Commoditized video rentals

About 12 years ago, I asked why people would pay for complex high-bandwidth Internet infrastructure for video on demand at $5/movie when they could rent a VHS at their corner store (then available at $1-2/night).

I got the technology wrong but the business principle right. The stand-alone (and chain) video store may be dying, but they are being replaced by the explosive growth of automated video kiosks from Redbox and DVDPlay.

Today, the Wests rent all our DVDs from such a kiosk at the two grocery stores near our house, except when we check out older DVDs free from the library. While we like (at least some of) the movies, the delivery of the movies is a commodity, and thus we, like other rational consumers, seek out the least expensive channel available.

Although a few articles have noted that Netflix sees the kiosks as its major competitor, I’ve been waiting for someone to really take seriously the kiosk business model and what it does for both for DVD distribution and also the entertainment industry as a whole.

Ryan Nakashima of the Associated Press does exactly that, and his article (at the Merc, Google and also here) shows a deep understanding of the dilemma facing both Hollywood and the broader industry, as his lead demonstrates

Hollywood studios are split over Redbox, the $1-per-night DVD rental kiosk company: They could supply it with cheap wholesale discs and ride its massive growth, or starve it in the hopes of preserving higher-priced purchases.

News Corp.'s 20th Century Fox fell on the side of starvation this week, joining General Electric Co.'s Universal Pictures, whose withholding of discs prompted a lawsuit.

On the flip side, Sony Corp.'s movie division signed a five-year deal just last month to supply Redbox. As part of the deal, Redbox would get discs more cheaply but would have to destroy copies after their rental lives ended rather than sell them as "previously viewed" for $7 apiece, as it had done in the past.

Redbox understands this opposition but also the role its business is playing in fueling consumption:

Redbox President Mitch Lowe is trying to convince studio executives that the machines help sell more movies and says more than a third of his customers rent movies before deciding to buy.

"From the studio executive's perspective, they've always had an issue with the dollar price point," Lowe said. "I think it's been very positive to expanding consumers' interest in film again."

I encourage everyone to read the whole article (which I excerpt in the name of fair use but will not reprint in its entirety out of respect for AP’s own problematic online business model).

The studio execs must be smoking something (ok they are, but …) if they think they can starve this channel. The business demand is unstoppable. Also, antitrust law (absent yet another gift from Congress) is clearly not on their side, as demonstrated by the arguments in Redbox v. Universal.

Lowe is right that the $1 price point is the magic number, and I don’t see that there’s any legal way they can dictate prices.
A reasonable compromise between Redbox and the studios is

• Keep your $1 price point
• 30 day embargo on bestselling releases (but not direct to video)
• Buy DVDs direct but no resale (ala Sony)

This would of course including offering those terms to DVDPlay and any other new entrant.

The lawsuit says Universal proposed a revenue share agreement that accepted the $1 price point (but never “below $0.99 per night”).

However, the Universal demand that Redbox share 40% of gross receipts — with a guaranteed upfront minimum — is just untenable. While a revenue share (rather than purchase/rental) model might be a better way to split revenues between the two parties, the 40% figure is outrageously high given that Redbox bears all the incremental costs and all the risks.

As always, the Hollywood view is “heads I win, tails you lose.” This is the last gasp of high supplier power based on a dying business model. As with other information goods such as newspapers and software, it will have to find a new business model to survive in the 21st century, and so (someday) needs to embrace its future rather than deny it.

Commoditization of distribution is here, and it’s not going away. The studio execs seem to be playing kick the can down the road — in the hope that facing up to this reality can be postponed another 5 years, until after they’re retired and some new schmuck is stuck with the problem.