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Movie Studios See A Threat In Growth Of Redbox

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http://www.nytimes.com/2009/09/07/business...mp;ref=business

In 1982, just as the VHS tape was taking off, a “Star Wars†buff named Mitch Lowe had a radical idea. What about building a vending machine that could rent movies? He called his invention Video Droid.

It failed. People were not yet comfortable using credit cards for casual transactions, the tapes broke easily and the technology involved with manipulating their bulk proved too expensive.

But Mr. Lowe did not give up, and his moment seems to have finally come.

Mr. Lowe, 56, is now the president of Redbox, a fast-growing company in Illinois that rents movies for $1 a day via kiosks. By December, there will be 22,000 Redbox machines in spots like supermarkets, Wal-Mart Stores and fast-food restaurants.

Redbox’s growth — it started with 12 kiosks in 2004 and now processes about 80 transactions a second on Friday nights — has Hollywood’s blood boiling. Furious about a potential cannibalization of DVD sales and a broader price devaluation of their product, three studios (20th Century Fox, Warner Brothers and Universal) are refusing to sell DVDs to Redbox until at least 28 days after they arrive in stores.

Redbox is suing them on antitrust grounds. Leery of waging their own battles, two other studios, Sony Pictures and Paramount Pictures, have signed distribution deals with the vending company. Walt Disney permits third-party distributors to sell to Redbox but has so far shunned a direct relationship.

Redbox and its vending rivals now have 19 percent of the rental market, compared with 36 percent for rent-by-mail services (Netflix) and 45 percent for traditional stores, according to the NPD Group, a market research company. NPD estimates that vending will grow to a 30 percent share by the end of next year, at the expense of traditional stores.

Studios, aware that consumers are unlikely to pity their plight and muzzled by the lawsuits, are keeping quiet. Fox, Universal, Warner and Disney each declined to comment for this article. But Hollywood’s powerful public relations machinery is in motion behind the scenes to connect the news media with a group that is equally threatened by Redbox but much more relatable: mom and pop rental store owners.

“These machines are to the video industry what the Internet was to the music business — disaster,†said Ted Engen, president of the Video Buyers Group, a trade organization for 1,700 local rental stores.

Mr. Engen is enlisting lawmakers to attack Redbox for renting R-rated movies to underage viewers — the machines simply ask customers to confirm that they are 18 or older by pressing a button — and trying to rally the Screen Actors Guild and other unions.

“It’s going to kill the industry,†said Gary Cook, business manager for UA Local 78, which represents studio plumbers.

Mr. Lowe, meanwhile, is portraying the studios as greedy giants scheming to trample the little guy. “Don’t let a few movie studios prevent you from seeing the latest DVDs for an affordable price,†reads a headline on a new Redbox Web site, savelowcostdvds.com.

Redbox, formerly owned by McDonald’s and now part of Coinstar, is only the biggest of a host of DVD vending companies. DVDPlay, whose kiosks are also red, has been aggressive in California, while MovieCube is big in Canada.

Blockbuster is scrambling to introduce its own rental kiosks. There are now about 500 Blockbuster Express machines, and plans call for 2,500 more by the end of the year; the company expects to open 7,000 in 2010, a spokesman said.

The kiosk boom is fed by several consumer and business currents, all related to the recession.

For starters, the dismal economy has made people think twice about buying DVDs, especially as the likes of Redbox have made renting easier. Consumers are also tiring of the clutter: The average American household with a DVD player now has a library of 70 DVDs, according to Adams Media Research.

Over all, DVD sales are down 13.5 percent for the first half of 2009 compared to the first half of 2008, according to the Digital Entertainment Group, a trade organization. Studios say some new titles are selling 25 percent fewer copies than expected. Rental revenue is up about 8 percent over the same period, according to the group.

Retailers, struggling to keep people shopping, have realized that having a DVD kiosk in a store creates foot traffic, making it easier for companies like Redbox to sign wide-ranging installation agreements. Some partners, like Walgreens, have offered discounts that essentially make rentals free.

Hollywood upset because it's been over pricing movies for years, a correction in price is inevitable.

£1 a movie seems a right to me, they might even tackle piracy at those prices.

However it's more important to protect the inflated costs so this could be an interesting case to watch.

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