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Peering into the Liquid Crystal Display: How will we rent movies in the future?

Crystal Ball

A corporate strategy article by Thunderbird students A. Andrikopoulos, L. Del Bianco, S. Golliher, I. Perez and K. Singh

As the movie rental industry evolves, what’s next for movie rental kiosks?

How many Americans have never seen a movie with a crystal ball or some tea leaves? Movies are replete with clairvoyant seers peering into the future. Harry Potter’s Professor Trelawney predicts the eventual demise of Voldemort or Harry. Precogs in the Minority Report have visions of crimes before they happen. Sandra Bullock’s character in Premonition is forewarned of her husband’s imminent death with lifelike visions. The companies that rent these same movies could certainly use such tools and talents to fully understand the future of the movie rental industry which has drastically changed in the last few years with the advent of recent technological advances for online streaming.

Crystal Ball

A corporate strategy article by Thunderbird students A. Andrikopoulos, L. Del Bianco, S. Golliher, I. Perez and K. Singh

As the movie rental industry evolves, what’s next for movie rental kiosks?

How many Americans have never seen a movie with a crystal ball or some tea leaves? Movies are replete with clairvoyant seers peering into the future. Harry Potter’s Professor Trelawney predicts the eventual demise of Voldemort or Harry.  Precogs in the Minority Report have visions of crimes before they happen.  Sandra Bullock’s character in Premonition is forewarned of her husband’s imminent death with lifelike visions.  The companies that rent these same movies could certainly use such tools and talents to fully understand the future of the movie rental industry which has drastically changed in the last few years with the advent of recent technological advances for online streaming. 

The Business We Call Show:  A Bit about the Movie Rental Industry

The annual revenue created by the video rental industry is $6B and a little over 3500 businesses compete for that $6B.[i]  There are three main distribution channels for this industry:  subscription services (42%), brick and mortar stores (36%), and kiosks (22%), where the percentages are the proportion of overall rental spending in 2010.[ii]  As the brick and mortar distribution channel has floundered in the last couple of years, shrinking 28.8% in 2011, kiosks and subscription services have experienced growth.[iii] 

Beginning in 2003 Redbox was able to capture a large portion of the movie rental business due to its revolutionary kiosk delivery system.  Meanwhile, Blockbuster and others with high overhead costs simply could not compete with the convenience and low price strategy of kiosk king Redbox.  Fast forward now to the present where the entire model and method of movie delivery is rapidly changing once again due to technology.  The new format now gaining market share is called Video on Demand (VOD) which enables customers to stream video to any number of devices ranging from computers and gaming consoles to smart phones.  Virtually any device that can connect to the internet can access VOD.  Large VOD players exist such as Netflix and iTunes, but many more have recently entered the market including big- and small-name companies ranging from Wal-Mart--Vudu and Amazon--Prime to Hulu, all hoping to get a piece of the pie.  While DVD rentals are popular, it is obvious that they will slowly decline in future years as VOD becomes more familiar and convenient for Americans.  Companies such as Redbox who once achieved a large market share through a very creative strategy will be forced once again to reinvent themselves to maintain market share as they transition into this new media format.  Failure to change and adapt to this new technology will force companies such as Redbox to face similar consequences as Blockbuster, Hollywood Video, and many others brick and mortar stores  in the early 2000’s.

No company needs tea leaves to know that at the heart of the major changes in the industry is the shift in the distribution paradigm away from physical mediums of stores and discs.   But what will happen as technology advances even more?  Will kiosks be edged out of the market entirely like their brick and mortar cousins?  Will the internet be the single portal upon which consumers will depend for their entertainment, and where will computer-free seniors and rural areas with no internet or poor quality internet get their movies?  Even the experts at movie rental giant Netflix have differing views.  According to an industry insider, Netflix Vice President of Content Jason Ropell “…it’s ‘incontrovertible’ that the future of video consumption will be Internet streaming on demand.”[iv]  This perspective contrasts with the view from Netflix Director of Communications Joris Evers who says, “The streaming service will never have the selection the DVD service has because of the licensing and the different worlds around it.” iv Here’s where the industry could use some tea leaves or tarot cards.

Back to the Future:  The Effects of Technological Advances

It’s a cold winter weekend night.  Icicles hang from the eaves of the roof.  The street glimmers with a fresh sheen of ice whipped treacherously slick by the piercing wind.  What could one do for entertainment?  The video store is closed and who wants to risk their lives driving to a kiosk?  VOD and online movies present great convenient alternatives that don’t require consumers to leave the house even when it isn’t icy and chilly.  Imagine that someone could watch TV shows or live sporting events from anywhere in the world.  At the touch of a button or a few keystrokes, the latest movies, online entertainment such as YouTube, and any favorite television channels are available.  While at home or on the go, consumers can watch what they want and when they want, anywhere and without all of those pesky commercials.  Doesn’t that sound amazing and a bit like being transported into the Jetsons cartoon?  Well, it’s reality.

This technological advance has dramatically increased the convenience of movie renting, presenting a competitive advantage over physical rentals.  It has also increased the scope of renting to include television shows and Indie films.  The selection of VOD is much greater than that of a single kiosk machine.  Given that VOD provides a wider variety of product and greater convenience for the consumer at a comparable price, it presents a significant strategic challenge for the companies who have built their business model in a kiosk-style distribution channel.  When the storefront distribution channel failed to recognize the strategic challenges presented by kiosks as well as Netflix’s mail order rentals, it lost vast amounts of market share.  Ignoring the challenge of VOD will lead to a similar demise for the kiosk distribution channel.

Why not all VOD, all the time?

However, VOD has not yet won the war for market share.  There are some major limitations to VOD including offering streaming capacity in only a few select technologies and the lack of availability to streaming without a Wi-Fi network.   Although the technology is available, the data plans to support streaming via high-speed data networks are not yet competitive in price. For example, imagine watching a three-hour movie on a tablet.  After watching around three hours, one could burn through the monthly wireless data allotment of 2GB.  Given that a 2GB data plan through AT&T has a monthly fee of $25 per month, that same movie could be purchased and kept forever.  Additionally, should VOD be the only distribution channel for movie rental, certain segments of the market would go unserved. These consumers include senior citizens and other people who struggle with technology.  Eighty-year old grandmas who refuse to get computers still wish to watch movies.  If VOD was the only option, this segment would not be served. 

Kiosks still provide a service for non-tech savvy users. There is no need to connect a computer to the TV or navigate a website for entertainment.  Also for users who want to watch movies without a Wi-Fi connection, renting a movie in a kiosk is the way to go.  People who can’t afford the monthly bill for a robust internet connection or simply have a poor internet connection would still find it really valuable to cheaply rent through kiosks. Finally, kiosks typically rent movies earlier after release than VOD, providing consumers with an option for rental that VOD cannot. 

An Affair to Remember:  Relationships with Movie Studios

Movie studios and video wholesalers control the timeframe the rental companies must wait before they can rent videos in an effort to optimize revenue for themselves.[v]  These timeframes are called windows and are defined as the waiting period after which a movie is available in certain formats. v   A significant example of this control being wielded occurred when the movie studios prevented Redbox from acquiring DVDs for rent from them until weeks after their release.  To further cut off supply to Redbox, the studios encouraged video wholesalers to prevent Redbox access as well.  These wholesalers (Target and Wal-Mart) instituted rules that limited purchases of DVDs.  Positive relationships with studios and wholesalers are therefore a key to creating value for the customer.  Because people typically only remember movie titles for a short time after their release and the length of time a movie can be discussed at the water cooler is finite , being able to rent a movie as close to its release on DVD as possible is critical to creating value for the customer.

Unfortunately, some kiosks’ pricing strategies have caused strained relationships between them and some retail partners and movie studios. For example, movie studios and retailers felt Redbox took sales away from newly released DVDs because of its low pricing model. Redbox has the lowest price for DVD rentals in its category. It charges $1.20 per night per movie rental, even if the movie was kept for additional nights.  As it stands, this relationship presents significant strategic challenges.  Without early access to movies, kiosks cannot compete on the core strategy that has sustained them:  cheap, new hits.

Hope Springs:  Strengthening the Relationship between Kiosks and Studios

Like Meryl Streep’s and Tommy Lee Jones’ characters in Hope Springs, the kiosk distribution channel could strengthen their relationship with movie studios to close the window, enabling shorter wait times between release on DVD and ability to rent.  (No marriage therapy required!) In bigger cities, movie kiosk companies could partner directly with theatres and studios to sell show tickets for movies, comedy shows, live music shows and more.[vi] This expanded offering will mean people can buy the tickets right at a grocery store or at a busy cross-section or a train station, instead of waiting in a long line at the venue or buying online and printing the tickets. This concept will be of real value to people with a fast-paced life and should help to improve kiosk company’s relationships with studios and other entertainments sources as well. In exchange for selling tickets, the kiosk companies could demand shorter wait times for newly released media. Another way to encourage studios to shorten wait times might be for kiosk companies to raise their prices slightly for new releases.  With higher prices, movie studios could be paid more and may be more inclined to shorten the window.  Consumers will be more attracted to kiosks that have the latest movies sooner.

SuccessFailureSign

Transformers-Transforming the Model for the Future

  After peering into the crystal ball, it is obvious that the future of digital home entertainment looks very competitive. The tea leaves indicate that companies like Redbox will need to go beyond leveraging their established kiosk model to provide more value and convenience to consumers. Here are few more ideas that could help kiosks overcome their strategic challenges:

Kiosks could enter the streaming business and cross promote the distribution channels.  As kiosk companies accumulate a better streaming collection of digital media, they should start a subscription service for both online content and kiosk rentals. On one plan, customers would be able to stream as well as rent movies from a physical location.  A platform approach can be used that offers a base plan with a limited number of DVD rentals and unlimited streaming content. Additional DVD rentals can be added on top of the base plan for a fixed fee based on need of the consumer. For instance, Redbox has recently partnered with Verizon to provide VOD service.  It should be noted that VOD is outside Redbox’s core competencies of operating kiosks and vending machines.  It will likely prove challenging to compete in an area that is not a strength.  Entering the streaming VOD business could also create additional strategic advantages and options.

Some other ideas might include partnering with other companies outside of the movie industry such as ESPN.  Kiosk companies could offer a live streaming sporting event package for an additional fee to customers.  They might try to cater to the large gaming market as they already have with kiosks and offer an online platform for computer game rentals, purchases, and online play in general.  Perhaps they could even have exclusive video games created for this platform that would attract additional users.

Kiosk companies could partner with a major airline for inflight entertainment options. Airlines can really benefit from streaming content from companies like Redbox and their available selection of the latest new releases. This partnership would increase satisfaction of air travelers and make them repeat customers. This partnership will open kiosk companies to an even broader customer base and will also provide an excellent source of marketing its different plans.

The oracle has spoken:  As storefronts have left the market, kiosks have become a viable alternative for renting physical DVDs.  In the future, the size and sustainability of the kiosk distribution segment will depend on how attractive the kiosk segment makes itself relative to VOD and how the kiosk companies manage their relationships with movie studios. 

 


[i] IBIS World, 2012. DVD, Game & Video Rental in the US: Market Research Report. [Online]  Available at: http://www.ibisworld.com/industry/default.aspx?indid=1370 [Accessed 15 July 2012].

[ii] Entertainment Merchants Association, 2012. Facts About the Home Video Market. [Online] Available at: http://www.entmerch.org/industry/facts-about-the-home-video.html [Accessed 15 July 2012].

[iii] Amobi, T. N., 2012. Movies & Entertainment. [Online] Available at: http://www.netadvantage.standardandpoors.com.ezproxy.t-bird.edu/NASApp/NetAdvan... [Accessed 15 July 2012].

[iv] Weinman, J. J., 2012. Die Hard, hardly dying. Maclean's, 14 May, 125(18), p. 44.

[v] Tryon, C., Fall 2011. Redbox Vs. Red Envelope, or What Happens When the Infinite Aisle Swings Through The Grocery Store. Canadian Journal of Film Studies, 20(2), pp. 38-54.

[vi] Lieberman, David. 2012. Is Redbox Preparing To Sell Movie Tickets At Its Disc Rental Kiosks? [Online] Available at:  http://www.deadline.com/2012/05/is-redbox-preparing-to-sell-movie-ticket... [Accessed 17 August 2012].

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