Redbox sues Universal over ‘anti-trust’ deal
UPDATE: Studio demands kiosk company wait 45 days to rent DVDs
By Danny King and Jennifer Netherby -- Video Business, 10/16/2008
OCT. 16 | Redbox is suing Universal Studios Home Entertainment, alleging that the studio violates anti-trust laws with an attempt to create a “vending rental window” 45 days after the standard DVD street date.
In the complaint, filed in U.S. District Court in Delaware on Oct. 10, Redbox claims that Universal presented the retailer with a “take it or leave it” revenue-sharing agreement that would shrink consumer choice by forcing Redbox to wait until 45 days after street date to rent Universal titles, limiting the number of copies of Universal titles Redbox kiosks could stock and requiring Redbox to destroy DVDs after their rental cycle instead of letting Redbox sell them as used product.
“Under the guise of a ‘Revenue Sharing Agreement,’ Defendants seek to eliminate the low-cost rental alternative for consumers,” the suit says. Redbox said that 60% of rental demand is satisfied in the first 45 days of a title’s release.
"They’ve done it for the whole kiosk business. We absolutely think what Redbox is doing is the right thing," said Charlie Piper, president and chief operating officer of DVDPlay, the No. 3 kiosk operator behind Redbox and TNR/Moviecube.
DVDPlay also has received the 45-day waiting period and the no-resale rules from Universal, which also distributes through VPD and Ingram.
"We plan on having Universal titles in our kiosks, and we won’t wait 45 days," Piper said. "We can buy off the street, just like any other customer."
The company hasn’t decided whether it will pursue legal action.
Redbox has built its business on $1 per night rentals. The company expects to have more than 12,000 kiosks in the market by the end of the year, each accounting for an average of 50 rental turns per day. To date, consumers have rented more than 200 million discs from Redbox kiosks.
About 15% of the discs rented or sold through Redbox are from Universal, according to Redbox spokeswoman Kristin Zanini.
No other studio has attempted to change the retailer’s distribution terms, she said.
In the complaint, Redbox said Universal said it will stop providing DVDs to wholesalers Video Product Distributors and Ingram Entertainment, which distribute discs to Redbox, on Dec. 1 if Redbox doesn’t sign the agreement.
Universal declined to comment on the lawsuit, which also names Universal City Studios, Universal City Studios Productions and Focus Features as defendants.
Redbox charges Universal with copyright misuse, two violations of the Sherman Anti-trust Act and interference with the retailer’s contractual relationships. Redbox is seeking “declaratory relief,” an injunction prohibiting Universal from limiting DVD supply to Redbox, monetary damages and court costs, according to the complaint.
Redbox said Universal first presented the proposed terms without warning when studio VPs Dick Longwell and Jamie Guzzaldo met with Redbox chief operating officer Mitch Lowe and other executives on Aug. 26 at Redbox’s Illinois headquarters.
In addition to its threat to stop selling DVDs to VPD and Ingram if Redbox does not sign the revenue-sharing agreement, Universal said it also would prohibit the wholesalers from providing any services to Redbox.
Kiosk retailers generally use distributors to remove the discs from their original DVD cases and package them for kiosks before shipping.
Ingram and VPD have indicated to Redbox that, even though they disapprove of Universal’s plan, “they would have no choice but to comply with the demand of a major studio,” the suit says.
Executives from Ingram and VPD were not available for comment.
No kiosk company currently uses revenue-sharing, sources said. One executive explained that it wouldn’t make sense for a studio to do a revenue-sharing deal with a kiosk company because the purpose of such a deal is to get more copies of a movie on shelves and boost rentals. As kiosks have limited shelf space, the upside for the studios is limited, the source said.
Under Universal’s proposed terms with Redbox, the retailer would pay a minimum upfront guarantee of $8 and then 40¢ per rental over the course of a 26-week revenue-sharing period. The studio would allow the retailer to carry no more than eight copies of a title per kiosk and would require that 100% of inactive rental inventory be destroyed, according to a term sheet included in the lawsuit.
Warner Home Video also requires retailers who use revenue-sharing to destroy 70% to 80% of used rental inventory on titles with more than $10 million in box-office gross, in an attempt to limit previously-viewed-copy sales.
The source said the real concern for studios is low kiosk rental pricing and sales of used rental discs, which are adding a glut of previously-viewed discs into the market.
Currently, when the rental period is over, kiosk companies send discs back to the distributor, where they are repackaged in their original DVD box and then resold as used. Redbox sells used discs for $7 beginning 12 days after street date.
Another source said the purpose of the revenue-sharing deal was to cut kiosks out of the rental business altogether by offering such an unpalatable deal that they would be forced to say no and the distributors would then be forced to stop selling to them.
“This is not about revenue-sharing,” the source said. “This is a smoke screen of offering them something.”
Universal does offer revenue-sharing through Rentrak to independent retailers on select releases, generally those with a smaller box office than Redbox carries in its kiosks. The studio allows retailers to sell revenue-shared discs as previously-viewed after 30 days on rental shelves.
Rental retailers that have lost market share to Redbox have not been the kiosk company's biggest fans, but some worry that if Universal is able to impose its terms on Redbox, it could set a dangerous precedent.
“My concern is that [Redbox is] almost treated differently than anyone else, and in reality, they’re in the same business all of us are,” said Todd Zaganiacz, owner of Video Zone in South Deerfield, Mass., and president of the National Entertainment Buying Group. “The concern is, if this passes, would a studio like Universal change terms with Rentrak to do the same thing for us?”
Charlie Piper, president and chief operating officer of DVDPlay, the No. 3 U.S. kiosk operator behind Redbox and TNR/Moviecube
