Paramount to give Redbox a spin

As the major Hollywood studios line up for and against Redbox, Paramount Pictures is playing it down the middle.

The studio, owned by Viacom Inc., has signed a first-of-its-kind trial deal guaranteeing that its titles will be available from the fast-growing $1-a-night DVD rental company through the end of the year. During that time, Paramount will study the effect of Redbox rentals on its total home-entertainment revenue, examining whether there is any decrease in the sales of its DVDs at Wal-Mart stores that house Redbox kiosks.

Under the terms of the agreement, Paramount will have the option at the end of the year to trigger a five-year deal with Redbox similar to ones recently struck with competitors Sony Pictures and Lionsgate. The estimated value of the agreement is $575 million -- substantially more than the $460 million that Redbox's parent company, Coinstar Inc., said it expected to pay Sony Pictures over a five-year period.

Redbox President Mitch Lowe said the main reason for the disparity is that Paramount movies have performed better at the box office this year. The Paramount deal also lasts four months longer, as it includes rentals for the rest of 2009.

Any Paramount agreement would give the studio a share of rental revenue, meaning it could earn more than $575 million if its movies prove popular. Sony and Lionsgate are selling their discs wholesale to Redbox.

Though it doesn't have a formal deal with the company, Walt Disney Studios allows its wholesalers to sell discs to Redbox as well.

Universal Pictures, 20th Century Fox and Warner Bros. have all attempted to prevent Redbox from offering their discs for at least 28 days after they launch. All three are defending themselves against lawsuits filed by the kiosk company as a result.

Studios opposed to letting Redbox offer their movies the day they go on sale have contended that $1-a-night rentals lower the perceived value of products that typically cost $15 to $25 to buy and $3 to $5 to rent. That's a blow, they say, to their bottom line at a time when DVD sales are down 13.5% compared with last year.

"There has been a lot of debate in the industry about the impact Redbox is having and will have, and we felt the best way to make a decision is by getting the information," said Paramount Vice Chairman Rob Moore. "Then we can make an informed decision based on what we will have learned over the next four months."

Guaranteed access to Paramount's movies was important for Redbox. The studio released two of this summer's most successful movies, "Transformers: Revenge of the Fallen" and "Star Trek," both of which are expected to be very popular when released on DVD in October and November, respectively.

Rental revenue could also provide a much-needed boost to the bottom line of Paramount, which recently had to delay the release of its high-profile movie "Shutter Island," starring Leonardo DiCaprio, until 2010 because of financial considerations.

Lowe said he was confident that providing detailed data to Paramount would help resolve the heated disputes in Hollywood about his company's effect on the entertainment business. Lowe has previously said his company's research found that DVD sales dropped less than 1% in stores that installed a Redbox kiosk.

"Many studios do their own analysis that we know is not as reliable and is aimed at coming to the answer they want to hear," he said. "We find that when we can form a relationship with a studio and share real data, it results in a positive step forward."

Moore said he hadn't reached any "definitive conclusions" as to what steps he would take if the data showed that Redbox rentals do in fact reduce overall revenue. If the studio attempts to impose a delay on kiosk rentals, as Fox, Warner and Universal have done, it will undoubtedly also find itself on the receiving end of a lawsuit.

But if it chooses to work with Redbox, Lowe estimated, Paramount will get more than 20% of the shelf space in his company's kiosks, which are expected to total 20,000 by the end of the year. Combined with the space guaranteed to Sony and Lionsgate, that means only about 50% of the approximately 700 slots in each kiosk will be available to the rest of Hollywood, which includes three of the most dominant studios.

"We still have room, but it's not infinite," Lowe said.

He did maintain, however, that despite the ongoing litigation, Redbox will be able to meet consumer demand for big upcoming releases from Warner, Fox and Universal such as "Harry Potter and the Half-Blood Prince" and "Ice Age: Dawn of the Dinosaurs."

In lieu of getting movies directly from those studios or their wholesalers, Redbox has been buying discs in bulk from retailers like Wal-Mart.


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