Q: Why are physical disc rentals so much cheaper than online video rentals when the cost of delivering online video is so much lower? (e.g. Redbox for $1/day vs. MSO VOD for around $4 or VUDU at similar price points)?
A: When you rent a DVD or Blu-ray disc the company you rent it from - Redbox or Blockbuster – has purchased a license to the movie. In effect, the company has purchased as many discs as they intend to rent out. So, for example, Redbox may buy 100,000 copies of “Mall Cop” and they make sure that no more than 100,000 copies are rented out at any given time. This means the company has to rent each “copy” of the movie out many times to recoup the cost of the DVD before they make a profit. The lower the cost of the rental the higher the turnover of the disc needs to be.
When you rent a movie online or from your MSO or iTunes, the movie studio shares in the rental revenue directly and controls the price at which that movie is offered. From a $5 movie rental the MSO may only get $1.50 while the movie studio gets $3.50. Of course, this doesn’t completely account for the large price difference. However, keep in mind that the movie studios earn huge revenues from physical disc sales. If a customer can easily rent a movie very cheaply on-demand, there is little incentive to buy the movie on disc. Hence, the studios set the price very high for digital rentals. Studio attitudes were clearly on display when Disney compared their revenue from rentals to that generated by DVD sales in a recent article in the Wall Street Journal. If you were earning a fifth of the revenue from a rental where would you place your emphasis?
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