Seeing kiosk chaos

Uni's Kornblau fights Redbox's $1 DVD rentals

The disc maverick is at it again. Universal's Craig Kornblau was alone among home-entertainment presidents in refusing to embrace Blu-Ray Disc until HD DVD had quit the high-def format war. Now Kornblau is battling a new adversary: Redbox, the kiosk retailer whose $1 DVD rentals give the normally even-tempered exec conniptions.

Co-founded by McDonald's — which sold out to Coinstar last week — Redbox rents DVDs at kiosks situated in 14,000 fast-food outlets and other retail locations nationwide. Its dollar-rentals program has proven popular with recession-wracked consumers.

But Kornblau worries that dollar rentals will eat into studio DVD profits, and he refuses to supply Redbox with Universal releases. That in turn prompted Redbox to sue Universal, which has responded with a motion to dismiss on grounds that the legal action is meritless.

A ruling is expected soon from U.S. District Court in Wilmington, Del.

"Anybody who knows anything about the law knows I can do business or not do business with whomever I want," Kornblau told a reporter recently.

Execs at Redbox stress that consumers' best interests would be served by its winning the suit.

"Our objective is always to get the customer what they want, and we are living up to that commitment," said Mitch Lowe, COO of the suburban Chicago-based retailer.

A home-entertainment industry veteran with stints in regional retailing, Lowe was a co-founder of Netflix before moving on to Redbox. He touts dollar rentals as well-suited for the tough economic times.

"For some customers, even a dollar a night is getting tough to afford, but we're replacing those and maybe adding a little by adding those who are looking for a better value," Lowe said.

"Consumers love a deal, and they love video rental," said Tom Adams, whose Adams Media Research charts home-entertainment trends. "So getting a deal on video rental is about the best thing that could happen to them, especially in a recession, when everybody is counting their nickels."

Popular or not, dollar rentals hurt studios, according to Kornblau, a quiet man with strong opinions who still insists backing HD DVD was the right thing to do as it lined Universal coffers with promo money from format proponents. His opposition to dollar rentals is based on the belief the trend will diminish studios' revenue from DVD sales and rentals.

Kornblau contends that DVD sales will decline if the spread between a consumer's cost to rent or buy DVDs becomes too great. More directly, a broadly downward trend in rental pricing would cut into the majors' rental revenue because studios are usually paid through revenue-sharing arrangements with traditional retailers.

Kornblau suggests Redbox only filed its legal action to discourage other studios from following Universal's example and refusing to ship Redbox DVDs for their first 45 days of release.

"The studios aren't stupid and have expressed concern about this since day one, but they're loath to get sued," another industryite acknowledged.

Of course, studios playing ball with Redbox also know rental revenue has been dwindling anyway. So suppliers try to lowball contract terms on dollar rentals — usually shying away from revenue-sharing arrangements — in an attempt to compensate for any negative effect on other rental revenue.

Houston-based TNR Entertainment, which Universal also refuses to supply, ranks a distant No. 2 in the kiosk segment, operating 2,100 Moviecube kiosks offering dollar rentals. Most are located in supermarkets.

Collectively, kiosks still account for a relatively small part of total DVD rentals, with an estimated 11% market share, but the segment has been growing fast. In 2008, a still-fledgling Redbox grabbed more than 5% of an $8.4 billion rental market, and the company forecasts an 80% jump in company revenue for 2009.

Meanwhile, there are signs traditional bricks-and-mortar retailers are getting squeezed by the kiosk trend.

Blockbuster's competitive response has been to announce plans for its own kiosk program. But dollar rentals are unlikely at Blockbuster kiosks, with Universal among studios participating in recent market tests.

In another distinction, though Redbox and TNR deal primarily in new releases, Blockbuster kiosks also will offer some catalog titles.

Redbox stocks each of its kiosks with about 500 discs featuring 150 different titles and turns over inventory quickly by selling off older titles. Customers can prepay online to reserve titles at kiosks of their choosing.

Investing about $15,000 per each new site, Redbox says its kiosks each generate an average $50,000 annually within three years of operation.

"The more machines we put in, the greater the convenience for the customer," Lowe said. "We don't know where the cap might be as far as market saturation."

Redbox expects to operate 20,000 kiosks by the end of the year.

Paul Bond contributed to this report.