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Redbox: The future of the movie machine

Redbox global strategyBy Jones Dias, Abhinav Kant, Vamsi Kothapalli, Kristal Nicholson, Filippo Sclafani and Pankaj Tamrakar

As recently as four years ago, almost no one would have been aware of what the word Redbox meant. Today, Americans have become devoted customers of this rising star of the impulse DVD rental industry. But will the fun and ease of Redbox’s unique impulse proposition last through the next decade? Do advances in technology, with an ever-changing array of readily available options, such as downloads or streaming, mean that the days of the Redbox are numbered?

The discussion seems to vary as to which strategy Redbox needs to take in order to continue to thrive in the rental business. Coinstar (Redbox’ parent) CEO Paul Davis, expressing his ideas in a recent conference call, considers streaming a “significant opportunity” while maintaining that he foresees a “long, profitable life ahead” for Redbox’s movie-machine kiosk business.

Fate has it that the CEO of subsidiary Redbox, Mitch Lowe, also co-founded Netflix. He too foresees a transition to digital media, and would like the company to take advantage of it, even when the disk business “is still very strong and will continue to be for some time.” But what makes Redbox so strong? After all, the former McDonald’s Venture was able to swiftly and quietly become a Blue Ocean champion of the impulse DVD rental segment.

In spite of its amazing current strength, Redbox faces dire predictions that it won’t continue to thrive through the near future that consider that the number of people willing to take time to leave their homes to rent a DVD, albeit at a lower price, is dwindling in the streaming age. Our interviews of Redbox users lend some support to this theory: “Why go out of my house if I can watch the movie I want at any time”, a college student says. Another revealed: “Sometimes I have thought about renting from Redbox, but when there are lines in front of the box I just think it’s not worth the wait.” But is this a paradigm shift in the rental business, and is Redbox doomed to watch its Blue Ocean impulse strategy evaporate?

Gary Cohen, Senior VP of marketing and customer experience at Redbox, and another serial internet entrepreneur at Redbox, tells a deeper story: “We fulfill a really interesting need. We provide a strong, immediate gratification… hard to beat. We’re significantly less costly than Blockbuster…(and) provide a lot more immediacy than Netflix.” 1

In fact, consumers love Redbox. In a recent American Marketing Association publication, Redbox proudly attained one of the highest imaginable Net Promoter Scores at 85, the percentage of people likely (rating 9 or 10) to recommend less the percentage of detractors (rating 1to 6). 2   It creates a value-added proposition for the consumer, who with the same amount of time and gas, can pick up a movie with the groceries. For the wide variety of fast-food, drug and convenience stores and supermarkets that now house Redboxes, they create both a source of revenue and customer traffic.

Cohen confirms other Redbox strengths within its core market: “There’s a lot of technology behind Redbox, (but we) want it to be simple for the consumer. Here’s the movie you want. Go ahead and take it home right now.” 3    Unique rapid-replace distribution, growth in dual-box systems, and long-term partnerships with the most ubiquitous and long-lasting American chain stores, libraries and colleges nearly guarantee the long, profitable life Davis predicts, through the instantaneous, everywhere ‘movie-machine’ availability no other provider yet has.

Redbox has grown so quickly and continues to prosper even as Video On Demand services have become available across the country because of these synergic competencies and unique value proposition. It faces tomorrow’s challenges with long-term Internet age expertise from the long list of internet media providers in management’s past history, much as a boxer draws from previous matches. Seven-year-old Redbox always tries to “find the uniqueness (of the product) and drive the message home”. 3    The kind of value that Redbox can deliver to its customers makes it successful, and that is clearly independent of pricy innovations in delivery technology.

The proactive steps that Redbox needs to take in order to continue to be a leader in DVD rentals develop its core strengths and build on its unique value-added proposition to customers. How it plans to face the challenge of substitution from the expansion of entertainment products and streaming determines its future.

For two years now, Redbox has been planning its entry into the video game rental segment with its ultra popular Redbox Kiosks. This complements existing services and enriches them. Mark Achler, VP of video games for Redbox, recently confirmed that the success of its videogame rental pilot program shows a growth trend and rental opportunity. Fast-forward to October 11, 2010, when kiosk powerhouse Redbox announced the unveiling of its video game rental offering at just $2 per night. Competitor Gamefly (G-Box), currently offers more than 7000 titles to hardcore game lovers, with Playstation 3 and Xbox 360 games at $2.50 and Wii games at 2$. At two dollars for any game, and for any game system, Redbox once again maintains its commitment to price advantage.

From a user’s perspective, the game is a great deal for $2, to be able to test a costly new game by renting it out from Redbox, and to purchase only after making an informed decision. The price-value proposition opens the door to a youth and low-budget market which traditionally shuns rentals because games cannot be “watched” in one day. Even the former partner of Mitch Lowe and current CEO of Netflix, Reed Hastings, has acknowledged the market for rentals in that “ video games very much are (exclusively) a disc-based solution - it’s very unlikely that we’ll be adding N64′s GoldenEye 007 to our queue alonside the James Bond DVD GoldenEye.”

Some analysts believe the Redbox should develop this particular core business strength, and say that the gaming segment is worth the investment. With games averaging $50 per title, Redbox’s relatively much less expensive price point truly creates the potential to develop this market. It newly empowers its customer base with the leverage of choice in gaming experience, by enabling customers to rent a game, and perhaps later avoid disappointment after a $50 investment. Video games sales could also build a logical expansion of revenue sources while strengthening its brand among high school and college-age users, a targeted segment. Entry into video games could turn out to be a win-win situation for Redbox, in more ways than one.

The next challenge: Internet delivery, a.k.a streaming. “Amid all the hype about delivering movies to Americans over the Internet, the most successful industry innovator has been Redbox, ”4 writes a long-time Barron’s columnist. Would this path draw valuable resources away from an already profitable company?

Digital streaming technology does have a promising future. Its reality, though, may not prove to be as lucrative as its allure.  Major players in this sector, such as Netflix, Apple and Hulu already exist. Ralph Schackart, a New York-based analyst with Wiliam Blair & Co. says: “It’s absolutely imperative for (Redbox) to have a digital story”.5   The relevant issue is how to make Redbox a star in an ocean already teeming with major players. Other analysts affirm that the best way to continue to have success and return on investment is to stick with what they do best: rent from the big red box.

Davis believes that strategy will be prioritized in streaming: “( it’s) complimentary to our core…We want to maintain and grow our consumer base.”6    Clearly the company does have the power to attract a partner willing to provide technology in exchange for a recognized brand, 21 million customers (90% of whom have broadband), and 26,000 locations. With little investment, Redbox would be able to leverage its brand while creating lasting brand equity and satisfying the impulse rental consumer in new ways. It would be similar to navigating this teeming ocean in an attractive cruise ship.

The future: Who needs soda anymore? Recently Redbox launched a competition at the Missouri School of Journalism to develop its brand among college users. These, and many more impulse buyers do not want to pay monthly fees to be able to watch a movie. The Redbox proposition is clear: you don’t have to.

The “movie-machine” is everywhere - in supermarkets, fast food restaurants and the local library - meaning that customers need only stop for a second, choose a movie, and enjoy it. Maybe soon we’ll buy it there. Redbox, by expanding the types of entertainment it offers with games, and giving its loyal core more delivery methods to choose from, continues to build its brand in the market it opened.   Its value proposition also continues to thrive, using the same core competencies and brand partnerships. Post-script: Will we be able to remember one day what the world looked like before movies came from a box?

Citations and References

1 and 2. (from the American Marketing Association website) http://www.marketingpower.com/ResourceLibrary/Publications/MarketingNews…
3. Gary Cohen in same source as above.
4. Andrew Bary in Barron’s: http://online.barrons.com/article/SB500014240529702038801045754193707805…
5. http://www.businessweek.com/news/2010-07-19/redbox-plots-web-strategy-in…
6. http://www.retailcustomerexperience.com/article_print/177519/Redbox-to-o…
(7) http://journalism.missouri.edu/news/2010/12-10-redbox-initiative.html

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.