Redbox Learns What a Release Window Delay Can Cost

By Gary Kim January 17, 2011

Release windows matter in the movie business. For Redbox, losing 28 days has meant about $6 million to $8 million in lost revenue for the fourth quarter of 2010, and possibly 14 million rentals in the quarter. 

Studios recently allowed Redbox access to new release movies. As part of the deal, though, studios require a 28-day delay between DVD availability elsewhere and through Redbox. That window appears to have played a role in lower fourth-quarter earnings at Redbox. 

There appear also to have been other contributing factors, though. Management thought Blu-ray activity would be higher. Also, not expecting the lower activity for new releases, the company removed older inventory prematurely. There also were some logistics issues. 

Studios have been concerned about Redbox, in large part, because of the price points the company has set. Redbox uses a $1 per rental model, and studios have been concerned that such rates devalue the content. The 28-day release delay for new movies that have gone into DVD release has been intended to blunt the impact of Redbox rentals, allowing both retail purchase and other higher-priced rental outlets to maintain a higher share of overall activity. 

Redbox owner Coinstar now says it "severely underestimated" the impact 28-day delays on movie availability, among other factors, would have on its operation. 

The company expected stronger performance from the titles scheduled for release during the 2010 fourth quarter holiday season, particularly from the slate of 28-day delay and higher-priced Blu-ray titles, despite a 16 percent lower box office for scheduled releases compared with those in fourth quarter 2009. 

In addition, in anticipation of demand for new releases that did not materialize, redbox removed older inventory early, impacting revenue and gross margin. Further, redbox consumers used "rent and return anywhere" to a higher level than expected, which caused temporary imbalances in available titles across the kiosk network.

The company said yesterday that it expects to make between $78 million and $82 million when it announces fourth-quarter earnings. Coinstar initially estimated that it would generate a profit of $84 million to $90 million. Moreover, it has revised its 2011 revenue outlook down from $1.85 billion to $1.70 billion.

"Overall, the performance of the Redbox business during the fourth quarter was not in line with our forecast," Coinstar CEO Paul Davis said. "This was Redbox's first holiday season with 28-day delayed titles, and we underestimated the impact that the delay would have on demand during the fourth quarter."

Davis also said that his company "expected much better performance from Blu-ray and had purchased to a higher level of demand." The company first started offering Blu-ray rentals in July.

In 2010, Redbox secured deals with Warner Bros., Universal Studios Home Entertainment, and Twentieth Century Fox to offer the studios' titles 28 days after they were made available at retail. 

Coinstar estimates that Redbox had 14 million fewer rentals during the quarter than it expected, largely because of the 28-day delay in getting access to new releases. 

"Prior to yesterday's preannouncement, we believed that the typical Redbox and Netflix customer is unaware of, or doesn't mind, the 28-day window for the majority of the year," Pachter wrote. "It is now clear that the 28-day window can make a difference in spending patterns at the holidays."

Redbox's other issue on the quarter, according to Pachter, was its inability to manage its "rent and return anywhere" offering. The program lets users rent a movie from a Redbox kiosk in one location and return it to another when they're done. He said that the program "caused over-supply of key titles in some kiosks and under-supply in others." The impact of that shift could have turned some customers away.

The experience illustrates in a stark way what a release window advantage is worth. 

In other news, Reliant Security, a provider of Payment Card Industry Data Security Standard compliance solutions for retail merchants, announced new features for the MPS Redbox, their flagship product.

Gary Kim is a contributing editor for TechZone360. To read more of Gary’s articles, please visit his columnist page.

Edited by Janice McDuffee

Contributing Editor

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