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Comment by mlazos | Hacker News Reader

So how does RedBox actually sell the code for such a discount and make profit? Is it because when they buy the physical copy they essentially get two copies? (One physical and one digital) and then they rent the physical one and make profit from that?

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I'm not convinced any of the replies to your question really answered it, so I'll add my own:

Redbox rents out DVDs/Blurays from physical kiosks. Normally they buy the discs straight from the studios (or whoever the studios go through). As a fallback, they'll literally buy them from Walmart or whoever, which I'm pretty sure is how they originally started before they were big enough to get the deals going. They still don't have a deal with Disney, so they buy them at retail from some unnamed vendor.

Disney retail movies come with a download code for digital copies, which Redbox has no use for, so they sell that code for cheap and everyone wins (besides Disney). They could literally throw the code away and still profit.

Does that help? You were basically on target.

Yeah this makes it seem even weirder that Disney is obsessing over the codes, it isn’t like RedBox is price gouging and making a huge profit off of their work. It isn’t even their main line of revenue.

Disney is upset because it "cheapens" the Disney movies. Why buy the expensive codes elsewhere (bundled with physical copies you may or may not want) when you can get them from Redbox on the cheap?

Exactly, Disney goes to great lengths to keep their main DVDs at premium pricing, including putting them out of print every so often, then re-releasing them later with some newly remastered nonsense.

Let's assume redbox buys a single bluray for $20, and there's rental demand for each movie for 1 year. If variable cost = $1/physical disc per month, then redbox profit per disc would be something like:

P = (# of rentals * $1) - $32

where $32 = the $20 disc cost + monthly var cost

If redbox rents the movie once per week, their per disc annual profit is $20

But, if redbox can now sell the virtual download code for $8 online (essentially $0 variable cost for holding digital inventory), and digital sales has little impact on physical rentals, then the equation would be:

P = (# of rentals * $1) - $32 + $8

With annual profit per disc in the 1x/wk rental case now $28, or a 40% gross margin increase. All #s are just napkin math/assumptions, but it's easy to see the benefit here for redbox.

You didn't need to go through all that maths.

The easy answer is "they get more money if they sell the code as well as the disc, instead of just selling the disc".

All I could think when I read that response was "thanks, but you're not Tyler Durden"

The license on the Bluray and DVDs that RedBox buys (Rental Licensed) typically require paying out royalties from the rental fee. As with all royalties, these are negotiated, but I have heard from people who ran their own DVD rental store fronts (when that was still a thing) that they could be as much as $5 per rental on.

Also the disk is usually a LOT more expensive (up to $100 for a new blockbuster release). DVD store fronts were already so low margin, it didn't take much disruption before they started to go under.

I was under impression that those direct deals with distributors are better deals for RedBox than buying discs in retail. Because if they don't get a good deal, they can always buy discs in retail for $20-ish something, and have no restrictions on renting or resaling them, and with no royalties or fees, because of "first sale doctrine".

Yes, but then they only get them once they are on general retail sale, and so don't get the newest (to-rental) movies. They pay more when they have an agreement, but the theory is they make it back from increased rentals (because people can't just buy themselves a copy at the supermarket, and enough people are lazy enough to spend a bit more so they don't have to return it).

As the story points out, Redbox don't have an agreement with Disney, and so buy their discs at retail price. It does mean they don't get the new blockbusters (which is why they have deals with other studios), but the costs above are reflective of their costs in this case. If they had a contract with Disney, they would get the block busters (at a higher price), but wouldn't get the digital codes (which are the subject of this case).

So, the answer to the question is yes?

Yes, the answer is yes. In fact, Disney movies, like many others in the US, often come in a multi-pack with a Blu-ray, DVD, and a digital code. They can sell the digital code while renting out both the Blu-ray and DVD. Then after a while, sell off those used discs as well once demand goes down (they don't usually sell them all, but they obviously want to reduce inventory in line with a lower demand over time)

Yes. Essentially they get digital download code for free, so they can sell it for whatever amount they feel.

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