What's the REDBOX flap really about?

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redboxWell, money, of course.  Here’s the background:

Redbox is a company that provides $1 DVD rentals through kiosks set up in local supermarkets and other convenient locations.  You’ve probably seen the large red kiosks standing next to the Coinstar machines, lottery ticket vending machines, and Rug-Doctor rental stands.

Redbox purchases the DVDs it sells through the same channels that other rental stores, and DVD retailers do.  They pay the same prices for the DVDs, then places them in the kiosks.

Some movie studios have objected to Redbox’s business model, and adopted policies that stop allowing distributors to sell DVDs to the company.  It seems that they’re pressing for a revenue-share model, where they’d receive a portion of each rental, which they’d insist be priced higher than the current $1.00 charged at the kiosks.

These studios feel that the availability of $1.00 DVD rentals undermines their ability to sell DVDs directly to consumers, and “cheapens” the perceived value of the movies.

The problem is, these studios are fighting an uphill battle.  Under copyright law, the “first sale doctrine” allows the purchaser of a legal copy of a copyright protected work, to do anything with the physical object embodying the work short of copying it.  So, what Redbox is doing is, for the moment, legal.  In fact, it’s the foundation on which the entire Movie-rental business, one of Hollywood’s most important revenue streams, is built.  In 2007, the case of NEBG, LLC v. Weinstein Company Holdings, LLC, 2007 WL 1454460 (D. Mass. May 18, 2007) addressed DVD rentals specifically, holding in favor of such rental arrangements.

Interestingly, Section 109 of the Copyright Act, which codifies the First Sale Doctrine, specifically carves out exceptions for c0mputer software and phonorecords.    Will DVD rentals be the next exclusion?  Not likely, since it’s such a big business, and a cash cow for the industry….

Another possible approach to the problem, from the studios’ point of view would be to switch from a “sale” to a “licensing” model… but again, with an established, mature business, switching to a new paradigm promises to be anything but a simple matter.

So,  can the studios simply refuse to sell to Redbox?  Maybe.  But, doing so might expose them to antitrust liability under the Clayton (15 U.S.C. Sections 12-27, and 29 U.S.C. Sections 52-53)  and/or Sherman Acts (15 U.S.C. Sections 1-7)

Redbox has sued Warner Bros, Universal and 20th Century Fox over their recent restrictions, and  the cases have, so far, survived early dismissal motions by the studios.

This promises to be an interesting set of cases, with long-ranging impact… But the big question is whether the courts will decide the matter before the DVD sale/rental business whithers on the vine in the face of on-demand cable, satellite and internet delivery of movies.

Stay tuned.

8 Responses to What's the REDBOX flap really about?

    • I really don’t know, Redbox’s plans, Sam. I’d say there are some significant legal hurdles they’d have to overcome. Here in the U.S., our copyright law recognizes a “First Sale Doctrine”, (similar to the concept of “Exhaustion” in Patent law… UK law may differ in ways that would make it harder to operate kiosks like Redbox’s there.

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