Redbox has Blockbuster seeing red

I ran across an interesting article in the USA Today on Wednesday.

I'm sure we've all seen those Redbox kiosks popping up in WalMarts, conveneience stores, and even McDonald's all over the country. What is interesting about this article is not the implication that Redbox is a potential game changer - that much is obvious - but rather this comment from Chase Carey, President of News Corp.

"Our (DVD) product rented at a dollar is grossly undervalued. It's a real issue. And we're actively determining how to deal with it."

What Mr. Carey is saying here is not fleshed out in the USA Today article - Carey thinks that a DVD rental ought to be worth more than $1 to the consumer. Most likely, Carey would hope that Redbox revert to Blockbusteresque prices of 4.99 for a 2 day New Release rental. Is this just a case of corporate greed, or is there a real "race to the bottom" being created?

A New DVD costs Blockbuster/Redbox/Netflix/etc. aproximately $18. Redbox can rent that DVD aproximately 15 times, and averages $2 a transaction (meaning that the average Redbox customer keeps the DVD for 2 days, and pays $1/day). That means that, absent other overhead costs, Redbox stands to make $12 per DVD in each machine. By the way, there are 22,000 Redbox kiosks, each offering aproximately 700 DVDs for rental, encompassing up to 200 titles.

And of course, Redbox manages to sell some DVDs to outlets once they have been rented 15 times, so there's a little more wiggle room in the numbers than a $12 figure implies.

Compare that to Blockbuster's lifecycle - $18 for a DVD, $4.95 per rental. If Blockbuster can rent that same DVD 15 times, at $4.95, they would make over $55 on the disc, plus whatever they could sell it for.

So it's clear where the motivation for Carey's comment above comes in - there's a much smaller pie for everybody to get a slice of in Redbox's world than in Blockbuster's world. And unsurprisingly, 20th Century Fox and Universal are both engaged in boycotts or lawsuits with Redbox, attempting to eliminate the competitor before it's too late.

But my Dad once told me that "Once you've paid 99 cents for a Big Mac, it's never worth more than 99 cents to you." I think that's true here: it's already embedded in the mind of the consumer that a DVD rental can cost as little as $1. If that's the case, it would behoove the rental industry to come up with new and creative ways to make a profit - like Netflix.