Why Don’t Online Movie Rental Companies Do the Same Thing?

Riddle me this Batman. If Redbox can offer DVD rentals from Kiosks for $1 per movie, then why can’t online download services offer movies for overnight rental for the same $1?

The answer isn’t quite so obvious. Redbox does two things very well.

First, they offer consumers an incredibly easy way to rent the most popular movies. They are the path of least resistance for movie consumption for many. You run by your 7-11, grocery store, whatever. There are the movies and they are only a dollar. Easy and breazy. You watch your movie on your TV.

Second, they do something for the movie industry that for the most part only Netflix also does. They pay minimum guarantees with no returns. In other words, a movie distributor can take an order from Redbox for say 500k units at $10 a DVD, with no returns and no resale of the DVD into the aftermarket. Redbox will actually destroy the DVDs. That’s a quick and easy $5,000,000 in hassle free revenue. With the emphasis on hassle free. From the studio perspective, that’s $5mm in net margin that doesn’t require the overhead and actual costs of distribution and returns, along with the opportunity to spend less on marketing and advertising to promote the title. Redbox takes care of all of that.

Doing business with Redbox, despite the fact that it can negatively impact retail DVD sales can be good business for some movie distributors. Particularly for bigger movies. The brilliance of RedBox is that they reduce the revenue risk and increase the revenue for every title they take. That’s hard for any studio to walk away from.

Which begs the question of why don’t online movie rental companies do the same thing? As I mentioned, Netflix (NASDAQ:NFLX) is the ONLY company with an online offering that offers material minimum guarantees for movie titles. Everyone else offering online sales and rentals does so on a consignment basis. They put no cash upfront. They don’t reduce the risk for movie studios, they actually increase the risk. The big box retailers place an order for an actual number of titles, and then they do everything they can , along with the studio’s help to sell those titles. Online does nothing. They tell you that if you get lucky and it sells, you get paid. Whats worse, some of them will try to charge you to promote the titles. So you could actually owe them money for ads they place, and still not sell or rent any titles.

Which leads to the paradox.

Why don’t any of the pure online rental or sale companies offer the minimum guarantees that would allow them to be the Redbox of the online world?

If anyone wanted to come in to the space and beat the hell out of Amazon (NASDAQ:AMZN), ITunes and every other “leading” movie and tv show download for sale or rental site, it would be expensive, but it would be easy. Go to the leading movie studios and production/distribution companies and offer them some big guarantees in exchange for online exclusivity. Content would disappear from the other sites and run to the new site faster than they could cash the check. The same could apply to Youtube and Hulu as well.

In these uncertain times, the certainty of money in the bank vs the absolute uncertainty of selling or renting content on consignment is of incredible value to studios and production companies. As is the certainty of money in the bank vs the uncertainty of advertising revenue around content is a powerful aphrodisiac. Its an amazing opportunity for someone with cash to turn the industry upside down. They could even take it one step further and create output deals that lock up the EXCLUSIVE online exploitations of movie and tv content at the time its being released. The money paid could be based on box office revenues for movies and ratings and longetivity for TV shows.

So why hasnt an existing pure online vendor stepped up and made the commitment? Because they aren’t very good at selling or renting content. Walmart knows how to sell DVDs. Best Buy (NYSE:BBY) knows how to sell DVDs. Blockbuster (NYSE:BBI) knows how to rent and sell DVDs. Netflix knows how to “rent” DVDs. Redbox knows how to rent DVDs. They all make commitments to product. Online vendors will only buy on consignment. To me that means they have no idea how to monetize content. Amazon, Itunes, Hulu, Youtube all know how to aggregate huge volumes of content and create volume in total. None know how to monetize specific titles like their offline competitors do. Netflix is the only company in the aggregation business with the ability and brains to offer guarantees, but they have the foundation of their subscription business to carry them. They also have the risk of a huge infrastructure that could hold them back.

The first pure online company to come along that can demonstrate a reliable ability to monetize content online and can offer guarantees, will turn the industry upside down. Just as Redbox has done.

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About Mark Cuban 144 Articles

Mark Cuban is the owner of the Dallas Mavericks basketball team, billionaire internet entrepreneur, and chairman and owner of the high definition television channel HDNet.

Mark made business history when at the age of 32 he sold his computer consulting firm MicroSolutions to corporate giant CompuServe and became fabulously wealthy overnight. Cuban later did the same with yet another enterprise, the live streaming Internet operation Broadcast.com, and sold it to Yahoo! for a record breaking price that pushed his own net worth into the billions.

He publishes his own blog at Blog Maverick where he speaks freely about basketball, technology, business, and the Internet.

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4 Comments on Why Don’t Online Movie Rental Companies Do the Same Thing?

  1. Interesting article and agree with some of the points; however I would like to see the studios maintain a digital library of their content and have an aggregate site that facilitates drop-shipping this content to the TV. The studio would receive the bulk of the charge with the aggregate site picking up a few pennies per transaction (and the cost of maintaining the aggregate site would be minimal as it would be an indexing site of video content).

    Guess I just don’t get the full picture.

  2. Redbox is popular with consumers because they can get the movie they want easily without waiting for cheap. If you’re talking about shipping a physical DVD, though, you’re talking about at least 1-2 days wait for the DVD, versus the 20 seconds it takes for Redbox to spit the DVD out. Then there’s the issue of shipping costs, online credit card fraud, and the fact that any single DVD is more likely to be in the mail than in your customer’s hands.

    Online isn’t everything. Local/physical will always win for some things.

  3. I have not used Redbox but have used both Roku and TiVo extensively. As an end-user I would like to send all physical copies of media I purchased over the years and convert those to digital. And use a media player to stream that content back to me. Any new purchases would add to my digital library. Also I can subscribe to content on a per-view basis or monthly “all you can consume” plan. My previous comment meant to indicate that the content library may reside at the studios who are in the business of distributing.

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