Summary
1. Sony Pictures has signed a multiyear deal to supply Redbox's (NASDAQ: CSTR) video rental kiosks. 2. Deal minimizes sell-thru of used Sony DVDs, while maximizing Sony non-theatrical titles.
Analysis
In the first such deal of its kind Sony Pictures Home Entertainment signed a $460 million, five-year deal effective 1 July, to distribute its DVDs to Redbox. The agreement covers theatrical releases, direct-to-video releases and library titles. The arrangement places Sony DVDs in Redbox kiosks on their standard release date, plus the deal will minimize the sell-thru of used DVDs due to the studio allowing easy access to large numbers of copyrighted discs.
This deal is Redbox’s first affront to the first-sale-doctrine: After several weeks in circulation Redbox typically sells the DVDs as used. Redbox is able to employ this model due to a loophole in the copyright law called the first-sale-doctrine which allows the purchaser to transfer (i.e., sell, rent or give away) a particular lawfully made copy of the copyrighted work without permission of the copyright holder once the lawfully made copy has been obtained.
A Redbox filing with the Securities and Exchange Commission concerning the Sony agreement indicates that Redbox will take predetermined minimums of theatrical and direct-to-video DVDs. Furthermore, Sony titles are expected to represent approximately 19.9% of the total DVD’s licensed by Redbox in 2009. This is a win for Sony as its overall rental market share was 13.9% in the first half of this year. The SEC filing also states that Redbox values the deal at $460 million over the five-year agreement (through September 2014). However, Sony does hold the right to exit the agreement in 2011.
David Bishop, The President of Sony Pictures Home Entertainment, has stated, “The agreement supports two of our overall business objectives - increasing the availability of our titles and eliminating a key source of previously viewed product in the marketplace.” Sony has accredited large amounts of deeply discounted DVDs, sold three, four or five weeks after release, to goods that were originally rented from kiosks.
Interestingly, at Redbox’s current growth rate it could be the largest volume rental service by the end of the year or not long after. Redbox is currently renting out DVDs at a rate of 7.5 million a week compared to the current market leader, Netflix, which ships out just over 10 million movies a week.
James Meyers consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
