Redbox 2011 Annual Report Download - page 14

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 the Redbox business 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 Redbox 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 certain studios to provide delivery of their DVDs
by the “street date,” the first date on which the DVD releases are available to the general public for home
entertainment purposes on either a rental or sell-through basis. In addition, we have licensing arrangements with
certain studios that make DVDs available for rent 28 days or more after the street date. Our business, financial
condition and results of operations could be materially and adversely affected if these agreements do not provide
the expected benefits to us. For example, these agreements require us to license minimum quantities of theatrical
and direct-to-video DVDs for rental at our kiosks. If the titles or format provided are not attractive to our
consumers, we will be required to purchase too many copies of undesirable titles or an undesirable format,
possibly in substantial amounts, which could adversely affect our Redbox business by decreasing consumer
demand for offered DVD titles and consumer satisfaction with our services or negatively impacting margins. If
studios that do not have a delayed rental window elect to delay the general release of DVDs to the rental market
for significant periods after they are released for retail sales, demand for rental of these titles may be adversely
affected. If consumers choose to rent these DVD titles from our competitors, purchase the DVD titles rather than
rent from us, or find our DVD title selection unbalanced or unappealing, our business, operating results and
financial condition could be materially and adversely affected. In addition, we have incurred, and may continue
to incur, additional non-cash increases to operating expenses, which are amortized over the terms of any such
arrangements, that also could have a dilutive impact on our stockholders, such as the issuance of equity under
certain of our existing studio contracts or to the extent we enter into similar arrangements with other movie
studios in the future. Further, if some or all of these agreements prove beneficial but are early terminated, we
could be negatively impacted. Moreover, if we cannot maintain similar arrangements in the future with these or
other studios or distributors, or these arrangements do not provide the expected benefits to us, our business could
suffer.
Litigation, arbitration, mediation, regulatory actions, investigations or other legal proceedings could result
in material rulings, decisions, settlements, fines, penalties or publicity that could adversely affect our
business, financial condition and results of operations.
Our business has in the past been, and may in the future continue to be, party to class actions, regulatory actions,
investigations, arbitration, mediation and other legal proceedings. The outcome of such proceedings is often
difficult to assess or quantify. Plaintiffs, regulatory bodies or other parties may seek very large or indeterminate
amounts of money from us or substantial restrictions on our business activities, and the results, including the
magnitude, of lawsuits, actions, settlements, decisions and investigations may remain unknown for substantial
periods of time. The cost to defend, settle or otherwise finalize lawsuits, regulatory actions, investigations,
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