BA 690 THESIS CASE STUDY REV 1.1
Coinstar – Redbox Division
Case Update
Strategic Management Initiative
Ben Sippy, John Thorne, Rob Winkler, Todd Masten
4/4/2013
BA 690 Thesis Case Study rev 1.1
Coinstar – Redbox Division Case Update
CONTENTS
History ...........................................................................................................................................................................4
Coinstar ......................................................................................................................................................................4
GroupEx .....................................................................................................................................................................4
Crane Games..............................................................................................................................................................5
Redbox .......................................................................................................................................................................5
Case Update...................................................................................................................................................................8
Coinstar Consolidated ................................................................................................................................................8
Redbox Business Unit ................................................................................................................................................9
Financials ...............................................................................................................................................................9
Market Share .......................................................................................................................................................10
Movies and Television .........................................................................................................................................11
Formats ................................................................................................................................................................12
Market Definition ....................................................................................................................................................13
General Environmental Analysis ..................................................................................................................................14
Demographic ...........................................................................................................................................................14
Economic .................................................................................................................................................................15
Physical Environmental............................................................................................................................................16
Political & Legal .......................................................................................................................................................16
Sociocultural ............................................................................................................................................................17
Technological ...........................................................................................................................................................18
Global.......................................................................................................................................................................19
Threat of Entry .............................................................................................................................................................20
Online and Physical Rentals .....................................................................................................................................20
Streaming Subscriptions ..........................................................................................................................................22
Threat of Substitutes ...................................................................................................................................................23
Industry Medium .....................................................................................................................................................23
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Bargaining Power of Buyers .........................................................................................................................................24
physical Rentals .......................................................................................................................................................24
Online rentals and Streaming Subscriptions............................................................................................................24
Bargaining Power of Suppliers .....................................................................................................................................24
Degree of Rivalry .........................................................................................................................................................25
Online Rentals ..........................................................................................................................................................25
Streaming Subscriptions ..........................................................................................................................................26
Immediate Competitors...............................................................................................................................................26
Blockbuster ..............................................................................................................................................................26
Netflix ......................................................................................................................................................................27
Amazon ....................................................................................................................................................................29
Vudu ........................................................................................................................................................................30
Google, You Tube, Google Play ................................................................................................................................31
Hulu .........................................................................................................................................................................32
Apple ........................................................................................................................................................................32
Cable, satellite and telecom companies ..................................................................................................................32
Impending Competitors ...............................................................................................................................................33
HBO Go ....................................................................................................................................................................33
Invisible Competitors ...................................................................................................................................................34
Movie studios coming forward through the value chain.........................................................................................34
Redbox Current Strategy .............................................................................................................................................35
Redbox Instant .....................................................................................................................................................35
Redbox Tickets .....................................................................................................................................................35
International Expansion .......................................................................................................................................36
Redbox Projected Strategy ..........................................................................................................................................37
Netflix Current Strategy ...............................................................................................................................................37
Netflix Projected Strategy ............................................................................................................................................37
Redbox Growth-Share Matrix ......................................................................................................................................38
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Netflix Growth-Share Matrix .......................................................................................................................................38
SWOTR Analysis: Redbox .............................................................................................................................................39
Strengths..................................................................................................................................................................39
Weaknesses .............................................................................................................................................................40
Opportunities...........................................................................................................................................................41
Threats .....................................................................................................................................................................41
Resources.................................................................................................................................................................42
SWOTR Analysis: Netflix ..............................................................................................................................................42
Strengths..................................................................................................................................................................43
Weaknesses .............................................................................................................................................................44
Opportunities...........................................................................................................................................................45
Threats .....................................................................................................................................................................45
Resources.................................................................................................................................................................47
using strength to attack weakness ..............................................................................................................................47
Contingency Plan .........................................................................................................................................................49
Gaining market Share ..................................................................................................................................................51
Redbox Strategy...........................................................................................................................................................52
Short-Term Strategy ................................................................................................................................................52
Redbox Instant .....................................................................................................................................................52
Redbox Tickets .....................................................................................................................................................52
LONG-TERM STRATEGY............................................................................................................................................53
Redbox portal ......................................................................................................................................................53
Redbox Auto ........................................................................................................................................................57
Redbox Productions .............................................................................................................................................57
speed and preparation ................................................................................................................................................59
SHAPING OUR OPPONENT ...........................................................................................................................................59
FIGURES .......................................................................................................................................................................62
BIBLIOGRAPHY .............................................................................................................................................................66
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Coinstar – Redbox Division Case Update
As of September 15, 2010, Redbox had rented out one billion DVDs through their
network of retail kiosks, and much has transpired since they achieved this milestone (Hitt, pg.
88). Before updating the case from 2010 to early 2013, we will first bring readers up to speed by
summarizing the case on Coinstar.
HISTORY
COINSTAR
Coinstar began operations in four locations in the San Francisco bay area in early 1992.
Founded by Jens Molbak, the immediate success of the original machines prompted rapid
expansion, and Molbak finished his stint at college in the bay area to return to Bellevue
Washington and grow the company. Ten years later in 2002, Coinstar had expanded to 10,000
machines and was collecting and processing more coin currency than the US Mint. By 2010,
Coinstar had assumed so much of the coin currency processing burden in the United States that
the US Mint had reduced its staff and subsequent coin output to one-third of its capacity prior to
Coinstar introducing their kiosks (wiki/Redbox).
As Coinstar began growing, Molbak and the management staff sought ways to capitalize
on their core competencies and acquired three related businesses in 2007. They started out by
purchasing an electronic payment service company called GroupEx.
GROUPEX
GroupEx was a privately owned financial services company that was the leader in
electronic money transfer services between the United States and Latin America. When Coinstar
completed the purchase, GroupEx consisted of a network of 1,650 send agents in 23 states
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servicing 13 countries. Coinstar aimed to use their extensive network to extend this to 31,000
agent locations in 143 countries by the end of the year.
Essentially, Coinstar would be
leveraging their kiosk locations to allow customers to send and receive funds electronically for a
fee. It made strategic sense in many ways, and it was seen as a boon to customers of both
Coinstar and GroupEx.
CRANE GAMES
Since Coinstar was considered the leader in ‘fourth wall’ retailing (covering the entrance
and exit of retail locations), it was a logical step for the company to expand into entertainment
and gaming machines that exist in the same retail space as their coin kiosks. Coinstar used their
relationships with strong retailers such as Wal-Mart, Lowes, and larger grocery chains to allow
placement of vending and gaming machines. The store was offered a split of the profits and soon
Coinstar kiosks and machines could be found in over 60,000 locations throughout the nation.
REDBOX
The final acquisition in 2007 was a partial ownership stake in a DVD rental business
called Redbox. Originally developed by McDonalds, Redbox was conceived as a retail service
kiosk offering groceries and DVD movies at subway stations in the Washington DC metro area.
Early piloting led to the removal of the grocery items; however, the DVDs tested well and the
program was soon expanded into a larger test market. Coinstar bought 47% of the company with
contingent rights to purchase a greater ownership stake several years down the road. Again
leveraging their relationships with management at retail and grocery outlets, Redbox expanded
rapidly (Hitt, p 89).
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In 2008, Coinstar increased their ownership stake of Redbox to a majority share and
ended up buying the rest of the company out a year later in 2009. By 2010, Redbox was
operating at over 27,000 locations with kiosks dispensing DVDs, Blu-Ray discs, and even
console games for Sony’s PlayStation 3, Microsoft’s Xbox 360, and Nintendo’s Wii System.
The business environment was changing rapidly and halfway through the first decade of
the new century, most brick and mortar video rental stores, having been in decline in for some
time now due to the internet and Netflix, had all but ceased operations. The last of the large
chains, Blockbuster, went bankrupt and was purchased by DISH Network. Blockbuster simply
could not compete with both the cost savings and convenience provided by their competition. In
2010 backed by DISH, Blockbuster launched its own DVD rental kiosks in an attempt to
compete with Redbox head to head.
Of all the competitors to Redbox at the time, Netflix posed the greatest threat. By 2010,
Netflix had acquired over twenty million registered users and their catalog of offerings had
grown substantially over the years (wiki/Netflix).
Netflix’s business model is markedly
different; however, both companies are seeking to provide consumers with a variety of newly
released entertainment. Netflix had two differentiating strengths with which Redbox has been
unable to compete against: a massive catalog of material from national and international studios,
and an increasing presence in the streaming business. For a flat fee, Netflix subscribers gain
access to a subset of the company’s offerings that can be streamed to their customer’s
televisions, computers, tablets and phones. Most new film and television releases are held for
their mail service, where customers pay a daily fee to movies that are delivered to them via the
US Postal Service. The streaming service was proving so popular that by 2010 many of the
larger television manufacturers had included a ‘Netflix’ button on the remote that takes the
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viewer straight to Netflix’s streaming service. By the end of 2010, Redbox had announced their
plans to join forces with Verizon and implement their own streaming business in the near future
to compete with Netflix.
Redbox has several other competitors in the DVD streaming space including Wal-Mart’s
Vudu, Apple TV, and Amazon’s Prime Service. Vudu was started by Wal-Mart as a way to
counter declining retail movie sales by offering streaming movie rentals to viewers at home.
Their business model is slightly different from Netflix’s as the customer is only charged for
movies they watch. One of the major advantages Vudu has is their ability to release movies to
consumers the same day the studios release them to the public; Netflix and Redbox are both
forced to wait 28 days before their customers gain access to new releases from most major movie
studios. For certain releases from studios, Netflix is forced into a longer, 56 day waiting period
as studios hope to leverage the waiting period to force heavy movie users to purchase DVD and
Blue-Ray movies before they hit the streaming and rental market. Apple’s device allows users
access to their iTunes library and the iTunes store for videos and movies that can be streamed to
their televisions via their computer. By 2010, Apple signed a deal with Netflix that included
access to their entire catalog through the Apple TV interface. Lastly, Amazon charges users a
flat fee of $79 for an entire year where they can stream movies, television shows, and videos to
their television or other internet enabled devices. As a bonus to Amazon.com customers, Prime
members also receive free two-day shipping on any order placed on the website. This alone
makes the service worth the price of admission for many Amazon members. The company also
charges a fee for access to newly released movies in both standard and high definition available
after the 28 day waiting period. In total, Redbox faces myriad competitors in a burgeoning field
and at the time the case ended in 2010, much was still up for grabs.
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CASE UPDATE
The Coinstar case in Hitt’s Strategic Management book ends in 2010, and a great deal
has transpired in the two years since. We will update readers on the company as a whole, with
particular emphasis on our chosen business unit of Redbox.
COINSTAR CONSOLIDATED
In 2010, Coinstar divested all of its business interests except for their coin counting
kiosks and Redbox. Since the vast majority of the company’s growth was coming from their
Redbox unit and revenues were declining in both GroupEx and their entertainment and crane
machines, they made the decision to focus on these two core units and harness their research and
development teams both in these units, and a newly formed unit called ‘New Ventures’. As of
this writing, the new ventures initiative has dabbled in coffee and gender specific retail kiosks,
but has yet to bear any significant fruit as they move slowly in and out of test markets.
Financially, Coinstar has accelerated their earnings with increased revenue through year
end 2012. The company ended 2010 with consolidated revenues of $1.43 billion. Revenues in
2011 were up 28.5% to $1.85 billion, and increased further by 19.3% in 2012 to $2.2 billion.
This is a ten year revenue rise of 1,315% which far outpaced anyone’s early expectations (Davis,
Coinstar 2012 Financial Report, pg. 3).
The company experienced similar growth in operating income as they worked to contain
costs and balance acquisition costs with revenue generation. Operating income in 2010 was a
healthy $143.2 million which equates to 10% of total revenue. In 2011, operating income had
increased to $209.8 million and increased again in 2012 to $262.7 million which represents 12%
of total revenues (Davis, Coinstar 2011 Financial Report, pg. 17). This demonstrates great
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agility by the company’s management team to keep costs in-line during a phase of rapid
expansion, almost exclusively in the Redbox division (See Figure 1).
REDBOX BUSINESS UNIT
The Redbox unit is where the company is currently finding explosive growth and
opportunity. While the company hasn’t placed all of their eggs in the Redbox basket, they are
currently committing the bulk of their resources to Redbox endeavors. At the end of the case in
2010, management announced their plans to open a streaming service to compete with the likes
of Netflix, which just recently launched. As a result, the majority of all Redbox revenues still
stem from the retail kiosks. Convenience had been a hallmark of the Redbox strategy and the
expansion of kiosks from 30,200 in 2010 to 42,000 in 2012 (Davis, Coinstar 2011 Financial
Report, pg. 12), backs up their goal of having a Redbox location within five minutes of most
consumers (See Figure 2).
FINANCIALS
Coinstar released only consolidated earnings; however, we were able to obtain revenue
data for the Redbox business unit culled from the consolidated data. While revenue grew slowly
during the test market and early growth phases, it has recently exploded after 2010. Redbox
closed out 2010 with a financial milestone; making over one billion dollars. Revenue for 2010
was $1.1 billion. In 2011 it shot up 34.6% to $1.56 billion. Again, in 2012 revenue increased
substantially by 22.2% to $1.9 billion. Since 2005, Redbox revenue has increased a staggering 12
times from $239 million to $1.9 billion (Davis, Coinstar 2012 Financial Report, pg. 44).
Operating income has also increased dramatically since 2010; more than doubling in two
short years. Ending in 2010, Redbox posted an operating income of $97.4 million. A year later
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saw operating income increase by 74% to $169.5 million, due largely to cost containment
measures aimed to reduce management overhead and maximizing the efficient use of the
company’s team of 1,750 field technicians. Operating incomes were up again in 2012, this time
rising 40.8% totaling $238.6 million.
The increase in operating revenue rises in proportion with the number of kiosks the
company installs. At the end of the case in 2010, there were 30,200 kiosks in the United States
averaging $38,400 per machine. By the end of 2012, the number of kiosks has increased to
42,000 with revenue averaging $45,447 per machine. This equates to an 18% increase in
average revenue in two short years.
MARKET SHARE
As mentioned earlier, the company has aggressively expanded kiosk locations from
30,200 in 2010 to 42,000 in 2012. This is a 40% increase in presence in the US; aided primarily
with the company’s ability to rapidly deploy new machines in key retail locations.
By the end of 2012, Redbox had attained 45.3% of the physical disc rental market with
major competition coming solely from Netflix. When the case ended in 2010, Redbox had
approximately 25% of the market in 2010 which results in an increase of almost 20% coming
mostly from Blockbuster and other local retailers. In 2011, Redbox overtook Netflix as the
leader in physical disc rental with a market share of 34.5% versus Netflix’s 30%. While Redbox
has done an excellent job of planning and expansion, much of the market share change is due to
Netflix focusing in digital streaming where they have a 61% share of the streaming movie
market. Without question, the industry is moving towards digital distribution, and while the
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Redbox kiosks are currently profitable, long term success will hinge on the company’s ability to
innovate and deliver in the streaming business (See Figure 3).
Expansion began in Canada in 2012 with the installation of the first 350 kiosks. The
company has completed deals with Wal-Mart and other major retailers and grocery stores in
Canada that will result in an additional 1,500 to 2,000 kiosks to be added in 2013.
The company also bought rival Blockbuster Express for $100 million, essentially putting
an end to the only retail threat the company had been experiencing (wiki/Redbox). The company
took over Blockbuster’s roughly 5,000 kiosks and has plans to convert and consolidate many
locations. To date, Redbox had converted 500 Blockbuster Express kiosks and removed an
additional 800. A plan to rebrand the remaining machines remains an ongoing effort.
MOVIES AND TELEVISION
One of the more significant changes since 2010 has been a price change that the company
deployed to increase revenue and help offset an increase in operating expenses. The rental price
for DVD movies increased 20% from $1.00 to $1.20. Blu-Ray rental fees remain at $1.50 and
games remain at $2.00. There are currently no plans to increase the prices in either of these
segments. While there was a vocal backlash against the increase, the effect on rental rates was
negligible as Redbox’s market share rose through both 2011 and 2012.
Redbox made improvements to the variety of their movie catalog, and also began
increasing the capacity of their machines. The company signed long term deals with most large
and medium sized studios including Lionsgate, Universal, MGM and others. The current design
of the machines accommodates 420 discs, but advancements in the design by Flextronics have
provided an increased capacity of an additional 80 discs.
The company is aggressively
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retrofitting their existing machines with the larger capacity carousels. All new machines will roll
out with the extended capacity and Redbox plans to have most kiosks updated by the end of
2013.
Redbox Instant, the company’s new streaming service, was announced as being in the
pipeline at the end of the case study in 2010, but did not go live to the public until 2013. The
endeavor is a joint venture with Verizon and is designed to go head to head with Netflix and
Amazon Prime.
One of the ways Redbox Instant differentiates their service from the
competition is by including kiosk rentals with their subscription.
This gives subscribers
immediate access to New Release DVDs. New Releases are a major driver in the industry and
no other subscription can deliver this advantage. This is a strategic move to integrate their core
business with the new streaming model. Early previews of the service depict it as identical to
both Netflix and Amazon Prime in function and appearance. The movie content focuses on
older, popular titles with an array of secondary offerings as well. The streaming quality is high
on all platforms including Wi-Fi, Airplay, and 4G services on televisions, tablets and phones.
In 2011, Coinstar purchased their only kiosk competitor, Blockbuster Express.
Blockbuster Express was owned by NCR and unrelated to the brick and mortar Blockbuster
stores; using the namesake as a means to familiarize customers. Blockbuster Express had
roughly 10,000 kiosks in operation when Redbox bought the company for 100 million. Redbox
has plans to convert or eliminate the Blockbuster kiosks in the short term, thus eliminating its
only source of physical renting kiosk competition.
FORMATS
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Late in 2010, Redbox agreed to rent video games for the three major console markets in
an attempt to take a bite out of video game rental company GameFly. GameFly uses a similar
model to Netflix where they allow users to reserve and rent games that are sent and returned via
the United States postal service. The gaming industry has recently conceded that their retail
market is dwindling and digital distribution will be the future for all game releases. To this end,
all of the major console manufacturers and gaming studios have setup digital distribution
services that seek to reduce retail sales and increase digital sales. In the short term, renting video
games is economically viable, but the future regarding physical sales and distribution is
uncertain. Redbox officially started renting video games in June 2011 for $2 per day. The
company has rented out 18 million games to date and is continuing to refine their offerings.
Xbox rentals account for 42% of the total, with the Wii accounting for 33% and the PS3 trailing
with 25%.
Blu-Ray discs were first offered by Redbox in 2009 and continue to grow in rental share.
At the end of the case study in 2010, Blu-Ray discs accounted for 7% of the total movies rented
from all kiosks. As the number of households with Blu-Ray devices increases, the number of
Blu-Ray rentals has proportionally increased. At the end of 2012, Blu-Ray rentals accounted for
12.5% of total rentals from Redbox kiosks.
As demand for high definition entertainment
increases, Redbox will increase the proportion of disks in the kiosk carousels to accommodate its
customers. Currently 21% of US households have an internet ready television, game console, or
Blu-Ray player; and this number is projected to reach 60% by 2017 (wiki/Blu-Ray Disc). This
not only signals an ever increasing demand for high definition entertainment, it clearly shows the
importance that streaming will play in the strategy for Redbox to grow and remain competitive.
MARKET DEFINITION
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The DVD market consists of two main segments: physical disc purchasing and rentals,
and streaming.
Redbox and their main competitor Netflix operate within both segments;
however, the prevailing trend is to abandon the physical market for the streaming market. The
physical disc market is still economically viable and will remain so while Blu-ray and DVD
players are still being produced. There are associated licensing and production costs that can be
prohibitive in the physical disc market but the streaming market faces none of these issues as the
data is stored remotely and accessed by the user on demand.
Netflix has already begun
managing the decline of its physical disc market and is pushing streaming expansion both
domestically and abroad.
GENERAL ENVIRONMENTAL ANALYSIS
DEMOGRAPHIC
Redbox has a fairly wide demographic base and garners wide ranging support from all
age groups from 18 to 80. However, the key demographic is with the 18 to 24 year old
population.
The younger generation is driven by the need for innovation with a rooted
dependency on technology and Redbox aims to fulfill the needs of this segment. The young
demographic looks for quick and inexpensive entertainment, and until the streaming business
model acquires greater market penetration, the DVD rental kiosks will remain desirable. Even as
the market has shrunk from $10 billion is 2005 to $6.8 billion in 2012, DVD rentals have
increased and subsequently leveled off in that same time period. This indicates that amidst the
declining life cycle of purchasing DVDs, rentals are increasing and will continue to level off
until streaming takes over the role of entertainment distribution.
A recent University of
Tennessee study (Slideshare.net/Redbox) revealed several key pieces of demographic data:
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-
The population of 18 – 24 year olds in the US in 2010 was 30,163,000 and will increase
annually, peaking at 30,575,000 in 2013.
-
52% of Redbox customers are female.
-
63% of Redbox customers have at least one child.
-
51% of Redbox customers have at least four people.
-
70% of the people polled had rented from a kiosk versus 30% that had rented from a mail
service.
-
The 18 – 24 year old demographic accounts for 26% of the Blu-Ray rentals and 74% of
the game rentals.
-
49% of customers that rent games from Redbox are female.
Redbox does not necessarily target racial demographics, but should acknowledge the
growing Latino population in the United States. While it is currently not being done, Redbox
could identify key areas where English is a second language and offer movies that cater to the
community.
ECONOMIC
The market Redbox operates in is in decline, and has been for over a decade. The DVD
rental industry is down over 30% since it peaked in 2005; however, industry revenues are still in
excess of $6 billion for 2012 (Davis, Coinstar 2012 Financial Report, pg. 32). Consumers have
been moving away from brick and mortar rental businesses, and the rental kiosk is seen as a
bridge to the eventual migration to a fully digital distribution system for all entertainment. The
economy has been difficult enough during the past several years, and it has been downright lethal
to companies slow to evolve. Aside from a few neighborhood rental shops, the brick and mortar
movie rental business is all but dead. The largest players, Blockbuster and Hollywood Video,
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both declared bankruptcy this decade and have pared down most of their operations.
Blockbuster, which at its peak was a billion dollar juggernaut with 60,000 employees in over
10,000 stores, has been reduced to fewer than 500 outlets by the end of 2012.
The economic recession starting in 2007 has been somewhat of a boon for Redbox.
Consumers tightened their wallets and spent more time at home which made a $1 rental from
Redbox a tremendous value. Interest rates are also at record lows, so financing opportunities for
the company were plentiful. At the end of 2012, the company was carrying $371 million in debt;
$200 million of which was convertible. The company has a debt to revenue level of 19%, which
is lower than the industry level by nearly 40%. The company states that inflation has been
negligible to operations since 2009, and there are no foreseeable economic barriers to the
company’s continued success.
PHYSICAL ENVIRONMENTAL
Redbox employs roughly 2,300 people; of whom 1,700 are service technicians who stock
and service the kiosks. Most of the machines are located in the United States and Canada with a
minor percentage overseas in Europe and Australia. Kiosks are generally placed inside retail
establishments, notably places like Wal-Mart or large grocery chains with many available 24
hours a day. The process and placement of kiosks are not likely to change.
POLITICAL & LEGAL
Redbox is the largest distributor of rental DVDs in the country, but they do not
manufacture anything in-house.
All of their compliance issues relating to environmental
protection, set up, and disposal are covered by Flextronics, the kiosk manufacturer
(wiki/Redbox). There are currently two pending lawsuits against the company, both of which
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appear to be weak attempts to pillage the pockets of a successful company. The first lawsuit is a
class action suit filed by the consumer rights division of BCA. The suit alleges that Redbox
knowingly and willfully takes advantage of their ‘no late fee’ policies. In essence, the company
does not have any stated policy regarding late fees as they charge a flat daily rate that allows
customers to return their DVDs prior to 9pm on the following day to avoid paying for an
additional day.
The lawsuit also alleges that Redbox has made over $100 million dollars
charging a $25 fee for movies that are never returned, yet the actual cost of the movies can be as
low as $7. The law firm is seeking people wanting to join the suit in Illinois where the suit was
filed. The second lawsuit comes from a small group of disabled residents in San Francisco
alleging that their civil rights have been violated because they are blind and unable to use the
kiosks. The kiosks use glass touch screens and do not support brail or any alternate means of
aural communication. Redbox has not commented on either case, stating only that the cases are
under review by their legal department.
Redbox Instant may face communications and clearance issues with the FCC, but their
alliance with Verizon precludes that the company defer these issues to Verizon which has great
expertise and experience in these areas. Aside from these lawsuits, there is little in this category
that impacts Redbox. They operate in a stable political and social climate distributing cheap
entertainment to families and individuals looking for movies.
SOCIOCULTURAL
As previously mentioned, Redbox does not actually manufacture anything. However,
they are partnering with Flextronics, the makers of the kiosks, and Verizon to push ‘green’
initiatives. In this day and age, a company’s image can be tarnished if they are not seen as ‘ecoconscious’ or ‘earth-friendly’. The company recently released their findings that by allowing
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customers to return DVDs to any kiosk of their choice as opposed to the one from which it was
rented from, they have saved over 100 million gallons of fuel, which removed some 2,000 metric
tons of air contaminants from the environment. Now, there is really no surefire way to guarantee
these findings, but people love to hear this type of positive spin. All old or damaged kiosks are
returned to the manufacturer by Redbox where they are dismantled and recycled to minimize
waste.
Redbox stands by their low price commitment to customers and has only increased their
prices once in eight years of operation. Even though prices rose 20% from $1 to $1.20 for DVD
rentals, Redbox still represents a tremendous value for people on a budget. The price for Redbox
Instant is also considered reasonable at $8 per month, given that each customer is entitled to four
free movie rentals from the Redbox kiosk network; essentially lowering the net price of the
streaming service to just $3.20. This is extremely reasonable for a month of unlimited streaming
and Redbox remains committed to being the low cost provider for all consumer entertainment
needs.
TECHNOLOGICAL
Redbox is caught in the crossroads of a technological revolution. The consumer DVD
market has been in decline since 2005, and it is very clear that the future of media distribution
will eventually be fully digital. With that said, Redbox is still very profitable and continues to
gain market share and revenue growth with their kiosk network of DVD, Blu-Ray, and game
rentals. The company feels it is reaching saturation levels and plans only 1,000 new kiosk
locations in the United States in 2013 (Davis, Coinstar 2012 Financial Report, page 2). In 2012,
researchers at Flextronics developed a way to add 80 more DVDs to the kiosks carousels and
have begun incorporating these increased capacity carousels at all locations with the goal of
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having all locations upgraded by year end 2013. This provides an increase of 80 additional slots,
which equates to an almost 20% capacity increase that is projected to raise yearly revenues of
$50,000 per kiosk to $60,000.
The key technological innovations in the industry are being driven by streaming and
storage advancements. The company’s current alliance with Verizon makes a great deal of
sense, in that Verizon has taken a strong leadership position in laying down a strong fiber-optics
data backbone in several major cities in the United States. Verizon FiOS, the company’s fiberoptic network, boasts the nation’s fastest data transmission speed at 300Mbps. Verizon has also
developed several key algorithms for throttling buffer and transmission speeds of media over any
regulated network which results in a very smooth and seamless movie experience to computers,
televisions and mobile devices. Netflix, and other streaming service providers, focus a lot of
resources on ensuring users have a steady and uninterrupted movie experience while using their
services.
GLOBAL
Globally, the DVD market has been in decline for some time as users migrate to network
and wireless streaming for entertainment. New markets, which generally prove fertile grounds
for emerging technology, are not good regions for Redbox expansion. Emerging countries like
China and India are especially poor markets. These countries have very poor regulatory controls
for movies, television shows and gaming software. The black market is so rife with pirated
entertainment that it is cheaper and far more convenient in these countries to buy a pirated move
for $0.50 than to acquire a legal copy for 100 times the price. The black market is so powerful in
China that none of the major movie studios bother to release their products on DVD or Blu-Ray
there, and things will remain this way until the Chinese government cracks down on illegal
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pirated entertainment (wiki/blu-ray_disc). Even though China is the second largest economy in
the world (and soon to be first) offering streaming services over government controlled
networks, few customers actually access these services.
China and India aside, the world is still becoming increasingly more connected and there
are great opportunities for the entertainment industry to expand into.
Redbox is opening
locations in Europe and there is great potential for expansion into Russia and Latin America. As
living conditions improve and wage levels rise, consumer technologies begin to pour into regions
that lacked the economic means or infrastructure to support. Latin American countries are
generally oriented around smaller communities with few retail outlets which make excellent
locations for DVD kiosks.
With the advent of cloud computing, increased storage capacity and download speeds, the
future looks bright for consumers seeking increased entertainment opportunities.
Several
companies are looking into USB or SD card transfers of movies directly from kiosk locations to
completely eliminate the need for physical DVDs.
With access to every studio release,
customers could soon have access to every movie title available on the planet.
THREAT OF ENTRY
ONLINE AND PHYSICAL RENTALS
Barriers to entry for companies looking to enter the physical rental business are relatively
low. For those companies looking to enter the electronic rental market the barriers to enter are
medium. Barriers to entry affecting these possible contenders are to scale in purchasing, product
differentiation, desirable locations and expected retaliation.
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Scale of purchasing is a barrier to entry and poses both weaknesses and opportunities.
High volume companies can get a better price, but they usually agree to a release window, such
as 28 days after the DVD release date. An independent retailer would not get this price, but they
would also not be subject to the release window and could rent immediately and ahead of the
high-volume competition.
Previously, format changes meant consumers were forced to purchase movies already
owned on new formats or rely on old technology. However, Wal-Mart’s digital media storefront
Vudu offers a new technology called UltraViolet. This new format allows consumers to transfer
movies to the cloud for a nominal fee. This is a much cheaper option for consumers that want to
stay up to date with current formats. They are the only company authorized to convert discs to
digital and are currently working on an app that allows consumers to convert DVDs from home
(Lawler, 2013b). This feature stores consumers’ movies on the cloud in the Vudu program,
similar to the way Apple revolutionized music libraries with iTunes.
One of the major keys to the physical rental market is availability of desirable locations.
When you are trying to rent physical DVDs you want to be in high traffic areas, Redbox has
been able to have exposure in these areas by entering partnerships with various retailers. Redbox
promotes that 68% of the entire population lives within a five minute drive of a Redbox kiosk
(“Redbox Fun”, 2013).
Brand name and customer loyalty may come into play with video providers. In terms of
physical DVD renters, Redbox has a well-established brand name that speaks to convenience and
value. As the platform shrinks and competitors scramble for new markets, Redbox has only
grown more dominant and market share continues to increase. Online media brands such as
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Apple, Vudu, and Amazon have a lot of scale and capacity, presenting formidable challenges to
any new competitors.
STREAMING SUBSCRIPTIONS
There are many reasons why the barriers to entry are so high in the streaming
subscription market. Some of these reasons include economies of scale in costs, availability of
capital, efforts made to differentiate product offerings, access to distribution networks, capital
requirements, switching costs and expected retaliation.
Economies of scale, in terms of costs, are extremely important when it comes to
subscription providers Netflix, Amazon, Hulu, HBO Go and Redbox. The reason this economy
is so important is due to the fact that these companies need to provide quality content for their
subscribers. The way they do this is by purchasing the content rights, sometimes exclusive rights,
from studios for a period of time to add to their digital libraries. The leader in digital content
currently is Netflix who spends billions of dollars in order to secure top notch content from
Disney, DreamWorks, AMC and WB amongst others (“Netflix’s billion”, 2012). The only way
that this strategy can work is by not only gaining but also keeping consumers locked into their
streaming service. So far, Netflix has been able to secure 33 million subscribers to spread out
their costs (Leber, 2013). New entrants will have to secure this content without a guaranteed
customer base. New entrants would have to risk purchasing unique content that hopefully could
sway customers away from established competitors to help you spread costs. While this may
seem like enough of a challenge on its own, you also have to compete with heavyweight firms
with big wallets. Netflix is the only relatively small company with a streaming subscription that
is not in a strategic alliance with a larger partner. Amazon is not small, Hulu is backed by both
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Disney and Fox (Smith, 2012), HBO Go backed by Time Warner and Redbox is aligned with
Verizon. Not only does this reduce Netflix’s available resources, but the weakness has recently
led to Netflix becoming a vulnerable take-over target. Netflix has attracted a lot of hostile
stakeholders moving in like vultures seeking to capitalize on the shifting market.
If companies enter this market and expect to take away market share from the big players,
they will waste valuable resources attacking strength. However, having said this, since the
market is steadily growing, niche players are moving in with little resistance. While the big
players are competing for the most popular content, they are allowing smaller niche players like
Crunchyroll, with their emphasis on anime and Asian broadcasting, to enter voids in the
marketplace with little resistance.
THREAT OF SUBSTITUTES
INDUSTRY MEDIUM
The threat from substitute products in this industry is medium.
Buyers don’t face
switching costs when choosing to purchase or rent home video products or their substitutes.
While there may be differing utility values for each option there are no switching costs. The
threat from these substitutes comes from the fact that there are lower cost substitutes. There are
many websites where consumers can watch free user generated videos, music videos and comedy
content from home. During tough economic times consumers may choose to forgo rentals and
purchases for this free content they can find online. These low price substitutes keep industry
prices down because if companies charge too much the utility/value equation might tip in favor
of substitutes.
While the industry faces pressure from low cost substitutes, higher cost
alternatives also create an impact. High cost substitutes include offerings like cable, movie
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theaters and plays. Basic cable puts a limit on what streaming subscription sites like Amazon,
Hulu, Netflix and Redbox can charge. Movies and plays give consumers a greater value due to
the ambience of the theaters, the more social aspect of these events and the ability to watch
something not available at home. Movie theaters put an upper limit on the amount that pay per
view internet video providers can charge for movie rentals. Of course, the degree of this threat
changes with economic times. During the most recent economic downturn, movie theaters were
hit hard while Redbox revenues exploded.
BARGAINING POWER OF BUYERS
PHYSICAL RENTALS
Buyers have a modest degree of power in this marketplace. Consumers’ power comes
from the product being relatively undifferentiated with very low, if any, switching costs.
Physical DVD renters differentiating feature is whether or not you can have someone assist you
in picking out a movie, the quantity of selection you have, and the ability of consumers to either
return a movie at the same location or various locations scattered across the United States.
ONLINE RENTALS AND STREAMING SUBSCRIPTIONS
Switching from one streaming service to another may not always include switching costs.
However, streaming suppliers are always trying to create switching costs to deter customers from
switching services. Switching costs created range from user accounts with a hub to an accessible
movie collection to access to new releases, exclusive content and original programming.
BARGAINING POWER OF SUPPLIERS
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Sony Pictures priced pre-release movies at $24.99 for a rental, a strategy that ultimately
failed. This unfavorable price was the result of a negotiation with Wal-Mart (Smith, 2012a).
Wal-Mart is responsible for 40% of all DVD sales and has a lot of power in such negotiations
(Fritz & Chmielewski, 2012).
Suppliers also have a lot of power within the industry because movie studios are
concentrated. While there are many movie studios, many of the lesser known studios are
integrated with the major movie studios. Streaming services and major rental operations are
dependent upon the content agreements with these studios. Suppliers have imposed limits on
when movies can be rented and distributed to the public in order to maximize margins.
Companies like Netflix, Redbox, Amazon and Hulu are trying to gain integration by creating
their own content. By creating their own content, they have exclusive rights and they have
diversified their existing supply of content.
DEGREE OF RIVALRY
ONLINE RENTALS
Rivalry within the home entertainment industry and online rental and sales market is
fairly high. Online storefronts are growing at a rapid pace, providing direct competitors with
complimentary growth. However, when you see a group of industry heavyweights all competing
in the same market there will eventually be a battle for market share with winners and losers.
While there is not a ton of marketing, there is a trend of consumers gravitating to the services
they are familiar with, such as parent companies Apple, Amazon, Wal-Mart, Google, etc. WalMart is getting a lot of publicity (and market share) with their disc-to-digital plan converting
physical discs into an UltraViolet copy. Apple has devoted fans. Amazon is very competitive.
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Google has an enormous user base (“September 2012”, 2012). Because there are little, if any,
switching costs, the competition is higher. Also, due to the fact that there aren’t a lot of ways to
differentiate their products, the products are commoditized. Apple, Amazon and Vudu allow
consumers to view extras and behind the scenes features that are usually reserved for discs only.
Vudu, Amazon and Apple are all are trying to create switching costs by having your purchased
movies catalogued exclusively on their home site.
During growth cycles, many competitors may look to enter the market and compete.
However, due to the relative size and market presence of the existing firms in the industry, new
competitors may be hesitant.
STREAMING SUBSCRIPTIONS
The competition in the streaming subscription market is more intense due to the high
fixed costs related to content acquisition. Because of these high fixed costs, content providers
need to finance their costs over their subscriber base. Amazon, Netflix and HBO Go are all
strong competitors. There is some differentiation among these companies pertaining to exclusive
content and original programming. Due to the low cost, a consumer will subscribe to multiple
services in order to obtain original programming, similar to (in both price and offering)
expanding a cable package. The only switching cost that may occur is the cost of a set top box to
enable users to stream new subscription services, which can be eliminated by Smart TV or other
media devices.
IMMEDIATE COMPETITORS
BLOCKBUSTER
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Blockbuster used to be a giant in the home entertainment industry. Now Blockbuster sits
on the brink of collapse because of their slow response to competition from Netflix and Redbox.
Blockbuster is trying to appeal to consumers through their DVD by mail service, in store rentals
and new mobile service. After Dish bought Blockbuster they announced that they would be
creating a Blockbuster streaming service to compete directly with Netflix.
cancelled these plans (Foster, 2012).
Dish has now
In 2012, Dish lost $35.3 million on Blockbuster’s
operations. Dish executives have said that if they can’t turn the business around they will shut it
down.
Dish has several strategies moving forward. First, Dish will continue to pursue the
introduction of mobile services.
Once their mobile service is established, they will then
introduce their mobile devices into profitable Blockbuster stores. Second, while Netflix has been
quick to write off DVD, this presents an opportunity for Blockbuster. Blockbuster will try to
lure some of Netflix’s former and current DVD by mail consumers away as Netflix turns to their
streaming future. Lastly, Dish will try to use the Blockbuster name to gain some market share in
the online rental market.
NETFLIX
Netflix has been in the forefront of the video rental industry, collecting and capitalizing
on several key first-mover advantages. Netflix offers consumers a DVD by mail service as well
as a streaming subscription service. As 2012 came to a close, Netflix reported just over 27
million subscribers to their streaming service. Netflix anticipates that their streaming service
will reach approximately 45 million subscribers by 2019. The popularity of Netflix’s streaming
service has made their mobile application one of the most prevalent apps across all smart devices
(Foster, 2012). In the month of September alone, Netflix subscribers streamed 382,078,000
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videos. Subscribers spent on average 11 hours and 2 minutes last September on Netflix’s
streaming site (“September 2012”, 2012). Netflix has begun to create their own original content
in an attempt to differentiate themselves from the rest of the streaming subscription services. So
far, Netflix has three original shows with more on the way.
Netflix needs to maintain loyalty with existing subscribers while attracting new
subscribers, and that deal-making can be expensive. The cost of content is growing as more
competitors are entering the market. The majority of revenues go directly to content agreements
(Trefis Team, 2013).
Netflix firmly believes that their future depends on their streaming subscription services
and focuses mainly on servicing these streaming consumers. In 2011, Netflix’s DVD by mail
subscribers peaked at 24.6 million subscribers. This year the number of DVD subscribers has
dropped to just over 8 million. International expansion is only provided with their streaming
subscription service. The number of Netflix’s DVD subscribers is expected to continue its
decline. Analysts speculate that while Netflix may lose some DVD customers because of the
change, these are customers that Netflix can afford to lose. These customers fall under the
category of heavy users who watch as many DVDs as they can each month. Netflix loses money
on heavy users, shipping up to 12 DVDs a month (Liedtke, 2013), but still makes more profit
with the DVD business than the streaming business. Streaming subscription services have
excellent cash flow but low profit margins.
Moving forward, Netflix needs to ensure that they will be able to maintain profitability
without their DVD by mail service. To do this, they need to reduce costs and work on adding
revenue streams. In order to lower their bandwidth costs, Netflix has created their Open Connect
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CDN Network. Netflix Open Connect is an ambitious project and Netflix has to work hard on
creating relationships with internet service providers to ensure its success. What Netflix wants to
do with this Open Connect Network is either have a peer to peer connection with ISPs or have
ISPs allow them to place network servers that contain copies of Netflix’s most used files in the
ISP’s datacenters (“Netflix Open”, n.d.). Netflix will benefit by reduced costs and ISPs will
benefit by being able to provide their customers with Netflix’s “Super HD” and 3D streaming.
Open Direct is already being used to transmit most international streams. However, in the
United States the only major players to sponsor the program have been Cablevision and Google
Fiber (Lawler, 2013).
AMAZON
Amazon, the internet’s leading retailer, offers consumers online rentals and sales as well
as a streaming subscription service (“The 500”, 2013). Amazon offers consumers a unique value
proposition that no other service can match. By subscribing to Amazon Prime for $79 a year,
subscribers gain access to library as well as the shipping advantages and other features. When
you add up all the benefits of joining Amazon Prime, subscribers may feel like the movie service
is essentially free. Even if someone wanted to join Amazon Prime just for the streaming
subscription service, the cost of Prime is still cheaper than the competition. While sites like
Hulu, Netflix and Redbox price their services at around $8, Amazon Instant is only $6.58 a
month (in one annual price).
Amazon is quickly creating a huge customer base for its Prime and Instant Video
services. Amazon Prime is expected to reach 25 million members by 2017 (Greene, 2013).
Prime subscription viewers have access to over 5,000 movies and 20,000 televisions episodes.
Despite these values, Amazon Prime’s subscriber base still lags behind Netflix (Pogue, 2012).
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Revenue from monthly subscriptions may be the only revenue a streaming service may
receive. However, Amazon’s model is able to collect subscription revenue as well as the
additional gains from the increased ordering habits of Prime members. On average, Amazon
Prime members spend twice as much annually than non-Prime members (Greene, 2013). While
Amazon’s subscription service is growing at a phenomenal pace, they are also commanding 18%
of the online rental and sales market (“The NPD”, 2013). Moving forward, Amazon must try to
understand what is driving consumers to sign up for their Prime membership, and why Netflix
remains more popular.
VUDU
Vudu is currently in third place behind Apple and Amazon in terms of online market
share controlling 15% of revenues (“The NPD”, 2013). Wal-Mart purchased Vudu in 2010
because they saw physical DVDs sales were slipping and wanted to enter the new market (Smith,
2010). The Vudu app is available on Xbox 360, Playstation 3, Android and Apple devices and
almost all smart devices. The only new 2012 smart device Vudu was not available on was Sony
televisions (Katzmaier & Pendlebury, 2012). Vudu’s video and sound quality are state of the art
and best in industry for now. Vudu offers HDX movies that play in 1080p with Dolby Digital
Plus 7.1 sound (“Gadget Review”, 2012).
Vudu gives consumers added value by converting their old DVD movies into UltraViolet
digital copies. While consumers are converting their old DVDs they can choose to upgrade the
video quality from DVD to HD. The basic transfer service costs two dollars. If consumers wish
to upgrade the video quality from standard DVD to HD it will cost them five dollars. This is a
huge deal for those that always need to be up to date with the latest technology or parents of
young children. Instead of having to buy new DVD’s or digital copies for $15 to $25 they can
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go digital for only $2 to $5. Currently there are two problems with the disc to digital program.
First, consumers have to bring their movies into Wal-Mart’s photo centers in order to participate
in the program (Frankel, 2012). Secondly, while most of the major studios are participating in
the disc to digital program, others, like Disney, are sitting out. While Vudu will have to work to
get all the studios on board they have announced that they are developing an app for at home
digital conversions (Lawler, 2013c).
In the future, Vudu needs to work on ensuring that all major movie studios will
participate in their disc to digital program. Vudu also needs to work on creating more brand
exposure. The disc to digital service is a nice start, but it isn’t enough. Vudu is competing
against familiar household names like Apple, Amazon, Netflix and Redbox.
GOOGLE, YOU TUBE, GOOGLE PLAY
Google is by far the world’s leading search engine. Over one billion people worldwide
use the Google search engine. Google owns two websites designed for online rental and sales:
YouTube, the free video sharing website, and Google Play, their online storefront. Google’s
advantage in this market is their overwhelming internet presence. Almost one quarter of the
unique streaming video viewers are visiting YouTube. The average time spent on the site in a
month is above four hours (“September 2012”, 2012).
Going forward, Google needs to figure out how to reach their audience with their product
offering. While they are the highest used search engine and video site they have yet to make a
dent in the online rental and sales market. The failure to capture market share could have
something to do with how people see the brand. YouTube is home to short user generated clips
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not genuine Hollywood movies. Google makes the most of this position through advertising, and
the free platform is unable to distribute paid content.
HULU
Hulu is in the streaming subscription market with a catalog that consists mostly of
television programming.
Television programming is the most popular content for both
subscription and online consumers. TV show rentals account for 80% of Netflix rentals and 90%
of all online transactions (“The NPD”, 2013a). Hulu differentiates itself from other subscription
services by securing the right to stream television shows long before the DVD release. In
addition to airing recent TV shows, Hulu also provides original series for their consumers.
According to the Wall Street Journal, Hulu is losing approximately $30 million each quarter due
to their content agreements (Smith, 2012). While Hulu is backed by Fox and Disney, these loses
are unsustainable. Hulu has a good customer base in place consisting of over 12 million unique
users. The dilemma for Hulu is how to increase both new subscribers and revenues from
existing subscribers.
APPLE
Apple, the current leader in the online market, controls 45% of the online revenue stream
(“The NPD”, 2013a). Apple gains advantages over other competitors because their popular
devices have a proprietary operating system that channels users to use their iTunes media store,
which in turn keeps the users on this platform for all of their needs, making it difficult to switch.
Non-Apple devices are able to consider other options (“Gadget Review”, 2012).
CABLE, SATELLITE AND TELECOM COMPANIES
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Despite the increased popularity of streaming subscriptions and online rentals, the lion’s
share of revenue from digital rentals is earned by cable, satellite and telecom companies. In fact,
more than three quarters of all digital rentals are originated from these sources (“The NPD”,
2013b). 72% of revenue earned by digital movie rentals goes to cable, satellite and telecom
companies (“The NPD”, 2013a). Cable controlled 56%, satellite controlled 26% and telecom
controlled 18% of the revenue. While the cable, satellite and telecom companies are dominating
the market now, this will not always be the case. These companies are fighting for their
continued dominance in their own markets. Cable and satellite companies are being disrupted by
low-cost streaming subscription services and free online entertainment.
In the future, these companies need to look at their current market offerings and
determine how they can provide greater customer satisfaction. These companies have faced
increased competition due to customer dissatisfaction with their products or failure of
management to realize new technology advantages. These companies need to either rework
current market offerings or look for the next industry innovation.
IMPENDING COMPETITORS
HBO GO
HBO Go is owned by Time Warner Cable and is coming on strong to compete with other
streaming subscription services. The service allows cable customers that are subscribed to HBO
to stream the company’s complete catalog of series, specials and movies. While HBO is known
for their original content, they are entering into content agreement contracts with major studios
like Universal, Fox, WB and Summit to ensure that their movies won’t end up on Netflix and
stay exclusive to HBO. There are currently two big drawbacks to this service. First, HBO Go
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requires consumers to subscribe to HBO via cable. In other words, the cost of the subscription is
in addition to the cost of premium cable (Tassi, 2013). Secondly, HBO Go is currently not
connectable with many internet devices, unable to connect with mobile devices like iPad, iPhone,
Android and Kindle Fire. The only smart internet connected devices HBO Go is compatible with
are the Roku, Xbox 360 and supported Samsung products. Redbox is definitely a late mover and
has lost some advantage by not being one of the first 5 or 6 streaming subscription services.
However, like HBO Go, they are trying to capitalize on their strengths to overcome the late entry
into the marketplace.
Moving forward HBO needs to assess the current demand for their product. Will the
added demand from consumers for the $15 HBO Go service make up for the decrease in cable
revenue? Or would they be better off continuing to bundle HBO with other cable programming?
Another thing HBO Go needs to address is their relationships with hardware manufacturers. In
order to increase the demand for and usage of their streaming service, they need to be accessible
on more devices. It is estimated that more than 21% of the United States population has access
to some sort of smart internet connected device. The most prevalent smart devices in these
homes are current generation video game consoles (“More than”, 2013). Currently, HBO Go is
only available on Xbox. However, on Xbox, in order to access HBO Go, not only do you have
to be a HBO cable subscriber, but you also have to subscribe to Xbox Live, bringing the cost of
the service even higher. HBO Go needs to establish relationships with Nintendo and Sony so
that their service reaches more homes.
INVISIBLE COMPETITORS
MOVIE STUDIOS COMING FORWARD THROUGH THE VALUE CHAIN
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Low cost rentals have disrupted the market for purchases, reducing the margins to
production houses. Warner Brothers has recently announced that the release window for movies
going to Netflix will now be 56 days. This move comes on top of the already instated 28 day
release window currently in place for kiosks and video stores (Edwards, 2012). However, if the
trend of rentals over sales continues, the studios moving forward into the rental market is a real
possibility. Sony has already aggressively experimented in this market, renting movies through
their website.
REDBOX CURRENT STRATEGY
Redbox must create an innovative plan around the strategic assets and invest in new
business models (to replace future lost revenues and profits as the existing market wanes). (Stark,
2011) Here are the recent efforts:
REDBOX INSTANT
Redbox Instant is a subscription model for cash flow, and a streaming platform (by
Verizon) in a cross-over industry. This new business has experienced tremendous growth and
may continue to grow exponentially as the industry shifts. This utilizes Redbox’s brand and
capabilities while diversifying the channel away from the DVD. From Verizon’s perspective,
Redbox gives their streaming service a competitive advantage. Redbox is maximizing their
strategic assets.
REDBOX TICKETS
Redbox has extended ticket agreements with several agencies (similar to their content
deal-making, extending this capability) and present a national brand, convenient retail locations,
an online web and mobile portal and charge a low $1 fee. They do not need to alter the kiosks as
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the tickets are using Redbox simply as a purchasing system (tickets are retrieved at the venue).
The product has already rolled-out to test markets. The new channel lifts the umbrella of
“America’s Destination for Entertainment.” This operation is within Redbox’s core capabilities,
deftly utilizes the strategic assets, drives new users to the brand, and creates another diversified
channel of revenue (Burkett, 2013).
INTERNATIONAL EXPANSION
Opportunistically, Redbox has expanded into Canada. “It’s the third-best rental market in
the world, and it’s all about having presence and brand recognition, and we’re still in the early
days there,” said Coinstar CEO Paul Davis (Tribbey, 2013). While our proposed strategy
focuses on a strategic alliance with Verizon and leveraging the company’s core competency with
their kiosk network, Redbox does have a well-engineered international expansion plan. The
company is currently expanding kiosks aggressively in Canada as consumer behavior is very
similar to that of the United States. For the first time ever, Redbox will install more kiosks in a
foreign country than they will domestically.
International expansion is considered a short-term strategy as they target segments of the
globe where smaller kiosk networks can be supported by regional demand. The company is
currently looking into kiosk expansion in both Latin America and European countries where
populated urban centers can be supported by small kiosk networks. The company acknowledges
that the demand for physical DVD has peaked and is now in decline. However, their studies
have shown that lower cost DVD players are still trickling into some parts of the world and
demand for physical discs will remain high in the short term. By leveraging the company’s core
competency of kiosk networks, Redbox anticipates global expansion to remain robust for the
next three to five years which will help build global brand awareness. The company expects
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revenue from international expansion to drive investments into their streaming infrastructure and
to help support international expansion of their streaming service globally.
REDBOX PROJECTED STRATEGY
Despite extending the current strategy of utilizing strategic assets and investing in new
businesses, Redbox must prepare for the inevitable decline in DVD business. We present an exit
strategy for the retirement of the DVD machines with the partners shouldering most of the
expense. We present new substitute technologies and ideas that may generate revenue as the
DVD falls into obscurity. We also elaborate on new strategic cross-over businesses and strategic
partnerships that utilize Redbox’s core capabilities and powerful brand. These options were
designed to diversify the revenue streams while mitigating risk and capital investments.
NETFLIX CURRENT STRATEGY
Netflix is currently the leader in low-cost subscription streaming and operates in three
business segments: domestic DVD by mail, domestic streaming and international streaming
(Jenks, 2013). Netflix positions itself as the alternative to HBO, considered one of the most
popular, premium cable channels. Initially starting off as DVD home delivery in an iconic red
envelope, Netflix is now managing that business segment for decline while subsidizing the future
development and growth of its subscription streaming service.
NETFLIX PROJECTED STRATEGY
Using big-data algorithms and analytics, Netflix has developed several original television
production series. Netflix is disrupting the cable and broadcasting with its low-cost subscription
model, and original programming is helping to drive new growth and increase loyalty.
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Netflix has also begun migration to a general purpose, open-sourced cloud computing
service for its rapidly growing global membership. The cloud service is designed to improve
features, usability, quality, reliability, and security of computing resources delivered as a service
over the internet (Netflix, 2013).
To help develop and enhance future streaming capabilities,
Netflix has introduced a world-wide competition, the “Netflix Cloud Prize”, to award ten
$10,000 prizes for improvements in cloud computing.
REDBOX GROWTH-SHARE MATRIX
Redbox accounted for 87% of total Coinstar revenues, a 22% increase in operating
income of $238.7 million. Fees charged to rent or purchase movies and video games reached
74% and 41% in past year-to-year growth and totaled $1,908.7 million in 2012. Redbox controls
45% of the $5.5 billion U.S. DVD rental market, which is also estimated to continuing growing
to $6.0 billion in 2013. Industry analysts expect DVD rentals will have tapered off in five years,
then begin steadily declining as online streaming becomes the norm. Nearly 40% of all DVD or
Blu-ray player purchases have been made during the holiday season and is used as a barometer
for future DVD rentals.
Redbox has been able to expand their kiosks and increase their
profitability year-over-year. Despite this growth, the platform is shrinking, so the kiosk business
is a cash cow.
NETFLIX GROWTH-SHARE MATRIX
Netflix has generated $3,609.3 million in revenues, $49.9 million in operating income,
and is divided into three business segments: Domestic DVD, domestic streaming, and
international streaming (U.S. SEC Netflix, 2012).
Netflix’s core strategy is to grow the
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streaming subscription business, both domestically and internationally, while the profitable but
declining Domestic DVD segment will subsidize this effort.
Netflix’s Domestic DVD business segment controls 30% of DVD rental market share and
brought $1,136.8 million of annual revenues, generating nearly 50% of the company’s
contribution profit. However, Netflix has determined that this particular market is in decline.
Due to current technology trends, consumer preferences have shifted as subscribers steadily
gravitate from DVD rentals towards online streaming video content.
The Domestic Streaming segment produced increased revenues up 15% to $2,184.8
million and enjoys a 44% market share with strong growth prospects for years to come.
The International Streaming segment produced $204.7 million in revenues, up 260%
from the previous fiscal year. However, this segment is currently operating at a loss due to the
need to develop infrastructure in brand new markets. Major areas of Netflix International
streaming expansion include Canada, Latin America, UK, Ireland, Finland, Sweden, Denmark,
Norway, and Asia.
SWOTR ANALYSIS: REDBOX
STRENGTHS
Redbox’s competitive strength lies in its ability to leverage its infrastructure and
distribution network of kiosks to deliver New Release DVD movies and games to as many
people as possible. The iconic “red box” is easily distinguishable in front of nearly any store
within a half mile from each other. With only a fraction of Netflix’s advertising budget, Redbox
has developed a strong and familiar brand.
Redbox’s “4th wall” position at retail partner
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locations utilizes an effective and convenient point-of-sale strategy. Consumer behavior studies
have shown movie rentals to be largely impulse-driven, allowing Redbox to thrive.
The machines are simple and easy to use, there are no contracts or late fees, and
consumers really love the convenience. But nothing has been able to compete with Redbox on
value. The $1.20 price per day for a New Release DVD has become the industry standard,
leaving a trail of shuttered movie retailers in its path.
WEAKNESSES
Content agreements are the name of the game. Production studios will auction off the
rights to advance release windows of content. If Redbox chooses to pass on these opportunities,
their customers will have to wait or will pay to go somewhere else.
Redbox has very limited TV show offerings, even in the streaming catalogue. These
titles are profitable and popular but Redbox remains focused on movie titles. Additionally,
Redbox does not have any original programming which is proving to be a worthwhile investment
in the current climate.
New government regulations on debit/credit fee transactions have raised the cost of DVD
rentals. Recent regulations forced Redbox to increase their rental fee a nominal amount to $1.20.
Further government, state or local regulations may not only erode Redbox’s bottom line, but may
drive consumers away if the total cost of DVD rental becomes significantly more expensive.
The Redbox kiosks can only hold a fixed number of DVD and games. The physical
aspect limits overall library selection and limits the breadth and depth of available selections.
Only so many varieties of movie and game titles can be carried at any one location. Each kiosk
must also maintain a sufficient quantity of these selected titles to maintain availability.
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Redbox has experienced seasonality in its revenue stream. December and the summer
months have historically been the high rental periods, while September and October have been
the low rental periods.
This is attributed to the start of the school year, as well as the
introduction of the new fall television season. The popularity of the titles has also been linked to
kiosk performance, spiking during a flurry of Academy Award-winning releases, and falling-off
over the course of a drought of hits. New Releases drive the industry.
OPPORTUNITIES
Redbox has done well recently, capitalizing on competitor’s missteps with regards to the
decline of the DVD platform. As Netflix tried to shift businesses for the future, they faced fierce
backlash from their subscribers. DISH/Blockbuster’s emergence from bankruptcy was equally
(if not more) costly. Other competitors have sold-out at opportunistic prices to Redbox. As the
market retreats, Redbox has created value.
As for the new subscription business, Redbox Instant has differentiated itself from the
competition, creating a new business in a growing market. This is the single greatest opportunity
for Redbox’s future, as the product and the market are both well-positioned for a large uptick.
THREATS
There are imminent threats to Redbox survival, and that is the decline of the DVD.
Digital streaming and video-on-demand services continue to erode from the DVD market.
Redbox’s dominance in the current media will eventually go the way of VHS and Beta. As
Redbox’s chief source of revenue, diversifying the revenue before the decline is crucial for
survival.
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Content agreements can potentially block Redbox from certain titles or pricing
advantages, or grant certain exclusivity or timely advantages to the competitors, leaving Redbox
with empty or unpopular shelves. Studios can also squeeze the margins in these deals. The dealmaking ups and downs are a constant threat.
RESOURCES
Redbox has several tangible resources available to become profitable in the video
streaming market.
Through its partnership with Verizon, Redbox can leverage its kiosk
availability to supplement the streaming service. No other company can dominate this aspect of
the DVD rental segment as well as Redbox.
The Redbox brand is a significant intangible resource. Redbox has popularized the lowcost, new release DVD rental which provides consumers an economical choice for video
entertainment. Redbox has maintained solid relationships with various production studios that
sustain the availability of theater release films in a timely manner. Use of the latest technologies
allows Redbox users to reserve their DVD or video game selection online for pickup at the
nearest Redbox kiosk. The overall premise is that Redbox will transfer its brand recognition and
familiarity from pay as you go kiosk rental to online streaming subscription service of Redbox
Instant.
SWOTR ANALYSIS: NETFLIX
Redbox faces competition from many video and entertainment providers. These include
companies who use other distribution channels, have more experience, greater and more
appealing media library, better financing, and better industry relationships. Some of these firms
are the mail delivery and online retailers like Netflix and Amazon; cable, satellite, and
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telecommunication providers like Comcast and DISH Network; traditional movie programmers
like HBO and Showtime; movie content providers through the internet like iTunes, YouTube,
Hulu, and Google; traditional brick and mortar video retailers and other DVD kiosk retailers;
retailers like Wal-Mart, GameStop and other chain stores selling DVDs and video games; and
finally other general forms of video entertainment like movie theaters, television, and sporting
events. The following analysis will focus on the #1 online video streaming company in the U.S.
today, Netflix.
STRENGTHS
Netflix is the world’s leading Internet television network with more than 33 million
members in over 40 countries enjoying more than one billion hours of television shows and
movies per month, including original series. For one low monthly price, subscribers can watch
as much as they want, anytime, anywhere, on nearly any Internet-connected screen or delivered
quickly to their homes (U.S. SEC Netflix, 2012).
Netflix’s greatest strength is attributed to first-mover advantages, having become
synonymous with the industry and the brand is a verb for streaming movies. Consumers will get
the service as a substitute instead of cable, or as a supplement in addition to cable, and then
forget they even have it.
Netflix utilizes their sizable economy of scale and significant content budget and
continues to build a broad and deep content media library. Using available subscriber data
analytics, Netflix identifies a mix of licensed and original content television and movie content
in line with its subscriber’s preferences.
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Netflix is further along the experience curve with the use of algorithms to base user
previous experiences to improve customer satisfaction.
Netflix believes that since the
competition is focused on a variety of products and service offerings, their sole focus on
streaming video will establish brand clarity towards improved innovations on product delivery
and consumer satisfaction.
Currently, Domestic DVD mailing service is expected to continue as a valuable consumer
choice and profit generator over the next several years while providing much needed capital
resources for the expansion of domestic and international online video streaming
WEAKNESSES
The Netflix brand was significantly damaged when management increased subscription
prices resulting from a decision in July 2011 to split the Domestic DVD mail segment from its
Domestic Streaming segment. Negative backlash was quick as unsatisfied customers responded
by canceling subscriptions. It will take nearly three years of current growth to recover these
subscriptions caused by the epic blunder.
The International Streaming segment, operating at a loss, is draining financial resources
as Netflix develops the required infrastructure to expand online streaming capabilities overseas.
The nearly 5 million current paid international subscriptions are not enough to offset $389.3M in
year ending losses.
Content agreements have been won but at record-high prices. Netflix is outspending their
competitors, shrinking their margins and pricing power. Netflix is also relatively small and
independent when compared to the competition, making them a takeover target and less likely to
survive a direct attack. Netflix’s movie streaming catalog is smaller than the competition, and
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lacks the key incentives held by competitive subscription models, such as shipping privileges
with Amazon Prime, or New Releases with Redbox Instant.
OPPORTUNITIES
As online video streaming continues to increase domestically and abroad, Netflix is
positioned to be the first choice in nearly every nascent market. Netflix is investing heavily in
infrastructure to expand into Asia, Europe, and Latin America.
Netflix is the industry leader in collecting and analyzing customer preferences and
viewing habits.
As original programming content is continuously developed from this
significant database, Netflix expects to maintain its customer loyalty while attracting new
subscribers.
Recent licensing agreements with key production studios, such as Disney Dreams Works,
and Time/Warner will solidify exclusive programming rights for numerous movie and television
productions for years to come.
THREATS
Domestic DVD mailing service is threatened by rising postal costs which will reduce the
contribution profit margins of the DVD mail service thru increased DVD shipping costs. . This
could result in significant declines in revenue as the subscriber base looks for alternative DVD
rental options, such as Redbox. Another threat exists with debt limits. A ratio analysis reveals
that Redbox spent less than 1% of its market capitalization on licensing fees while Netflix spends
nearly 24%. (Figure 4)
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Other similar competitors offer diverse streaming video content that Netflix is lacking.
Exclusive content from television production and original production series from HBO,
Showtime, and Hulu Plus among others, are not available from Netflix. Additionally, video
game rentals, either online or from a kiosk are readily available from other sources, like Redbox,
GameFly, Sony, and Apple.
As more and more competitors enter the streaming market, the battle for licensing
agreements will become more intense.
These competing efforts will eventually drive up
licensing costs with the production studios. Similar licensing agreements between production
studios and other online streaming video companies will balance the video content throughout
the industry leaving exclusivity to those uniquely positioned for production, distribution, or other
competitive advantage.
Netflix’s relatively undifferentiated subscription service may lose share as the first-mover
advantages wear-off.
Not only does Netflix lack the key incentives held by competitive
subscription models, such as shipping privileges with Amazon Prime, or New Releases with
Redbox Instant, but these services cost the same price or less. More importantly, Amazon Prime
and Redbox Instant not only add value to the subscription for the consumer, they also both
provide additional sources of revenue. The Prime member is encouraged to shop more and to
purchase more (and statistically does). The New Release DVDs are simply credits- if the
consumer upgrades to Blu-Ray or uses all of the nightly credits, the consumer pays the a la carte
price.
These additional revenues are increased by the heavy users.
Conversely, Netflix
generates no additional income, relying only on subscription revenue, and actually operates at a
loss on the heavy users.
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Netflix is relatively small and independent when compared to the competition, making it
a prime takeover target. Aggressive profiteers are rushing in as stakeholders to try to capitalize
on the shifting market. They do not have the best intentions for the firm or for consumers.
RESOURCES
As the industry leader in domestic online video streaming, the subscription model
produces a strong and dependable cash flow. Although in decline, their Domestic DVD mail
service remains highly profitable, providing a 50% contribution margin to the bottom line.
Netflix uses this income to offset losses in its online streaming service expansion, both
domestically and abroad.
Netflix enjoys significant brand recognition as the first mover in the online video
streaming industry.
High customer satisfaction and word of mouth recommendations pay
dividends towards future growth.
USING STRENGTH TO ATTACK WEAKNESS
Previous sections have explained that Netflix struggles to expand and build-up the
infrastructure required to support its streaming business, actually using the DVD proceeds to
subsidize the effort. Well, Verizon has this infrastructure in place. Verizon produces more profit
in one quarter than Netflix’s entire market cap. Netflix is significantly exposed to increasing
debt, substantially higher costs, and hostile stakeholders. Also recall that Netflix attempted to
spin-off the DVD business to a new brand (Quikster), but had to reverse the decision due to
unprecedented consumer backlash. The damage from this resulted in Netflix losing a significant
number of subscribers, or about three years’ worth of new growth, and sent the stock tumbling.
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Redbox’s dominant DVD platform and straightforward leadership have created opportunities
from the competitor’s tragic mistakes.
The core capabilities related to being the dominant force in physical DVD distribution
(Fritz, 2012) are associated with technology, user-interface, customer satisfaction, convenience,
value, and content management. These existing capabilities made them a strategic partner for
Verizon’s entry into the streaming business. A lot of the attention surrounding Redbox Instant’s
entry appeared to be a direct attack at Netflix, but in reality, it is Verizon’s FiOS that is being
disrupted by Netflix. As a cable provider, they are challenged by Netflix’s low-cost subscription
model. FiOS is currently offering a premium suite of similar products and features, as well as
the same platform technology and user-interface used by Redbox Instant. Redbox Instant is not
“entering” any areas of business outside of their existing capabilities (and neither is Verizon).
Redbox has a national brand that is popular, simple, value-driven, and possesses the industryleading expertise in content agreements.
Also, Verizon has to differentiate the low-cost
subscription streaming model from their premium FiOS service. Thus, the Redbox brand is a
key-player in this new venture. The new venture expects to be profitable in 2014. (Szalai, 2013)
Of all of Redbox’s features, such as the kiosk convenience and usability and the
streaming platform, the single greatest strength is being both the a la carte price and lowest-cost
price for New Releases, by far the biggest driver in the industry. As long as they hold this
position (and consumers continue to purchase brand-new DVD players), the low-cost kiosks will
remain profitable. Competitors are unable to compete in this area, they either stream New
Releases at a price disadvantage, or they are losing market-share to Redbox kiosks.
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Verizon’s strategic alliance with Redbox allows them to offer this New Release tie-in,
blocking any new entrants to the New Release DVD market and differentiating the product from
Netflix.
So what may have appeared as a Strength-against-Strength competition is actually farmore strategic. The strategic alliance is comprised of a vastly superior (by 30:1) streaming and
cable company (Verizon FiOS) partnered with a powerful brand-image and leading distributor of
New Release DVDs (Redbox). When you factor in the low-cost subscription market grew over
260% last year, this is more like entering quasi-blue water than direct competition. But to the
low-cost subscriber, this is a competition, and Verizon believes with Redbox kiosks, they are
attacking the competition at their weakest point.
CONTINGENCY PLAN
The strategic move here is entering the subscription business model, which they have
done. The company is focused on differentiating its subscription from the competition in order
to gain market share. The competition, long-awaiting this challenge, has the following reactions:
-
Increase Catalog – content agreements drive this big business. Redbox is currently a
front-runner in this area, but in order to stay ahead of the competition they will need to
remain vigilant. The big support of Verizon should only help matters, but the dealmaking is relentless and under constant pressure.
-
Price Reductions – as the young industry grows, the first movers are adjusting their
pricing and strategy. Redbox Instant has the infrastructure and resources in place to
compete on price. Redbox Instant can afford to be the premium subscription because
they have a broader selection, exclusive titles, and because the kiosk business is dominant
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in the DVD business. Being the experienced deal-makers and in the high-volume part of
the market, Redbox is careful when negotiating new agreements, which gives them the
flexibility to compete on price. Netflix, which has spent much more aggressively, is now
more exposed to market prices.
-
Offer New Releases – this is Redbox’s bread and butter in the current market. Given that
the DVD platform is shrinking and Redbox market share is increasing, Redbox has
cornered the market, virtually walling-off any new entrants. Future content agreements
may radically shift the industry, which would erode this competitive advantage. (Gandel,
2010)
-
Obtain Exclusive Content – again the market-leading contender, Redbox has successfully
secured a lot of exclusive titles in the effort to differentiate themselves from other
subscription models. But these exclusive titles are obscure to the average customer,
resulting in unproven effectiveness. The average customer is more-likely interested in
the deal Netflix just struck with Disney (starting in 2016) to get all franchise titles weeks
before Redbox and the competition. The effectiveness of the deal (and the staggering
price paid) is also unproven. Already a take-over target, the increased debt may make
this competitor even more vulnerable.
-
Create Original Programming – out-gunned by the competition, Redbox Instant needs to
dabble in this. First of all, original programming is a huge driver of new subscribers.
The cost of a subscription is low, so like adding a premium channel, a customer is likely
to supplement their cable bill for a hit show and/or some franchise content. Secondly, the
core capabilities of the entertainment distribution company remain completely intact.
The success of the Sopranos demonstrated this, the top quality talent and production is
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available for hire, so the product is of the same quality and caliber and comes from the
same core capabilities that make hit shows. The only difference is the way the show is
distributed, which IS the core capability of HBO, Redbox, Netflix, AMC, etc. There is a
secular shift in the industry occurring right now. Finally, this is a low-cost investment.
(Matthews, 2013). Each episode of the Sopranos was $2 million to make, an entire
season $30 million. This left customers clamoring for HBO subscriptions, some even
signing up for cable. If a subscription service can launch some exclusive content to
generate just a fraction of new subscribers, they can recoup their investment (Summers,
2012).
Like the strategy canvas, the contingency plan demonstrates that Redbox is a formidable
competitor in the low-cost subscription services, but that without Original Programming, they
may never gain share from the competition.
GAINING MARKET SHARE
The market share growth and dominance in the DVD industry is evident, but the platform
is shrinking. The subscription model presents a much more viable business with high-velocity
growth, but has entrenched competition. They will need to differentiate their product in order to
grow market share in the now-important category. In the short term, they can trumpet their
exclusive titles and access to New Release DVD kiosks, but in the long term, they will need
exclusive programming. This is a low-risk investment to secure subscriptions and drive new
growth. The subscription business is very likely to experience tremendous growth, but to gain
share, the brand will need to be successful in this new market, and one way is with unique and
exciting content (Stone, 2013).
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The diamond tip of Redbox’s current position is their high-value pricing. This is an
enormous driver for market share. Redbox must maintain the value position in order to maintain
market share. They also must rely on the brand strength to get the existing market share to crossover into the subscription business. In the subscription industry, streaming media is substantially
more scalable than the DVD business. However, as the value position, Redbox is susceptible to
price fluctuations in the market. They risk reduced profits if they end up in a price war, or losing
market share if they go up-market. But in current conditions, Redbox has a stable position in a
growth market. (LeClair, 2013)
REDBOX STRATEGY
SHORT-TERM STRATEGY
In order to succeed in the short term, Redbox must create an innovation plan around the
strategic assets and invest in new business models (to replace future lost revenues and profits as
the existing market wanes) (Stark, 2011). Here are the recent efforts:
REDBOX INSTANT
Redbox instant is a subscription model for cash flow, and a streaming platform (by
Verizon) in a cross-over industry. This new business has experienced tremendous growth and
may continue to grow exponentially as the industry shifts. This utilizes Redbox’s brand and
capabilities while diversifying the channel away from the DVD. From Verizon’s perspective,
Redbox gives their streaming service a competitive advantage. Redbox is maximizing their
strategic assets.
REDBOX TICKETS
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The ticket industry is often perceived as a monopoly controlled by Live
Nation/Ticketmaster, who uses this advantage to charge exorbitant fees. But research shows that
Ticketmaster has only a 30% share (far from a monopoly) and the rival ticket services are
handled through many disjointed operations across the country through various levels of
technology (or lack thereof). Redbox is able to unite all of these rival services under individual
agreements (similar to their content deal-making, extending this capability) and present a
national brand, convenient retail locations, and online web and mobile portal, and charge a low
$1 fee. They do not need to alter the kiosks as the tickets are using Redbox simply as a
purchasing system (tickets are retrieved at the venue). The product has already rolled-out to test
markets. The new channel lifts the umbrella of “America’s Destination for Entertainment.” This
operation is within Redbox’s core capabilities, deftly utilizes the strategic assets and drives new
users to the brand, and creates another diversified channel of revenue. (Burkett, 2013)
These new businesses are perfectly aligned with the short term strategy. Redbox’s engine
of innovation must continue to produce such ideas.
LONG-TERM STRATEGY
Just like the short term, in the long term, Redbox also intends to innovate around the
strategic assets and to invest in future growth. The long-term strategies extend the capability of
utilizing partnerships to obtain growth and expertise. Just like Redbox Instant and Tickets, they
are diversifying risk and revenue streams by extending opportunity through strategic alliances.
REDBOX PORTAL
The strategic component is to utilize the retail footprints, as well as the inevitable exit of
the DVD business. There is a lot of potential value in the national physical kiosk presence and
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we want to make sure we are realizing this value. Like-services, such as Redbox Tickets, are
great concepts as they extend the entertainment-brand umbrella and diversify the revenue stream.
These ideas require no major costs or changes to the existing infrastructure or to the kiosks
themselves. However, we are in the beginning phases of a major shift in the kiosk business, as
the DVD business is inevitably going to expire. Thus, we have devised a strategy to exit the
DVD market while maintaining our existing customer base, further reducing costs to our
partners, improving and diversifying our revenues, as well as offsetting the costs of the
transformation. The idea is for the kiosks to offer data sync.
Sure, Blockbuster has disappeared, but so has Tower Record and Borders. The disruptive
force of ecommerce has left a path of destruction in physical retail, save for Redbox kiosks. The
kiosk is now transitioning from the last bastion of retail to the cutting edge of retail. Redbox is
positioned to become the physical media newsstand & data storefront to the physical public.
Ecommerce still requires a network connection, and while that technology is not going
anywhere, it is not everywhere. There are places today, even in developed societies, where a
connection (with today’s technology) may likely never exist. Also, many types of devices
require a computer to sync or interface with. Additionally, many consumers rely more and more
on mobile data networks, rendering home networks as superfluous. With Redbox Portal, you
could by-pass the network completely with direct-to-device (or direct-to-drive) content
downloads. This level of direct connectivity is important when you are considering substituting
DVDs with about 40G of data. Having the vision to realize that our developed country is only
50% connected to high-speed internet at home translates to a big market for DVD substitutes.
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This model is appealing to low-income households, rural households, travelers, and
developing nations immediately.
Redbox Portal unlocks a whole new market for mobile device uploading, downloading,
charging, and storing. This kiosk technology is already being used by Samsung to download
apps to cell phones in developing nations where data-network usage is at a premium (or out of
reach for local average incomes). This would also work well in rural areas where networks are
poor. This would also benefit travelers, granting instant access to cloud storage, pictures, music,
books, and movies to any device, especially wifi-only devices such as a reader, or non-smart
devices, such as a storage drive or media player. This would also be helpful in the event of a
crisis or as preventative back-up.
The encrypted technology would also eliminate the circulation of pirated material,
opening-up international markets (places previously avoided) for all studios and increasing
licensing revenues for the entire production chain. Each terminal would now have access to any
title and have an infinite supply of copies available- no reservation required.
The cost of overhauling the kiosks would be significant and would hinder access to the
waning DVDs, so we are choosing a different route: A new, re-designed stand-alone machine
will be rolled-out on the coat-tails of the existing property agreements and kiosk connectivity.
This re-designed machine would not have DVD capability, so the roll-out would not affect the
DVD business, and the DVD business can be retired gracefully, resulting in uninterrupted
service for both models. These terminals would provide a user interface and USB port and SD
card slot and would be considerably cheaper and smaller than the current Redbox DVD vending
machine (even wall-mounted). Maintenance costs will substantially drop as there will be no
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moving-parts or inventory. The costs of the new machines will be offset almost entirely by the
partners- the property owners will have to purchase the new machines when/if they retire the old
ones.
The current machines are manufactured and serviced by third-parties, and these
agreements will simply be rolled-over (extended or terminated), with no major disruptions to
Redbox.
Even though the machines are stand-alone and may be used in different markets, the
brand should be extended to this new mobile/data entertainment market, as Redbox Instant is
currently available on several mobile devices. But a more strategic maneuver would be a
strategic alliance with web-based media storefronts such as Amazon, iTunes, Google Play, or
other cloud technology to reduce risk and provide retail customers with a familiar channel and
online partners with new markets.
This new venture would give partnership instant access to all of the titles and capabilities
of the existing media storefront, such as books and music currently not available with Redbox,
and whatever advantages that may come with that partner. For Redbox, this new venture will
utilize several existing core capabilities (kiosk partnerships, content agreements, property
agreements, data networks/terminals) and provide a diversified revenue stream in a new potential
market. Strategically, Redbox Portal will continue supplying the existing “physical” market, as
well as the a la carte market, with full media store and a physical (digital) storefront. Redbox
Portal will also cater to the same market as Redbox Instant and the consumer who has cancelled
their cable bill in lieu of a streaming service. Redbox Portal will extend these cost opportunities
by allowing a consumer to also cancel their home internet, further disrupting the entire industry.
As smart phones and tabs continue to displace home PCs, Redbox Portal will cater to the
growing market of consumers who rely solely on mobile data networks.
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REDBOX AUTO
Another extension of the brand may come from offering high-speed device charging at
the Portals. This may be convenient to some travelers or developing nations and the meteredpower can be distributed at a profit, but in the current market conditions it would basically be
brand extension and brand-building for future synergies:
In about four years, electric car charging stations are expected to take 20 minutes of
charging for every 3 hours of driving (Musk, 2013). That will put many idle drivers into
charging stations for breaks, and the trend will increase. By now, (in the future) having already
extended the brand into charging small devices, they have laid the groundwork for future power
projects. They could cross-over into the market of offering kiosk charging terminals to drivers of
electronic cars, and build synergy with the entertainment brand as well as the Redbox Portal
newsstand.
Redbox can rely on their existing retail network and deal-making prowess to
negotiate partnerships with local utilities, service station operators, and property owners.
These retail power station newsstand kiosks will capture the transaction of charging your
car while presenting you with a digital newsstand to browse while you wait. You can flip
through front page news, add a new playlist and podcast to your car’s audio, and download a
Blu-ray movie for the big screen that evening. No cable, no gas, no mail, and no mobile data
usage.
REDBOX PRODUCTIONS
Redbox, in the business of content distribution, must invest in new and original content
just as it invests in existing content. There is a secular shift in the industry occurring right now
where the networks and studios behind the biggest productions are losing their control of the
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distribution and/or the associated revenues. Where is the revenue going? In TV, the advertising
revenue is leaving broadcasting and heading to cable channels (Vranica, 2013). Broadcast
television ran in seasons designed to maximize advertising revenues. Pilots were built over 9
months. Even the consumer had to wait each week for another episode. As this market has been
disrupted, the quality of the programming has fallen, and new channels have flooded the market
with low-cost or low-risk options. Talented directors, actors, writers are available, but on the
sidelines. Audiences are demanding more, while studios are spending less. This leaves a vast
new market open to new investors, especially the investors with growing markets and increasing
budgets, such as low-cost subscription streaming.
With the traditional industry disrupted, a high-quality pilot can be put together in 2weeks, not 9 months. Entire seasons of episodes can be released all at once, which works for
audiences that are accustomed to streaming recorded episodes whenever it is convenient for
them. Hot young writers, previously smothered in the insulated bureaucracy or kept out of the
‘boys club’ of traditional broadcasting, can be developed or given opportunities. Star actors and
directors are able to find suitable projects again. Niche products, narrow sub-categories, and
other previously overlooked demographics can be developed, targeted, and catered to.
Redbox can start ordering shows with a fairly favorable risk-return ratio, and these
products can quickly drive new subscribers. Studio partnerships could also be tweaked to
provide a direct channel with a limited investment from Redbox, decreasing the risk and bringing
an entire catalog and existing franchises exclusively to Redbox. Either way, this investment
would in-turn drive new subscriptions which must become the primary source of revenue. This
investment in future growth strengthens the brand and extends on the core capabilities.
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SPEED AND PREPARATION
The biggest driver of at-home movies is New Releases and these advantages are a big
part of Redbox’s brand value. Redbox deal-makers must continue to elevate their position
against the competition. Deal-making must remain a primary concentration.
The profitability of the DVD kiosk is still increasing, but the platform is shrinking. This
advantage for Redbox will eventually shift, likely within the next 5 years.
The low-cost
advantages of the kiosks will allow them to generate profit for an extended amount of time,
possibly the next 20 years (according to Reed Hastings, the CEO of Netflix), but the Redbox
Portal option may cause a sweeping overhaul sooner rather than later.
The Portals should be developed immediately. Following the same origination of the
DVD kiosks, which were built and patented by third party manufacturers, this is simply an
investment to specification for Redbox (print-to-part manufacturing and engineering).
International markets/expansion, kiosk re-designs (Redbox Portal/partnership), and
original programming (Redbox Production/partnership) should all be pursued immediately.
Redbox is not directly impacted in the traditional processes of infrastructure or manufacturing,
nor do these ventures require large capital investments. These strategic alliances allow Redbox
to move very quickly.
SHAPING OUR OPPONENT
Given the secular shift in the industry, with production and distribution radically
changing with shifting markets and revenues, analysts believe the horde of online competition is
ripe for a series of mergers and consolidation. Redbox appears well-suited to survive this
feeding-frenzy, whether they enter new alliances or in the event of being directly attacked.
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First, the company built the kiosk business into a strong brand and differentiated product.
Then it used this foothold to attract a major suitor in the name of Verizon. This lifted Redbox
out of the diminishing DVD market (it is currently dominating) to a powerful position in the
heart of the rat race of subscription streaming. Here the competition is thick, but with the
advantages of the partnership, they are offering a differentiated product that can compete. The
dominant leader, Netflix, is considerably smaller than Verizon, so the new venture is secure in
the event of being directly attacked, and has the upper hand in any consolidation efforts or
partnerships. Precariously perched as a new entrant in a crowded market, Redbox is standing on
bedrock with Verizon.
Redbox Instant by Verizon would like you to believe that the fierce competition is
overwhelmed by dominant Netflix. The truth is the telecom behemoth will win by offering
complete integration and tiers of programming.
They have very low risk in entering the
subscription market partnership as they are already providing scalable services for their cable
customers. They have a low risk of damaging their premium brand, which will protect their high
margin businesses. If subscriptions take off, they can leverage their new market share to further
extend the high-end businesses (such as developing FiOS in new markets) while increasing the
margins and positions of the low-end (such as charging a market premium).
For Verizon, this is a low-risk, high-reward entry into a high-velocity market and a new
opportunity which happens to rely solely on an existing capability. HBO and other cable
services are better as partners than as competitors. The covert target competition is the other
multi-level distribution and entertainment companies who they frequently compete with in other
markets, such as Time Warner, DISH, and Comcast, with their cable and programming
subsidiaries, and similar-size multi-billion market caps.
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Netflix has a staggering lead against Redbox Instant, but dominance ends there. Netflix
poses no threat to Verizon or Redbox’s established markets. Netflix finds itself relinquishing
market share in DVDs, bleeding money to new infrastructure and expansion, overpaying for
content agreements, supporting heavy customers postage fees, trapped between retail kiosks on
one-side and premium cable on the other. Completely surrounded, Netflix is now painted as a
takeover target, while trying to recover from a self-destructive leadership gaff.
Has Verizon, with premium offerings and industry leading services, won all without
fighting by earning more profits than Time Warner and Comcast combined? Or have the cable
giants overlooked the same thing Blockbuster overlooked 10 years ago, Redbox’s next major
disruption.
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FIGURES
Figure 1
Coinstar Consolidated Revenues
$2,500,000,000
$300,000,000
$250,000,000
$2,000,000,000
$200,000,000
$1,500,000,000
$150,000,000
$1,000,000,000
$100,000,000
$500,000,000
$50,000,000
$-
$2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Revenue
Operating Income
Figure 2
Redbox Unit Revenue
$300,000,000
$2,500,000,000
$250,000,000
$2,000,000,000
$200,000,000
$1,500,000,000
$150,000,000
$1,000,000,000
$100,000,000
$500,000,000
$50,000,000
$-
$2009
2010
Revenue
2011
Operating Income
2012
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Figure 3
Redbox Market Share
versus all competitors
100
90
80
70
60
50
40
30
20
10
0
2009
2010
2011
All Others
2012
Redbox
Figure 4
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(Matthews, 2013)
(Stone, 2013)
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(Vranica, 2013)
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