talk to go away. If redbox can rent movies for less than redbox, so be it. This is what competition is all about.
This madness shall not stand! ;->
Feste has been spouting this nonsense ad naseum on this site but the facts are that he has no basis for his claim that revenue sharing is anti-competitive.
And Michael, for you to claim that revenue sharing should be removed is ridiculous as well.
Revenue sharing is a tool that allows rentailers to achieve copy depth that they would not be able to afford if they had to buy their titles outright. In exchange for their reduced costs, they agree to bring in increased copy depth. The overall effect is increased revenue for both the studio and rentailer.
Michael, you comment that several studios have come to an agreement with Redbox in regards to carrying their titles in a revenue-sharing manner. If you look at the regular market share for those companies compared to the % Redbox agreed to stock their titles in their machines, you will find that Redbox, like any other rentailer who revenue shares, agreed to stock an increased depth of titles from those studios.
The problem is that Redbox had to give away too much percentage to get those studios to agree. So now they cannot possibly make a similar deal with the big 3.
As for Redbox being able to purchase titles at a wholesale cost? They had that chance but refused to do so. They wanted their special deal to continue. The big 3 refused to let that happen. Redbox bluffed and lost.
Why is the movie industry afraid of takin’ on Google’s YouTube…maybe because the David and Goliath roles are reversed??
lol this is funny because if you think about it Redbox is a large company purchasing movies at a large quantity the studios could not sell on their own so what the hell are they complaining about??? People have become more aware and tight with their spending so they are making a choice between a $20 dvd or a $20 in groceries. Redbox comes in and buys what the consumers are not buying and of course more. If you have 20 of a product and it used to sell out now only 12 of them are selling because consumers are conserving their spending and a company comes in and says hey we like this product can we buy 45 what would you do??? Say no because the company is going to rent it out for less of the value! I don’t think so. They should close down all dollars store then because the products are being devalued and could be bought for 5 dollars else where.