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Universal's war on kiosks (updated with working links) - October 17, 2008

There's a real "Back to the Future" quality to Universal Studios' current campaign to force operators of DVD rental kiosks into rental "revenue-sharing" deals. For those familiar with the history of the home video business, it smacks of nothing so much as the studios' infamous efforts to strangle the video rental business in its crib 25 years ago. Then, as now, the studios were flummoxed by section 109(a) of the copyright law, the so-called first sale doctrine, which provides that "the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord." And then, as now, their response was to try to render the first sale doctrine moot by coercing retailers into bogus "licenses," so that no legal transfer of ownership in lawfully made copies occurred.

Some background: Over the past five years, video rental kiosks have grown significantly in popularity and ubiquity. The kiosks are increasingly common in supermarkets, mass merchant outlets, fast-food restaurants and other high-traffic retail areas. Most offer DVDs for around $1 a night, far less than the average in-store video rental of around $3.75. The kiosk operators can keep their prices low because they have little in the way of direct real-estate costs (they generally split the revenue generated by a kiosk with the host retailer) and have very low labor costs because the fully automated kiosks require no staffing once they're loaded with discs.

The largest operator in the U.S. is Redbox, a spin-off of McDonalds, which has about 12,000 kiosks in the field. Redbox purchases the DVDs it rents from two independent wholesalers, VPD and Ingram Video, which in turn purchase product from the studios.

In August, Redbox was presented with a new offer by Universal Studios Home Entertainment, which it was told it couldn't refuse: Stop buying Universal movies from VPD and Ingram, lease them directly from the studio and we'll split the revenue. And oh yeah, you can't have the movies until 45 days after every other retailer in America has them and you can't put more than 8 copies of any Universal movie in any one kiosk. If Redbox refused the new "terms," it was told, Universal would stop supplying movies to VPD and Ingram altogether so that Redbox could not purchase them.

That prompted Redbox to sue Universal, charging it with copyright abuse, anti-trust and interference with its contracts and business relationships. The complaint is here. The proposed revenue-sharing agreement is here.

You don't have to be a lawyer to see something fishy about Universal's proposed agreement. Most revenue-sharing deals are designed to increase the number of rental copies in the market on street date, to satisfy the maximum number of consumers and capture the maximum amount of revenue when demand for the title is at its peak. The Universal agreement is designed to do just the opposite: restrict supply and limit revenue.

Universal is hardly the only studio with a jaundiced view of Redbox. Executives at other studios will tell you they believe the presence of a dollar-a-night Redbox kiosk in the breezeway of a Wal-Mart store undercuts sales of new DVDs in that same store.

True or not--legal or not--the source of the studios' kiosk rage is obvious: they don't like Redbox's pricing strategy, and they don't like that Redbox has built an apparently successful business doing something the studios don't like, with "their" movies.

Which is another way of saying they do not like market forces. Redbox is self-evidently meeting a consumer demand for cheap, convenient, overnight rentals, just as video rental shops were manifestly filling consumer demand three decades ago.

Yet for all of Hollywood's famous elan for whipping up interest in its movies through hype and hoo-hah, the studios paradoxically have always exhibited a peculiar loathing of real consumer demand. Can anyone imagine GM or Ford telling Avis to stop buying their cars and renting them because too many people are renting them?

I have some thoughts on the origins of that strange paradox that I'll be addressing in a future post.
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