Redbox 2013 Annual Report Download - page 14

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with Walmart is governed by contracts that provide either party the right to terminate the contracts in their entirety, or as to any
store serviced by the contracts, with or without cause, on as little as 90 days’ notice. Cancellation, adverse renegotiation of or
other changes to these relationships could seriously harm our business and reputation.
Our business also depends on our ability to obtain adequate content from movie studios and video game publishers. We have
entered into licensing agreements with certain studios to provide delivery of their DVDs by the “street date,” the first date on
which 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 other studios that make DVDs available for rent 28 days after the street date.
If we are unable to maintain or renew our current relationships to obtain movie or video game content on acceptable terms, our
business, financial condition and results of operations may suffer.
Our inability to receive delivery of DVDs on the date of their initial release to the general public, or shortly thereafter,
for home entertainment viewing could adversely affect our Redbox business.
Traditionally, businesses that rented movies in physical formats, such as DVDs, had enjoyed a competitive advantage over
other movie distribution rental channels. After the initial theatrical release of a movie, the major studios generally had made
their movies available on physical formats for a 30- to 45-day release window before release to other movie distribution rental
channels, such as pay-per view, video-on-demand, premium television, basic cable, and network and syndicated television.
However, in recent years, 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
making video-on-demand or other digital delivery methods available prior to or simultaneous with the physical 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 certain movies have been made available via premium video-on-demand while they are still
in theaters. Further, some studios have implemented restrictions on renting DVDs for weeks following the initial release of the
same title for purchase. For example, Redbox has entered into arrangements with certain studios 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. In addition, studios may seek to impose longer delays, or studios that currently provide content on street date
may seek similar delays. 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 content library effectively, our business, financial condition and results of operations could be
materially and adversely affected.
A critical element of our Redbox business model is to optimize our library 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 library 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 library 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 library. In
addition, if we are unable to comply with, or lack the necessary internal controls to ensure appropriate documentation and
tracking of our content library, 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