Redbox
Mini Project
Hussein Nasreddin
Meg Robinton
Background
In 2002, Redbox created an innovative way for consumers to rent DVDs by inventing a fully automated
DVD-rental kiosk that could be placed in high-traffic consumer locations such as grocery stores and fastfood restaurants. At the time, the predominant method for renting a movie required one to travel to a
local movie rental store (e.g., Blockbuster, Hollywood Video) and purchase a fixed- period (e.g., 3-,5-,7day) movie rental for around $4. If the movie was returned after the due date, the customer would be
charged a hefty late fee. Though Netflix had recently launched a subscription-based DVD rental
program via mail, Redbox truly transformed the way that in-person DVD rentals were conducted.
The original Redbox launched inside a McDonald’s restaurant in Washington DC; by 2005, there were
over 1,200 kiosks spread across the nation. In the same year, Redbox became an independent company
after Coinstar, Inc. partnered with McDonald’s and invested in the company (Coinstar eventually
purchased the company outright in 2009). By 2011, Redbox kiosks were found outside of McDonald’s
restaurants in grocery stores, convenience stores, and mass merchant stores in over 29,000+ locations.
Redbox reports that over two-thirds (68%) of the U.S. population lives within a 5-minute drive of a
Redbox kiosk. As of March 2012, Redbox has transacted an impressive 2 billion rentals1.
Value Proposition
The main value of the Redbox kiosk is captured by the end customer. This new DVD-rental platform
allows customers to rent a DVD while they conduct their regular daily errands and eliminates the extra
trip they would need to make to the movie rental store. The Redbox business model is also based on
daily DVD rentals at a low cost ($1.20/day for DVD, $1.50/day for Blu-Ray). The business model means
that customers only pay for the number of days they actually need and are no longer charged late fees.
Redbox also offers the customer the additional value of being able to reserve their rental through the
Redbox website or the Redbox smartphone app (available on iPhone and Android). The days of driving
to the movie rental store only to find that the movie you were looking for is out of stock are over.
In 2011, Redbox expanded their rental offering to include video games. Rather than pay around $50 to
purchase a video game, customers can now rent a video game from Redbox for $2/day. This offering
allows customers to try out a game before making the decision to purchase it.
1
www.redbox.com
Most recently, Redbox announced that they are expanding their offering to include Redbox Instant, a
new product resulting from a joint-venture with Verizon2. Though the details of the offering are still
being finalized, Redbox Instant will be a package offering that includes both Redbox discs and Verizon’s
instant streaming content: “DVDs at the Kiosk + Instant Streaming Hits, All in One Fist-Pumping
Package”3. Customers will pay a monthly subscription (the price is still to be determined) and receive an
allotment of disc rentals from Redbox kiosks and receive access to video-on-demand movie rentals and
purchases. The new service is still going through alpha testing but is expected to launch by the end of
20124. This new service will further expand Redbox’s value to the customer by providing ultimate
flexibility – the ability to rent movies without leaving home.
Ecosystem
Aside from providing the end customer with a compelling value proposition, Redbox had to consider
many other players in their ecosystem:
2
http://www.bloomberg.com/video/85811202-coinstar-ceo-davis-on-verizon-joint-venture.html
https://www.redboxinstant.com/rbgatekeeper/
4
http://www.engadget.com/2012/09/25/redbox-instant-targets-launch-by-year-end-blends-subscription-s/
3
Content Developers
The Redbox rental model relies on content created by third-party developers, such as movie studios
(e.g., Disney, Paramount) and video game publishers (e.g., Activision, EA). In the majority of cases,
Redbox purchases the content directly from the content developers at wholesale prices. Though
Redbox builds awareness and drives trial of the content, several large movie studios have recently
become concerned that Redbox may be negatively impacting their initial DVD sales and thus the
relationship has become tenuous5.
Content Suppliers
Due to the tenuous relationship with several large movie studios and an agreement that does not allow
Redbox to purchase DVDs from studios until 28-days after their initial release, Redbox began purchasing
new releases (about 40% of the titles in the kiosk6) directly from retailers (e.g., Walmart, Target, Best
Buy)7. However, challenges have recently arisen in this channel as well as retailers have begun to limit
the number of DVD purchases per customer in order to improve availability of new releases8.
Kiosk Host Establishment
After the end customer, the establishment that hosts the kiosk (e.g., McDonald’s, grocery stores)
receives the most value from the Redbox kiosk. Though the amount is not published, it appears that
Redbox shares a portion of the revenue with the host establishment9. In addition to the direct monetary
benefit, retailers also benefit from the increased traffic received from customers visiting their store to
rent and return the DVDs: “A typical Redbox kiosk in a grocery store accounts for approximately 480
visits per week, including rental and return visits. According to NPD Group data, approximately 52% of
these trips are specifically to visit Redbox.10” In addition, a third-party operator handles the actual
maintenance and restocking of the kiosk so the benefits from the kiosk are essentially cost-free for the
host establishment.
5
http://www.deadline.com/2012/06/redbox-will-rent-john-carter-dvds-soon-despite-disneys-new-28-day-delay/
http://www.businessweek.com/technology/content/feb2010/tc2010022_125668.htm
7
http://www.deadline.com/2012/06/redbox-will-rent-john-carter-dvds-soon-despite-disneys-new-28-day-delay/
8
http://www.businessweek.com/technology/content/feb2010/tc2010022_125668.htm
9
http://www.washingtonpost.com/wp-dyn/content/article/2007/04/27/AR2007042702295.html
10
Spielvogel, C., “The argument for Redbox”, Video Business, May 4 2009.
6
Telecom Company
With the expanded offering of Redbox Instant, a new player has entered the ecosystem: Verizon. That
said, this partnership is very low-risk for Redbox given that Verizon actually holds the majority share
(65%) of the joint-venture11 . Verizon and Redbox will work together, each specializing in their own core
competencies (video on demand and low-cost disc rentals, respectively) to offer an attractive value for
movie renters with broadband access.
Redbox’s Strategy to Align the Actors in the Ecosystem
Redbox’s consumer-centric, value-based strategy has proven wildly successful. As a niche player in the
DVD rental market, Redbox effectively segmented the market and shrewdly expanded their footprint
across the country – thanks in part to information technology advancements and partnerships that have
helped them remain innovative. Although a quick macro “stoplight” overview paints a buoyant picture
of their ecosystem, further analysis of the risks provides insight to the key strategic moves made by the
growing company.
Content Developers, notably major movie studios such as Disney, Sony and Paramount, have proven to
be the most inhibiting player in the Redbox ecosystem. The battle between Redbox and Content
Developers is based on a simple premise: movie studios profit when consumers buy DVDs, and rental
outfits’ activities cut into those sales. This relationship has seen countless legal battles, but the most
common resolution (and the one most frequently followed) has been for a 28-day moratorium on
11
http://www.inc.com/karl-and-bill/redboxs-smart-move-what-you-can-learn.html
newly-released DVD rentals. Simply put, if you want to watch a new DVD, you have two options: buy it
at full price, or rent it 28 days after its release. Additionally, Redbox’s rumored “workaround” strategy
(purchasing DVDs straight from retailers, subsequently avoiding the 28-day window) has created an
additional wrinkle in the relationship between Redbox, Content Developers and Retailers (additional
info below). Though this “work around” solution solved the issue temporarily, it may not have been the
best solution for Redbox in the long-run. Because Redbox is so reliant on the content from the
developers, it may have been wise for them to instead increase the surplus for the content developers
by offering them an incentive (e.g., profit sharing plan, purchase price above wholesale, etc.).
Content Suppliers play a unique role in the Redbox ecosystem. As Content Developers look to extend
and expand the waiting period for newly-released DVDs (from 28 to 56 days), increasingly powerful
rental companies like Redbox began stocking their kiosks with retail purchased (and even crowd
sourced) inventory12. While this move might cut into Redbox’s gross margins, it answers consumer’s call
for fresh content and immediate gratification.
In 2010, perhaps as a testament to the aligned interests between Content Developer and Suppliers, key
national retailers such as Wal-Mart and Target limited the number of newly released DVDs that a single
customer could purchase. This change in policy forced Redbox to not only expand their sources, but also
to reconsider stepping back into the negotiating room with Developers.
Much like with the content developers, it seems that Redbox was perhaps too consumer-centric in their
decision to directly purchase DVDs from retailers. Redbox, ignoring the larger ecosystem dynamics at
play, did not offer retailers any sort of reasoning/incentive, and as such, they were treated as “regular”
customers. At a minimum, this would have allowed the retailers to order enough stock to meet the
increased demand. For Redbox’s “work around” plan to have been successful – they should have
minimized the risk and considered partnering with the content suppliers upfront.
Kiosk Host Establishments (aka Retailers) are among the biggest fans of Redbox kiosks. Key to this,
Redbox did a fantastic job minimizing the adoption chain risk involved in the partnership; their selfautomated kiosks take up minimal space, boost customer traffic and, most importantly, they help drive
up incremental retailer revenues (via customer traffic as well as shared profits). Redbox recognized the
12
http://www.newser.com/story/147692/netflix-redbox-find-easy-way-to-beat-studio-rules.html
importance of aligning retailer’s interests, thereby ensuring that their end consumers (i.e., people who
want to rent DVDs) could have the opportunity to walk by kiosks. The rent-and-return anywhere policy
also helps spread customer traffic to a variety of locations; while I might rent a DVD from outside the
grocery store, the simplicity of the network allows me to return it at the gas station, ultimately
benefiting both sets of retailers.
The rapid expansion of on-demand digital media players (Netflix Instant, Hulu) has pushed Redbox to
explore innovative technologies and partnerships. Partnering with Verizon, a key Telecom Provider with
access to 14% of US homes13, was a critical move to minimize co-innovation risk and more safely enter
the video-on-demand market. By limiting their investment ($14mm) and stake (35%) in the venture,
Redbox can focus their attention and dollars on their core competency (low-cost DVDs, national kiosk
expansion) while concurrently expanding into the ever-growing video-on-demand market.
In summary, Redbox did an excellent job at creating a compelling value for the end customer, the kiosk
host establishments, and Verizon. However, they should have more carefully considered the value they
could offer to content developers and suppliers – two ecosystem players that are crucial to their
success. Unfortunately, Redbox is seeing the consequences through their legal battles with movie
studios and new restrictions set by the content suppliers.
A look ahead to the future
Redbox is continuing to expand their offering, most recently through a live-ticket kiosk pilot program (in
Philadelphia). Although not yet fully vetted and rolled out, it represents a potentially innovative
alternative to standard live event ticket vendors (Ticketmaster, LiveNation, StubHub). Will Redbox
effectively manage the adoption chain risks involved in the live-event market? The results are yet to
come, however their continued pledge to simplicity, cost competitiveness and widespread access for
consumers are a step in the right direction.
13
http://www.inc.com/karl-and-bill/redboxs-smart-move-what-you-can-learn.html