Why is Redbox so much cheaper than Amazon and iTunes?

Last night, I rented “Waiting for ‘Superman’” from a Redbox kiosk near my house. This was my first Redbox experience.

I would normally just wait for it on Netflix Streaming, but I wanted to see the movie right now since it’s relevant to stuff I’ve been writing and discussing a lot lately. A friend had mentioned Redbox, and I had to go to the store anyway, so I checked to see if Amazon or iTunes could compete with the $1 Redbox price.

I ended up going with Redbox because I didn’t want to pay the premium being charged for rental by both Amazon Instant Video and iTunes.  Here’s the breakdown:

Redbox – $1.06
Amazon – $3.99 (276% more than Redbox)
iTunes – $4.99 (371% more than Redbox)

What’s interesting is that it would seem that renting physical media would be more difficult and expensive than renting digital media. Someone has to service the kiosks, the physical media can be lost, stolen or damaged, etc. The rental terms are very similar – a 24-hour rental is standard. So why is it so much more expensive to rent from Amazon and iTunes than Redbox?

There could be a few things at work here:

  1. A convenience premium. I chose Redbox because I decided it was worth the relative inconvenience of using a kiosk to save $3.93 over Amazon. My decision was easier because I was already going to the grocery store and the Redbox kiosk was directly on my way home from the store (I knew this thanks to the Redbox iPhone app – good job Redbox). Had I not already been going out, I may have chosen to pay the Amazon premium instead.
  2. Price skimming. Online video streaming is becoming mainstream, but it isn’t yet ubiquitous. I would guess that the demographic who is most likely to rent a movie from Amazon or iTunes (the pseudo-early adopters) has more disposable income and may be more willing to part with the extra couple bucks. To wit, the technology required to stream instant video (at minimum a PC with a broadband connection, or an Xbox 360, PS3, Wii, TiVo, iOS device, Android device, etc.) is much more expensive than a standard DVD player.
  3. Non-obvious operating costs for online content providers. Although I cited kiosk maintenance and the risk of lost, stolen or damaged media as potential cost drivers for Redbox, Amazon and iTunes may have different operating costs to worry about. They have servers to host the content, digital media licensing fees, the cost of upstream bandwidth necessary to stream video, etc. Those costs could actually be greater than the costs that Redbox faces for maintaining its kiosks.

What else could be behind the steep premium for renting movies online?