Redbox, which operates red, boxy-looking DVD rental kiosks, has filed suit (.PDF) against News Corp.’s 20th Century Fox.
Here’s how we got here:
- RedBox rents out DVDs for a dollar.
- News Corp (NWS) executives think that’s too cheap and that it’s undercutting Fox’s DVD sales.
- So Fox asked its distributors to wait 30 days before sending DVDs to Redbox.
- In its suit, Redbox says “Fox’s actions constitute copyright misuse, violate the antitrust laws and tortiously interfere with Redbox’s existing supply contracts with its distributors.”
Redbox has filed a similar suit (.PDF) against Universal Studios.
Pali Research’s Rich Greenfield — a huge Redbox bull who says the company’s revenues will grow 90% in 2009 — wonders if it would matter if Redbox loses the suits and has to buy Fox and Universal DVDs at retail prices.
The real question is does any of this matter? If Universal and now Fox are allowed to “window” Redbox and the vast majority of the studios follow suit, the most important question is does it matter. Redbox currently has 16% EBITDA margins with 46% of its kiosks less than a year old and 75% less than two years old. This implies that the margins on a mature Redbox (2-3 years old) are substantially higher than 16%. In turn, even if Redbox’s cost structure moves meaningfully higher (being forced to buy DVDs at retail and then putting them into their machines) due to the inconvenience of not having a direct supplier of DVDs, can Redbox continue to flourish (with a cost to install a kiosk at only $14,000-$15,000), albeit at lower margins/profits. Margins may also be affected down the road as growth slows, as the majority of a kiosks new release DVD end up being transferred to new kiosks to build inventory within the unit.
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