Redbox & DVD Sales

DVD producers (movie studios) are facing a challenge in the sales of DVD's. DVD's can be purchased for ownership or rented to customers. Rentals traditionally took place at video stores such as Blockbuster. Now DVD's can be rented at a Redbox kiosk - which is basically a vending machine for renting DVD's - at a significantly lower price ($1 per day) than DVD rental stores. Also movies can be rented "on-demand" usually in the $5 price range.

The dilemma movie studio's face is that selling DVD's to Redbox may be cannabalizing the purchase of DVD's or the "on-demand" DVD market. If movie studios (20th Century Fox, Warner Bros. & Universal) refuse to sell DVD's until about a month waiting period this may be an anti-trust violation. If they do not, Redbox rentals may reduce revenues from customer's purchases or choosing the "on-demand" option. Additionally, Redbox can re-sell the DVD's in the used DVD market, reducing some sales revenue if Redbox is able to purchase the DVD's originally at whole sale prices.

Some movie studios (Paramount) are pursueing revenue-sharing and both Sony and Paramount have negotiated that Redbox destroy the DVD's as opposed to Redbox re-selling them in the used DVD market.

This all gets back to two fundamental issues in the market. One is the actions of downstream firms in substitute selling channels, which is a secondary problem for movie studios. The other - and in my opinion the most important is the lack of effort movie studios devote to raising customer satisfaction with DVD sales. Charging significantly higher prices above marginal costs leads to increases in counter-feiting and other illegal responses by consumers. Making consumers waste time at the start of the DVD by not allowing customers to skip the ads is not increasing customer satisfaction.

Redbox on the other hand is rather customer friendly. You can reserve your DVD on-line. You can return it at any Redbox, and they are located in places many people frequent - grocery stores, pharamacies, retail outlets, as opposed to dedicated stores usually in strip malls, that may not be as frequent with customers shopping patterns.