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Sony, Redbox sign $460 million distribution agreement

By Marcy Magiera -- Video Business,07/21/2009

JULY 21 | PHYSICAL: Sony Pictures Home Entertainment signed a $460 million, five-year deal to distribute its DVDs to Redbox, the $1 per night rental kiosk operator that other studios have accused of undermining DVD sales.

The deal, believed to be the first such relationship forged with Redbox by a major studio, was effective July 1. It covers theatrical, direct-to-video and catalog titles in Redbox’s more than 17,000 kiosks nationwide.

“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,” SPHE president David Bishop said.

Bishop declined to discuss terms of the deal, but a Redbox filing with the Securities & Exchange Commission values the deal at $460 million over five years, through September 2014. Sony has an out clause that can be exercised in 2011.

Bishop characterized the deal as a “copy depth licensing agreement.”

The SEC filing says that Redbox will take agreed-to minimums of theatrical and direct-to-video DVDs and that Sony titles “are expected to represent approximately 19.9% percent of the total DVDs licensed and purchased by Redbox for 2009.” That will give Sony a significantly larger presence in Redbox kiosks than it commands in the broader rental channel. The studio’s overall rental market share was 13.9% in the first half of the year, according to Rentrak.

The deal is limited to DVD and does not include Blu-ray Discs.

Studios have grappled with how to deal with Redbox, one of the only growing retailers of packaged media, because of its low-priced rentals and the large amount of used discs it generates that end up being sold to consumers, both of which many execs believe cannibalize sales of new DVDs.

Kiosks are driving growth in the rental industry, however, with revenue from kiosk rentals up more than 150% in the first half of the year, according to Rentrak. Overall rental revenue, including online and bricks-and-mortar retailers, grew 8% in the first half. DVD sell-through, by comparison, was off more than 15%.

Bishop acknowledged that one of the negative aspects of the kiosk business from a studio perspective is that large amounts of product from kiosks sometimes end up sold to consumers at a deep discount three to four weeks after street date. Sony’s Redbox deal does minimize the amount of inventory that can be sold as used.

Bishop also addressed the perception that cheap kiosk rentals cannibalize new DVD sales, citing Sony research that showed Redbox renters are not core DVD buyers.

“I would prefer that all consumers buy our product rather than rent it,” he said, but added that Redbox is a consumer-driven phenomenon that the studio would rather work with to its advantage than ignore.

All studios do not feel the same way.

Redbox and Universal are engaged in an ongoing antitrust lawsuit brought by Redbox after Universal allegedly insisted on a revenue-sharing agreement with the kiosk operator that, among other things, would create a vending window 45 days after the initial DVD release and restricts sales of used discs.

Sony’s deal places DVDs in Redbox kiosks at their standard release date.

“Redbox is thrilled to build on our positive relationship with Sony Pictures Home Entertainment and to provide our consumers with increased access to their favorite titles,” Redbox president Mitch Lowe said in a statement.

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