The $1 DVD rental debate: LA group says Redbox will lose movie makers $1B

We know many Hollywood studios view Redbox $1 DVD rental kiosks as a problem that must be kept in check. A recent report from the Los Angeles Economic Development Corporation (LAEDC) says those rental kiosks could represent a billion dollar drain on Hollywood's revenues.

The report, entitled "The Economic Implications of Low-Cost DVD Rentals" (PDF available here) characterizes those red boxes as pockmarks on the face of a sickened home video industry.

LAEDC, which is led by Bill Allen, alum of CBS Television and MTM Productions (you may recall its sweet logo), says that $1 rentals cannibalize DVD sales, lower the perceived value of DVD movies, and cause conflicts with other retail channels.

Based on market records and estimates, LAEDC predicts these three factors will have a snowball effect on the industry. For each billion in home video revenue, the motion picture industry earns $250 million, which translates into $1.5 billion in economic output, according to the group. Therefore, if a billion in revenue is lost, LAEDC predicts catastrophic after-effects, including a loss of 9,280 jobs with earnings totaling $395 million, a decrease of $35.4 million in contributions to health and welfare funds for guild members, and $30 million in lost tax revenue.

"Of the 9,280 jobs, almost half will occur in the Information sector. In addition to motion picture sound and recording industries, this sector includes publishing industries, radio and television broadcasting, telecommunications industries, and Internet service providers," the study says.

The majority of the 27-page report is report is dedicated to drawing a parallel between $1 DVD rentals and a corresponding decrease in the retail sales of DVDs. But most of the information is speculation based upon what the group admits are "limited" data sets, and calls its estimation "problematic" because "the dynamic feedback between [the rental and retail] markets makes estimation especially difficult."

Furthermore, it says, "Foregone revenues from low-cost new release DVD rentals may be hard to distinguish from other transformational shifts in the industry, such as...the current delivery of content through Internet providers...[and] households opting for other forms of entertainments, such as gaming and social networking."

Indeed, even in LAEDC's methodology, it says it cannot reliably predict a title's sales and rental balance. For example, the retail cost of a DVD may be cut due to the title's poor box office performance; but the lower cost can actually improve the title's sales beyond expectations, so why couldn't the same be done with rentals? It is conceivable that a cheaper rental price may stand to increase the consumption of a title which otherwise lacked buzz and would have performed poorly.

Even if singularly, a cheap rental draws one more consumer away from a DVD purchase -- as LAEDC contests that rentals do -- collectively, cheap rentals have drawn more consumers to titles they may have otherwise have avoided.

Redbox told Betanews that it has already proven this to be true. "The recent film Management starring Jennifer Aniston performed better at Redbox than it did at the box office," the company's representatives told us today. In this case, its kiosks actually served as a growth engine for Hollywood.

The company added, "Redbox promotes Hollywood titles to more than 200 million people that pass by the Redbox locations each week, driving increased awareness and viewership."

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