The Continuing Saga of the "Kiosk Wars"

The studios have hated movie rental, some more than others, since losing their efforts to repeal the First Sale Doctrine in 1984, which essentially allowed retailers to rent movies on VHS (and later, other formats) without paying any royalties to the studios. In home entertainment during the mid-late 80’s and early-mid 90’s, the studios maximized their profit by creating a two-tier system of initially releasing high-priced rental titles on cassettes with suggested retail prices of $90, which were then eventually reduced to sell-through price points of $30 nine months later for sale to the consumer. Due to the onset of lower-cost DVD, in 1996 the studios began to revenue-share with Blockbuster, Hollywood Video, and Movie Gallery, and they have continued to do so ever since. Brick-and-mortar rental revenues have steadily declined, especially with the explosion of the kiosk industry, which had never revenue shared with the studios over the years. This inability to participate in the new rental revenue stream, combined with a strong belief by most studios that the sale of used inventory (and some even believed kiosk rental) cannibalized the new sales of their product, are at the core of this industry dispute.

 

Two interesting developments have recently occurred in these “kiosk wars”. The attempt by Warner to impose the previously kiosk-only month long delay window on Netflix (and Blockbuster’s Total Access) is intended to leverage a revenue sharing deal with that studio, which would then allow the online rentailer(s) to continue to get the product on the same release date as the rest of the industry.

 

The other wrinkle is in the Paramount agreement, in which the studio is testing revenue-sharing with Redbox for a four-month trial period, with a heavy emphasis on providing detailed rental transactions data. This will be the first insight into the nagging question over the last few years of “Is it possible to rev-share at a buck-a-day ?”, even though the phrase in that question is a misnomer, because it is widely known that all kiosk operators’ average transaction value is significantly over $2.00.

 

To clarify an earlier point raised by GLG Educator Alex Mendoza in a related article on this subject, the combined market share of the four studios that are still releasing their product to the kiosk business model on the industry-wide street date equates to about 55%. Redbox and the other kiosk operators will continue to buy the other three studios’ A-titles “sideways” and make them available for rent by the important first Friday after street date. While the major theatrical, “must-have” A-titles will continue to indirectly purchased, the kiosk operators will under no circumstances buy those respective studios’ very important (and many monthly) direct-to-DVD releases, their distributed lines or television product, nor their “work titles” – the very same product that the other studios through their agreements have locked up for years to come. Redbox and the others will buy from these three studios only what they absolutely need to have, and nothing more, adding merely another 20% - 25% to that market share. Those discretionary dollars in the monthly open-to-buy to fill in the remaining gap will translate into new opportunities for independent suppliers.  

 

VOD and digital downloading will continue to grow for the studios, gradually but consistently; the platforms will just not achieve mainstream penetration for several years to come. According to Rentrak’s OnDemand Essentials service, “consumers made a record 476 million free on-demand transactions during July, as video-on-demand viewing hit a new record, with transactions up 19% during the month compared to the previous year, and music-related content accounting for 31% of the free units”. Note the emphasis on “free”, the same powerful lure of Netflix streaming and Hulu viewing. It begs the question of how these models will hold up when they inevitably begin to charge for their services, and how much, if at all, they cannibalize packaged media in the near foreseeable future.

 

According to a new report by Adams Media Research, Redbox, Blockbuster Express, e-Play, The New Release, and DVD Play are expected to generate $830 million in total rental revenue through about 25,500 kiosks in 2009, a 70% increase from 2008. AMR said kiosk rental revenue would increase 15% annually through 2013. The keys to the success of the business model lay in its two primary demographic groups : either “the captive audience” (e.g., military bases, large apartment and office complexes, colleges and universities, etc.), or “the customer coming back to that same location every other day or so, anyway” (e.g., grocery, fast-food, convenience stores, etc.).

 

The studios, some who “get it” more than others, need to understand that rental will always, always exist. Most people want to see the overwhelming majority of movies they watch once, and then move on to the next one. That doesn’t mean they don’t want to own and collect their favorite films, but they only do so because of either repeatability or pride of ownership. The natural maturation of the format and our present economic malaise are the main reasons for declining DVD sales, not the proliferation of kiosks. Not coincidently, rental is up 8% over last year. Often lost in the noise of the “kiosk wars” is the fact that with its consumer-friendly pricing, customers very often take more than one movie and even more frequently try films they normally wouldn’t, contributing to that rental spike.

 

Estimates for the future growth of the kiosk universe range from a low of 60,000 to a high of 90,000 units. They will continue to prosper as consumers have clearly and enthusiastically adopted this business model, and the most visionary studios already understand that they must proactively embrace rental, and specifically the kiosks, even if begrudgingly.