The $1 DVD Rental Kiosk

Redbox movie kiosks, which stock DVDs that rent for $1 a day, are popping up by the thousands in supermarkets, drugstores, restaurants and convenience stores.

For all the talk about movie-watching on the Internet, Wi-Fi and cell phones wiping out the corner Blockbuster, a ubiquitous vending machine the size of a refrigerator has Hollywood worried.

Consumers are pulling DVDs out of Redbox kiosks in record numbers, undermining longtime economics that have propped up the movie business and triggering a backlash from a major studio that has sought to cut off Redbox's supply of new DVDs.

"We have grown at a phenomenal pace over the last six years, and that growth is continuing, even in the midst of the recession," said Gregg Kaplan, chief executive of Redbox Automated Retail.

Redbox operates nearly 12,900 kiosks throughout the United States — four times as many locations as Blockbuster Inc. — and plans to introduce 7,100 more by the end of the year. Each machine holds as many as 700 DVDs and 200 movie titles.

Consumers rent a DVD from the machine using an ATM or credit card. A typical kiosk can earn about $50,000 annually in revenue per machine in operation after three years.

Blockbuster started rolling out its own DVD-vending kiosks last summer and is testing $1-a-night rentals at 600 stores, with plans to roll out the new pricing to 4,000 outlets.

The discount DVD-rental business worries movie studios because they fear it is undercutting DVD sales, which dropped 13 percent in the fourth quarter, according to analysts.

In recent years, DVD sales have been the means for studios to earn a profit on movies, as ticket sales have barely offset production and marketing costs. Some studios say consumers will forgo buying DVDs if they have a cheap rental option.

Last year, Universal Studios sought to withhold DVDs from Redbox until 45 days after release to prevent competition with sales. When Redbox rejected the deal, Universal ordered wholesalers to cut off supplies. Redbox then sued Universal, alleging restraint of trade.

Universal says it has the right to direct wholesalers to conform with its marketing plans and determine when a motion picture will be available to the public.

In the early part of the decade, when DVD sales were booming, Hollywood paid little attention to Redbox. The company was owned by fast-food giant McDonald's Corp.

Market testing by McDonald's in 2004 showed that consumers were willing to use the machines as a cheap and quick alternative to the video store.

By the end of 2005, Redbox reported that it was renting more than a million DVDs a month out of 1,200 locations.

"It's a regularity of traffic, and the biggest single place people are going after the supermarket is to their homes," Redbox's Kaplan said. "Consumers tend not to rent DVDs when they're not going home."

McDonald's ultimately sold control of Redbox to Coinstar Inc., which recently announced that it would acquire full interest.

Coinstar does not disclose earnings for Redbox. But its automated DVD-rental business, which includes the smaller DVDXpress kiosk operation, reported operating income of $73 million on revenue of $388.5 million in 2008. The company expects sales to nearly double this year to between $690 million and $750 million.