Rise of redbox

 
Aug. 19, 2007 | by Bill Yackey

This article originally published in Self-Service World magazine, Sep 2007.

For McDonald's customers, "dinner and a movie" has taken on a new meaning. Landing in McDonald's restaurants nationwide, the redbox automated DVD-rental kiosk, one of the most popular kiosk deployments of 2007, has found its niche. It offers fast-food customers the same convenience and low price point for movies that McDonald's offers for its food.

Redbox's popularity isn't from having the most kiosks deployed, but from consumer buzz — as evidenced by last month's Self-Service World survey of the Top 10 Hottest Deployments. Redbox topped out at No. 1, as voted by readers of this magazine.

But having the most kiosks deployed doesn't hurt.

With around 4,000 DVD-rental kiosk locations, redbox is the leader in the automated DVD-rental market, which also includes DVDPlay and The New Release (operators of the MovieCube kiosk). Redbox believes it will reach 6,000 locations by the end of 2007, tripling the number of locations the company had at the beginning of the year.

"Redbox is firing on all cylinders," said Rufus Connell, research director for information technology at Frost & Sullivan. "They have good hardware and software, good marketing and good partnerships for their deployment locations."

The redbox business model is simple: Each kiosk carries about 500 DVDs, all of them recently released flicks. Redbox says the selection process is part art and part science. Large and medium box office films automatically make the cut, while a purchasing team selects lesser-known titles based on customers' perceived interest.

Customers select their movies using a touchscreen and swipe a credit or debit card for payment. Each movie costs $1 per night to rent; if the movie isn't returned, charges cease after 25 days and the customer owns the movie.

"The $1 rental is its biggest appeal, although the average customer ends up keeping it for longer than one night," said Gregg Kaplan, CEO of redbox. Kaplan said the average rental time is a little more than two nights, but only a small percentage of people keep DVDs past the 25-day mark.

To return a movie, a customer inserts the DVD back into the kiosk, hopefully right-side up. (The DVD cartridge reads, "There is no special reward for putting the DVD back in the case the right way, but you'll be a better person for it!") Rented DVDs can be returned to any redbox kiosk nationwide, a trait that is unique to redbox, Kaplan said.

The model seems to be working. Redbox went from 93,000 rentals in 2003 to 21 million rentals in 2006. The company recently surpassed 50 million rentals.

Redbox takes advantage of its history with McDonald's Corp., which gives it access to its pick of McDonald's locations.
Redboxes are found in McDonald's restaurants and in numerous grocery store chains, including Giant Food stores, Albertson's and Wegman's.

Of burgers and boxes

Redbox is the brainchild of McDonald's Corp. and was launched in 2001 as a concept of McDonald's new business development department. Kaplan has been there since the beginning.

"At the time, McDonald's was looking for long-term growth opportunities and ways to grow their core competencies," Kaplan said. "They were also looking for a worldwide project outside of the food sector."

Kaplan said McDonald's was poised to produce a new service outside of food for several reasons. First, he said the company is world-class at replicating a system of delivering products to customers, as represented by the growth of its franchises over the years.

Second, the chain is excellent at picking real estate and it knows where to place restaurants to draw the most traffic.

"The McDonald's locations we're in typically have ample parking, are located in busy areas and the restaurant draws customers with great-tasting meals and snacks," said Greg Waring, vice president of marketing for redbox.

Finally, Kaplan said McDonald's specializes in operating its service under a brand name, proven by cultural recognition of the Golden Arches, and now the redbox name.

The concept for redbox was based on self-service robotic vending machines that dispense high-end products such as cell phones and iPods. When designing the concept, Kaplan's business-development team also followed several macro trends they saw in the customer-service industry.

For instance, the team noted that automated self-service was becoming more prominent, mainly because of the convenience factor. It also noticed that people liked to use kiosks because they could be in control of their transactions.

"We also saw that consumers like to use machines in high-traffic locations that operate under one brand," Kaplan said.

"The result was a redbox brand that is generic enough that it can be used not only at McDonald's for DVD rental but could eventually become representative of financial kiosks or for ticketing kiosks at travel centers," he said.

Redbox broke away from McDonald's in 2006. Kaplan said McDonald's was convinced the DVD-rental industry would be bigger than what McDonald's restaurants wanted to handle and that it might be a distraction to its core business.

But McDonald's didn't completely set redbox adrift. McDonald's Ventures LLC, a wholly owned subsidiary of McDonald's Corp., still owns about 47 percent of redbox Automated Retail LLC.

Another 47 percent of redbox is owned by Coinstar Inc., makers of the green self-service coin-counting kiosks found in many grocery stores. The remaining percentage is owned by investors of a tech company redbox acquired.

"Redbox's association with Coinstar has given it credibility," said Francie Mendelsohn, president of Summit Research Associates, a self-service industry research firm. "The partnership gave it entré with supermarkets around the country." Giant Food Stores is one of those supermarkets. The chain operates 186 stores in the mid-Atlantic states and is known for self-service initiatives such as self-checkout and self-service floral and seafood departments. Giant began deploying redbox kiosks in March 2006.

"The customer response to the redbox kiosks has been very positive," said Jamie Miller, public affairs manager for Giant Food Stores. "At this point, over 80 percent of our stores have deployed a redbox."

To date, grocery stores and McDonald's restaurants have proven to be the most effective locations for redbox, but that was not without careful planning. The first market test for redbox took place in Denver in 2002 with 10 kiosks. Now, Kaplan said, redbox has as many as 12 market tests going on at any one time, all studying the kiosks' effectiveness.

"It's gone beyond intuition. There is a great deal of analysis and measuring to find the optimal place to put these kiosks," Kaplan said.

The online advantage

Redbox competes in a market that includes brick-and-mortar stores such as Blockbuster or Movie Gallery and also in the online rental venue with sites such as Netflix, which deliver DVDs through the mail.

Tamara Mendelsohn, a senior analyst for Forrester Research, said, "redbox is part of a new set of players that is emerging and putting pressure on traditional merchants to enhance their customer and brand experiences and come up with more innovative ways to tie their channels together — be it stores, Web, mobile, etc."

"It has never been part of redbox's strategic goals to knock out retail stores." — Gregg Kaplan, CEO, redbox
Blockbuster has proven this theory by launching its Total Access program, a concept similar to Netflix but that allows customers to return and exchange movies at Blockbuster stores.

Redbox also offers online rental. On its Web site, which echoes the graphical user interface of its kiosks, users can search for the nearest redbox location and the availability of titles at that particular kiosk (made possible by real-time inventory updates), and reserve the movie for later pick-up.

"One of the reasons kiosks are gaining popularity is because of this online reservation," Kaplan said. "People were showing up at the movie stores only to find that their title isn't there."

A little help from friends

Google "redbox" and you will find Web sites such as redboxcodes.com, insideredbox.com and redboxfriends.com. These sites are not affiliated with redbox, but they aren't scam sites, either. In fact, redboxfriends.com really is a friend of redbox.

These third-party sites promote themselves as news and information sites for redbox kiosks, telling users about new and upcoming releases and hosting blogs. Redboxfriends.com even acts as a social networking site that allows members to upload pictures and chat within groups based on redbox movie titles.

The sites' main purpose, however, is to share promotional codes that give users free rentals. Redbox gives promotional codes to store managers and employees at redbox locations as an incentive to begin renting from the machine. Kaplan said the codes the Web sites share usually are leaked by store employees.

But where most companies would see these sites as undermining their business, redbox calls it "leveraging enthusiasm." Redbox gives out codes for free rentals, too — in exchange for the customer's e-mail address the first time he uses the machine.

"The codes are designed to give new customers a chance to use redbox," Kaplan said. The free rental is only for one night, and, again, since the average customer keeps the movie longer than one night, Kaplan thinks the $1 trade-off is well worth it.

The future of the rental industry

Just as music media evolved, moving in recent decades from the cassette tape to the CD and now to MP3, movie media has shifted from VHS to DVD and now is on the cusp of its next step. That step will determine what lies in the future for redbox and other players in the DVD-rental industry.

Some industry analysts believe Blu-Ray discs will be the next big thing in the DVD sector, beating out HD-DVDs in a VHS-or-Beta-style battle for consumer acceptance. Redbox hasn't decided how it may stock Blu-Ray or HD-DVD. "When consumer adoption of one or both of them begins to really accelerate, we will start to consider the decision, but not yet," Kaplan said.

Aside from DVD technology, another question persists: What effect will redbox and other automated rental kiosks have on the revenue of brick-and-mortar stores? Redbox carries only new releases and, although Blockbuster didn't comment on what percentage of its revenue comes from new releases, Kaplan predicts it to be about 85 percent to 90 percent.

But maybe the Blockbusters of the world shouldn't worry.

"It has never been part of redbox's strategic goals to knock out retail stores," Kaplan said. "We just concentrate on great service for our customers and getting them to come back."

Or, maybe they should.


Topics: DVD Kiosks , Entertainment & Gaming , Self-Service World Magazine


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