Redbox 2010 Annual Report Download - page 13

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network and syndicated television. Increasingly, however, major studios have experimented with compressing
the window between DVD and video-on-demand release or with releasing movies in each channel
simultaneously. Additionally, in some cases, major studios have staggered releases of DVDs such that a movie
might be less available for rental until as much as 28 days after the DVD becomes available for purchase at a
retail outlet.
However, certain movie studios have changed or are changing and other movie studios could change their
practices, including shortening or discontinuing altogether, or otherwise restricting, movie distribution windows,
including simultaneous video-on-demand/digital downloads/online streaming and DVD releases or making
video-on-demand/digital downloads/online streaming available prior to DVD release. For example, certain movie
studios have made new release titles available on video-on-demand or for online purchase on the same date as the
DVD release, and that certain movies will be made available via premium video-on-demand while they are still
in theaters. Further, certain studios have implemented or announced their intention to implement policies to
lengthen the time that certain video retailers, including those providing movies on physical formats, must wait
before renting movies following their initial release on DVD to retailers. For example, our Redbox subsidiary has
entered into arrangements with Warner Home Video, Universal Studios and 20th Century Fox that include
delayed rental windows. Entering into these studio licensing arrangements that contain a delayed rental window
may decrease consumer satisfaction and consumer demand, and we may lose consumers to our competitors that
offer DVD titles without a delayed rental window. Any of these developments could have a material adverse
effect on our business, financial condition and results of operations. For example, we believe that the 28-day
delayed rental window of certain of our DVD titles during the holiday season negatively impacted our fourth
quarter 2010 rental and financial results.
If we do not manage our DVD inventory effectively, our business, financial condition and results of
operations could be materially and adversely affected.
A critical element of our DVD Services business model is to optimize our inventory of DVD titles, formats, and
copy depth to achieve satisfactory availability rates to meet consumer demand while also maximizing margins. If
we do not timely acquire sufficient DVD titles, due to, for example, not correctly anticipating demand,
intentionally acquiring fewer copies than needed to fully satisfy demand or the lack of available titles, we may
not appropriately satisfy consumer demand, which could decrease consumer satisfaction and we could lose
consumers to competitors. Conversely, if we attempt to mitigate this risk and acquire a larger number of copies to
achieve higher availability rates for select titles or a wider range of titles, our inventory utilization would become
less efficient and our margins for DVD Services would be adversely affected. Our ability to accurately predict
consumer demand as well as market factors, such as our ability to obtain satisfactory distribution arrangements,
may impact our ability to timely acquire appropriate quantities of certain DVD titles. In addition, if we are unable
to obtain or maintain favorable terms from our suppliers with respect to such matters as timely movie access,
copy depth, formats and product destruction, among others, or if the price of DVDs increases or decreases
generally or for certain titles, our inventories may become unbalanced and our margins may be adversely
affected. For example, we believe that in the fourth quarter of 2010, we purchased too many copies of DVDs for
our kiosks, and removed older titles too early, negatively impacting our revenues and gross margins. Further, the
delay in our ability to rent certain studios’ DVD titles pursuant to a delayed rental window may negatively affect
consumer satisfaction and demand, and we could lose consumers to our competitors because of the timing of our
inventory. In addition, if we are unable to comply with, or lack the necessary internal controls to ensure
appropriate documentation and tracking of DVD inventory, we may, among other things, violate certain of our
studio licensing arrangements, be forced to pay a fee for unaccounted for DVDs and be susceptible to risks of
theft and misuse of property, any of which may negatively affect our margins in the DVD Services business. Any
of these developments could have a material adverse effect on our business, financial condition and results of
operations.
For example, we have entered into licensing agreements with Sony, Lionsgate, and Paramount. Under these
agreements, the studios agreed to provide delivery of their DVDs by the “street date,” the first date on which the
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