Welcome to Lowpass! This week: A deep dive on the state of Redbox, which is facing numerous lawsuits over unpaid bills.

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Unplugged kiosks, unpaid bills: Inside Redbox’s rapid decline 

“We still exist. Thanks for asking.” The bio of Redbox’s X account may have been intended as a cheeky response to naysayers doubting that DVD rentals are still a thing. These days, however, the word “still” is doing a lot of work.

Ever since Redbox got acquired in mid-2022, the number of its iconic red kiosks in front of supermarkets and convenience stores declined by at least 8000, or roughly a quarter of its total footprint. Its parent company Chicken Soup for the Soul Entertainment is facing a massive cash crunch that has made it impossible to buy new movies for its remaining kiosks.

The company stopped paying many of its bills around the time of its acquisition, resulting in a wave of lawsuits from retailers, content providers and other business partners. It faces a delisting from the NASDAQ stock exchange, and its financial disclosures paint the dire picture of a worsening financial situation that is starting to look more and more like a death spiral.

A Chicken Soup for the Soul Entertainment spokesperson declined to comment when contacted for this story.

Redbox’s writing has long been on the wall. With video viewing transitioning to streaming, it was inevitable that Redbox would ultimately have to give up on its DVD rental kiosks. The company prepared for that transition by launching its own streaming service, while executives pledged to maintain the Redbox rental business for many more years. 

Those plans look more doubtful by the day. Just in the past few months, Redbox has been sued by a number of former partners, including NBCUniversal, which in its February lawsuit alleged that Redbox stopped paying royalties for both physical discs and digital rentals in June of 2022. The studio contends in its lawsuit that it is owed $16.7 million in royalties and interest payments.

Redbox and its corporate parent are also facing lawsuits from 828 Media Capital, which financed a Redbox-produced Western movie, and film distributor Bungalow Media. The company has also been sued by its financial advisor, the investment bank that facilitated the Redbox deal, a streaming content provider, a staffing agency, a cyber security vendor, the marketing agency it used for close to 20 years, as well as departments of labor and tax collectors in multiple states, among others. (Many of these lawsuits haven’t been previously reported.)

But perhaps the biggest immediate threat are disputes with retailers that have been hosting the company’s DVD rental kiosks. Pharmacy chain CVS claimed in a lawsuit filed last month that it hasn’t received any payments for commission fees from thousands of Redbox kiosks at its pharmacies since 2022, and is owed $424,000 in back payments.

When CVS realized that chances for repayments were slim (the chain called Chicken Soup’s financial filings “concerning” in its lawsuit), it canceled its contract with Redbox and asked the company to pull all of its kiosks from the chain’s stores by the end of 2023. Redbox allegedly did not, forcing CVS to scramble and remove at least one kiosk itself from a store that was being closed and prepared to be turned over to its landlord.

Redbox kiosks did reportedly disappear from Publix supermarkets last year, but the company nonetheless filed a creditor lawsuit in January. 

Illinois retail chain Sheetz alleged in a lawsuit filed at the end of last month that it hasn’t been paid any money for Redbox kiosks at its stores since the end of 2022. According to that lawsuit, Redbox has been sending over quarterly commission statements, but not any payments. When Sheetz confronted a Redbox representative about the missing checks, he responded that the company was “aware of the non-payment,” according to an email included in the legal filing. The Redbox rep added: “Leadership within the parent company have been developing a plan to resolve the cash flow issues. My hope is this will be resolved soon.”

Instead, the cash crunch got worse. Chicken Soup for the Soul Entertainment, which also operates Crackle and a number of other online video ventures, acquired Redbox for $375 million in 2022, which included a $50 million all-stock payment, as well as the assumption of $325 million of debt.

At the time, the two companies celebrated the deal as a way to combine physical and digital, with Chicken Soup for the Soul Entertainment CEO Bill Rouhana predicting that Redbox’s business would rebound after the end of a pandemic-related industry-wide slowdown. He even told Indiewire that his company could become “the next Disney.”

The company’s financial disclosures paint a very different picture. Redbox was operating 36,000 kiosks at the time of the acquisition. By late last year, that number had shrunk to 28,000, and they weren’t making the company nearly enough money. “Operating results have not met management’s expectations, particularly Redbox’s kiosk rentals, resulting in insufficient cash flows and working capital to operate the business efficiently,” it acknowledged in its Q3 earnings report.

That cash crunch, and the company’s inability to secure a $40 million loan, only made things worse for Redbox and its corporate parent: The company “was unable to pay for all the movies that were offered to it by its providers,” according to the Q3 report. Or, as a Redbox user put it on the company’s Facebook page: “We haven’t had any new movies for a long time.”

No cash means no new movies means fewer rentals means even less cash: The aforementioned CVS lawsuit shows a vicious cycle in effect, with commission fees from rented movies at the company’s stores declining from around $112,000 in Q4 of 2022 to just $50,000 in Q4 of 2023. (Those fees remained unpaid regardless, according to the lawsuit.)

Redbox had a falling-out with 7-Eleven as well. Redbox kiosks remain at many 7-Eleven locations, but have been unplugged, with the credit card slots taped shut. Speaking under the condition that I not name them in this story, a Redbox employee told me that the reason for Redbox not hauling away those unused kiosks is likely connected to its inability to pay for the removal.

Chicken Soup for the Soul Entertainment acknowledged in its most recent filing that its dire cash situation has had an impact on many parts of its day-to-day operations. Again, from the Q3 filing: “The company’s capital resources continued to worsen. [...] As a result of its diminished capital position, in the fourth quarter, the company has received an increasing number of termination and/or non-renewal notices from content suppliers and other service providers, including receiving default notices under certain of its leases (offices, distribution facility, and its car fleet).”

Chicken Soup in the hole. Taking a closer look at the numbers in Chicken Soup for the Soul Entertainment’s most recent financial filings can be dizzying. Back in May, Chicken Soup told investors that it would generate $500 million in revenue in 2023, thanks largely to DVD rentals picking back up. During the first nine months of the year, its actual revenue was just $255 million, while its losses ballooned to more than $536 million. The company’s jaw-dropping deficit at the end of September: $783 million.

A good chunk of those 2023 losses were due to an impairment charge, with Chicken Soup writing off around $230 million on the Redbox assets on its books in Q3. While this is a one-time charge, it also shows how much of a miscalculation the Redbox acquisition was: After taking on $350 million in debt as part of the acquisition of the DVD rental chain, Chicken Soup put the value of Redbox’s IP, technology and customer relationships at below $35 million at the end of Q3.

Chicken Soup for the Soul Entertainment’s share price, which surpassed $42 in June of 2021, currently lingers at around $0.15 – too little for NASDAQ’s taste. The stock exchange has repeatedly warned the company that it faces a delisting.

All the while, Chicken Soup for the Soul Entertainment has seen many key executives leave over the past few months. Following the departure of former Redbox CEO Galen Smith in December of 2022, the company also lost its President, Chief Innovation Officer, Chief Legal Officer, Chief Content Officer and Chief Operating Officer, according to their respective Linkedin profiles.

Operating a DVD rental business in 2024 is clearly a challenging proposition, and Redbox was saddled with debt even before it got acquired. Still, many current and former Redbox employees are taking to Glassdoor and social media to blame its new parent company for the DVD service’s downfall.

Here’s how the aforementioned anonymous Redbox employee put it: “It was a great company until Chicken Soup got the Soul.”

What else

The DOJ is suing Apple. Multiple reports suggest that the Department of Justice is ready to pull the trigger on a lawsuit against Apple over App Store terms and fees.

Sony has reportedly paused VR headset production. The company is said to be looking to get rid of existing inventory before making more PSVR2 headsets.

Twitch discontinues Prime Video watch parties. Once hailed as the next big thing for streaming services, co-viewing seems to be falling out of favor.

Sonos Voice Control finally gets Spotify support. Two years after the launch of the Sonos voice assistant, and perhaps just in time for he launch of its headphones, Sonos devices are gaining support for voice-controlled Spotify playback.

This may or may not be Meta’s next VR headset. A since-deleted Reddit post showed leaked marketing material featuring a headset dubbed the Meta Quest 3s. Its authenticity has been questioned, but Meta does have plans to release a cheaper Quest later this year.

Spotify alleges Apple is blocking its app updates. The music service has told the European commission that Apple hasn’t approved an app update featuring alternative payment methods, despite new EU rules.

New sports streamer appoints Pete Distad as CEO. Distad previously worked for Hulu and Apple before taking on the leadership role at the joint venture between Disney, Fox and Warner Bros. Discovery.

Everything Epic Games announced at GDC. A good summary of Epic’s 2024 “State of Unreal” keynote presentation.

That’s it

Okay, I’ll admit it. I’m not in love with Netflix’s new hit show “The Gentlemen,” but I’m watching it anyway. What should I stream instead? Send some suggestions by responding to this email!

Thanks for reading, have a great weekend!

Image of the Redbox DVD courtesy of (CC-BY) Flickr user m01229.