Studio to distribute DVDs through service

Sony Pictures Home Entertainment has signed a $460 million, five-year deal to distribute its DVDs through Redbox, the operator of $1-per-night rental kiosks that other studios have accused of undermining DVD sales.

The deal, which became effective July 1, covers theatrical, direct-to-video and catalog titles in Redbox’s more than 17,000 kiosks nationwide. Although the deal places titles in Redbox kiosks on their standard release dates, Sony’s arrangement is limited to DVDs and does not include Blu-ray Discs.

“The agreement supports two of our overall business objectives — increasing the availability of our titles and eliminating a key source of previously viewed product in the marketplace,” SPHE president David Bishop said in a statement.

Bishop, who characterized the deal as a “copy depth licensing agreement,” declined to discuss terms of the deal. However, a Redbox filing with the Securities & Exchange Commission values the deal at $460 million over five years, through September 2014. Sony has an out clause that can be exercised in 2011.

The SEC filing also says that Redbox will take agreed-to minimums of theatrical and direct-to-video DVDs and that Sony titles “are expected to represent approximately19.9% percent of the total DVDs licensed and purchased by Redbox for 2009.” That will give Sony a significantly larger presence in Redbox kiosks than it commands in the broader rental channel. The studio’s overall rental market share was 13.9% in the first half of the year, according to Rentrak.

Studios have grappled with how to deal with Redbox, one of the few growing retailers of packaged media. In addition to its low-priced rentals, Redbox generates a large amount of used discs that end up being sold to consumers. According to many studio execs, this business plan serves to cannibalize new-DVD sales.

However, kiosks are driving growth in the rental industry. According to Rentrak, revenue from kiosk rentals was up more than 150% in the first half of the year. Overall rental revenue, including online and bricks-and-mortar retailers, grew 8% in the first half. By comparison, DVD sell-through was off more than 15%.

Bishop acknowledged that, from a studio perspective, a negative aspect of the kiosk business is that large amounts of kiosk product sometimes end up sold to consumers at a deep discount three to four weeks after street date. Sony’s Redbox deal does minimize the amount of inventory that can be sold as used.

Bishop also addressed the perception that cheap kiosk rentals cannibalize new DVD sales, citing Sony research that showed Redbox renters are not core DVD buyers. “I would prefer that all consumers buy our product rather than rent it,” Bishop said. However, he acknowledged that Redbox is a consumer-driven phenomenon that the studio would rather work with to its advantage than ignore.

All studios do not feel the same way.

Redbox and Universal are engaged in an ongoing antitrust lawsuit brought by Redbox after Universal allegedly insisted on a revenue-sharing agreement with the kiosk operator that, among other things, would create a vending window 45 days after the initial DVD release and restricts sales of used discs.

Follow @Variety on Twitter for breaking news, reviews and more