Redbox Playing Studio Hardball
5 Feb, 2015
By: Erik Gruenwedel
Home Media Magazine
http://www.homemediamagazine.com/rental/redbox-playing-studio-hardball-35184
Redbox has looked at the domestic box office and its dominant physical
media market position and has taken the gloves off. The days of throwing
money at studios for new release street-date availability are over. The
kiosk vendor wants distribution terms that it deems fair and reflect
market reality.
Galen Smith, CFO of Redbox parent company Outerwall, acknowledged
Redbox’s distribution agreement with Warner Home Video had ended without
a new one in place. As a result, Redbox is acquiring Warner titles
through alternative (i.e. retail) channels, according to the CFO.
Redbox, which is headed by former Warner executive Mark Horak, last year
extended existing distribution deals with Sony Pictures Home
Entertainment, Paramount Home Media Distribution and Universal Pictures
Home Entertainment, while signing a new agreement with Lionsgate.
“We continue to have good discussions with [Warner],” Smith said on the
Feb. 5 fiscal call. “It’s really about finding a contract that works
well for both parties and allows us to support the home entertainment
industry. We look forward to [working with them] under the right terms.”
Redbox is also facing a contract renewal this year with 20th Century Fox
Home Entertainment.
When asked if the agreement impasse with Warner was due to last year’s
price hike and the studio’s desire for higher per-unit fees, Smith
declined to give details other than to say any distribution agreement
would have to be fair and factor in the state of packaged media.
The CFO said studios with revenue-sharing agreements would actually
benefit from the price increase. He said Redbox is the second- or
third-largest buyer of packaged media content from studios.
“We are critically important, [and studios] are obviously critically
important to our business,” Smith said. “But what’s important is that
[an agreement has to be] something that works for both parties.
“We take a very contrarian view to the market overall in providing new
releases at a great value to our consumers, and we want to continue
doing that.”
Lower Revenue, Higher Margins
Meanwhile, Outerwall said Redbox’s price increase late last year
produced a bigger windfall than expected, helping to offset the
third-quarter’s weaker performance and secular decline in the physical
rental market.
Indeed, Redbox operating income increased about 9% to $121.3 million
from $111.3 million during the previous-year period. Operating margin
was 24.6% compared with 22.4% a year ago. The average rental transaction
increased to $2.72 from $2.58 during the previous-year period due in
part to the price hike and continued push toward higher-margin Blu-ray
Disc rentals.
Revenue was relatively flat at $494 million. Rental transactions
declined 10.7 million units to 181.3 million from 192 million units in
the year-over-year period. Same store (kiosk) sales decreased 1.3%
compared to an increase of 0.9% a year ago.
CFO Smith attributed the decline in rental transactions to three
factors: The underperformance of key movies and video game releases
early in Q4; moderately lower demand from price sensitive consumers
following the December price hikes; the ongoing secular decline in the
physical rental market.
Box Office Blues
Nearing the midpoint of the current first quarter, Smith said rental
demand was down reflecting Redbox’s yearlong downward projection for
2015. He attributed the decline to the price hike and expected lower box
office.
“We expect the number of box office titles releasing at Redbox in 2015
will decrease from 2014 as a result of the 16% decline in theatrical box
office in the second half of 2014,” he said, adding that high-frequency
rentals dipped 3% in the quarter.
Looking ahead, the CFO said current Q1 box office releases are 31% below
the same period a year ago with eight fewer theatrical titles released
in the quarter.
“We expect content strength to improve in Q2 as the Q2 2014 release
slate was particularly weak,” Galen said. “It’s really driven by content.”
The company is focusing on recent consumer initiative – Blu-ray Upsell –
intended to generate higher-margin BD rentals, in addition to consumer
loyalty program “Redbox Play Pass,” which rewards frequent renters with
free titles and has generated 1.5 million members in two months since
launch.
“While other companies have moved away from physical media, we believe
we are uniquely positioned to take advantage of the long tail of
physical rentals, despite the secular decline in DVDs,” Smith said.
Indeed, the CFO said that during the week of Dec. 29, Redbox had its
best rental week ever.
“It proves that when you have strong content, [it] will continue to
perform very well [at rental],” he said.
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