Redbox Wars

The Redbox Wars

As I sit here and think about our study this week of two major principles (supply and demand) that drive our market economies in the US and globally, I couldn’t help but also think about how these principles are the underlying factors in some recent legal woes in the DVD industry, particularly for newcomer, Redbox.
Redbox Automated Retail, LLC, is a wholly-owned subsidiary of Coinstar, Inc. and offers new release DVD rentals through its network of conveniently located, self-service kiosks.   Redbox is available at select McDonald’s restaurants, leading grocery and convenience stores, and Wal-Mart and Walgreens locations in select markets.  Each fully automated Redbox kiosk holds approximately 500 DVDs, representing up to 200 of the newest movie releases. Consumers simply use a touch screen to select their favorite movies, swipe a valid credit or debit card and go. Customers can keep the DVD for as long as they’d like for an affordable price (usually $1/day), and return it to any one of Redbox’s more than 17,000 locations nationwide.   Redbox recently rented its half billionth DVD.  That milestone comes only five years after Redbox first debuted with 12 kiosks in Denver.  Today, Redbox is in forty-eight states and has millions of customers.
Redbox’s research showed that the demand for DVDs, especially new releases, was very elastic, indicating that they could very well lower the price of DVD rentals and still generate significant revenue.   (see Demand, Elasticity, and Total Revenue Graph 1 below)
The problem is that Redbox’s rapid and phenomenal success and increasing market share in the DVD rental business has made many of the movie production companies that supply Redbox with movies to start to wonder if Redbox’s low rental price is causing them to lose revenue on DVD purchases.
                                                                    |

Some of them began to blame rental companies like Redbox and Netflix for the inelastic...