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11 September 2009 • 7:00 am

Blockbuster and Hollywood Threatened by Redbox

A Redbox kiosk outside a Walgreens. Peter Wynn Thompson for the New York Times

A Redbox kiosk outside a Walgreens. Peter Wynn Thompson for the New York Times

According to an article earlier this week in the New York Times, there will be 22,000 Redbox automated vending kiosks renting DVDs for a dollar a day by December. In the already crowded market for video rentals, Redbox and similar firms are occupying a niche between Blockbuster’s retails stores and Netflix’s rent-by-mail and nascent online streaming services.

With self-service machines, overhead is quite low. Not only do such retail stores as Walgreens, Wal-Mart, and McDonald’s welcome the foot traffic that the kiosks bring, but some are even subsidizing rentals – the article reports that Walgreens has discounts that essentially make the rentals free. So the business model combines the low overhead of Netflix (with no retail stores) with the convenience and spontaneity of any-time impulse rentals (sort of like Blockbuster). And Redbox supports the kiosks with a simple web site that enables its customers to locate machines, view the surprisingly extensive (yet limited) inventory of titles in each machine, and reserve movies online. Very low cost rentals, web-enabled browsing, same day rentals, convenient locations (movies can be returned at any kiosk, not just the one at which it was rented), in short, yet another new value proposition for video rentals.

The response to the rise of the rental kiosk industry from Hollywood and Blockbuster (the leading operator of retail DVD rental stores), is predictable. Hollywood is reeling. Once opposed to recorded movies in the home, Hollywood is now dependent on the revenue stream of selling DVDs. But people may be getting tired of buying new DVDs for an average of about $25 when option to rent is down to only a dollar a day. DVD sales were down over 13% during the first half of 2009, compared with the same period in 2008. And sales of used DVDs by Redbox (which focuses on new releases), may be cannibalizing sales of new DVDs. With hardline tactics that seem borrowed from the recorded music industry, three major Hollywood studios are the target of an antitrust suit by Redbox for refusing to sell DVDs to Redbox (and the other similar firms) for the first 28 days after their release.

Meanwhile, Blockbuster is reported to be ‘scrambling’ to introduce its own rental kiosks, apparently in much the same way that it scrambled to introduce its rent-by-mail response to Netflix. Some might charitably call Blockbuster’s strategy to be a ‘fast follower’ of industry innovations, but they continue to appear to be caught off-guard by each new innovation. Is ‘me-too’ a sustainable strategy? And remember, Blockbuster has recently been on the edge of bankruptcy.

I don’t have any great flash of insight to share with you about the increasing role of rental kiosks in this industry. But I am a fascinated spectator of this intense competition. With no vested interest in the outcome of any of the players, I still think that Blockbuster is toast, Redbox and other kiosk renters will enjoy a surge of profit until they, too, are rendered obsolete by a new technology, and Netflix has the most promising and forward-thinking strategy. I am still betting on Netflix. Do you agree?

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