With consumers watching their wallets during the recession, some people are finding dollar-a-night video rentals from Redbox too good to pass up.
Coinstar CSTR, best known for its self-service coin-counting machines in grocery stores, in February became full owner of Redbox. For about a year previously, Coinstar was a 51% owner of Redbox. In February, it bought the 44% stake held by fast-food chain McDonald's MCD and smaller stakes from other investors.
Coinstar President Gregg Kaplan doesn't expect much change in strategy under Coinstar's full ownership. After all, he says, under Coinstar's majority ownership, Redbox embarked on a major expansion. Kaplan was chief executive of Redbox before the acquisition.
Redbox added 6,000 or so kiosks last year to grocery, drug and discount stores. The Oakbrook Terrace, Ill., company plans to add 8,000 kiosks this year, bringing its installed base of DVD rental machines to more than 20,000.
The rough economy hasn't hurt Redbox, Kaplan says. Its low cost resonates with users looking to save money on entertainment, he says.
"If you look at the folks who are doing well in this environment, it's Wal-Mart, McDonald's (and other) low-price-point, high-value (companies), and we consider ourselves part of that group," Kaplan said in an interview. "We haven't seen anything (negative from the recession). Business is good."
IPO Market Nixed Plans
Coinstar's acquisition of the remaining shares in Redbox valued the video rental company at more than $300 million.
Before Coinstar's move, Redbox had been planning an initial public offering. It ditched those plans last year when the IPO market soured.
Kaplan says Redbox is profitable, and he sees a lot of growth ahead. Redbox is in 48 states, but its presence is small in many of them. For instance, it has 44 kiosks in Denver, but just two in New York City.
"There's a tremendous opportunity to add many more locations," Kaplan said.
Redbox is looking to add grocery stores as well as midsize and small convenience stores to its roster of kiosk locations. Redbox has a deal with 7-Eleven to put kiosks at about half of its convenience stores by year-end.
Redbox has found that revenue per machine goes up when there are more kiosks in a region, Kaplan says. Since the machines are networked, customers can reserve movies online and return movies to any Redbox machine nationwide.
Redbox is by far the largest operator of automated video rental kiosks in the U.S. Competitors include DVDPlay and The New Release, also known as MovieCube.
Blockbuster and its ilk have been hurt by convenient, lower-cost rivals Redbox and the subscription, DVD-by-mail service Netflix NFLX. Redbox grabs customers interested primarily in the latest releases, while Netflix touts its deep library of more than 100,000 DVD titles.
Blockbuster followed Netflix into the DVD-by-mail business and has been experimenting with video rental kiosks. But given Blockbuster's precarious financial situation, it might not be able to afford a big investment in kiosks, Kaplan says.
35 Million Users
Redbox says its low price has sparked rapid adoption.
"A buck (per rental, plus tax) is a good number in a recession," said Tom Adams, an analyst with Adams Media Research. Blockbuster charges as much as $4.99 plus tax to rent new releases. The average Redbox customer keeps a DVD movie for about two days.
Redbox had $400 million in sales last year, says Coinstar, which expects Redbox to have $690 million to $750 million in sales this year, up 80% at the midpoint. Coinstar projects earnings before interest, taxes, depreciation and amortization of 14% to 16% from the business.
Redbox boasts 35 million unique users. Customers pay using credit cards, and users pay $1 for each day they keep the video out, maxing out at $25. So Redbox doesn't care if users don't return a DVD, because those users in effect end up buying the DVD for $25.
In January 2008, Redbox passed the milestone of 100 million DVDs rented. The current figure is more than 300 million.
Video rentals from self-service kiosks generated $524 million in sales last year in the U.S., or about 6% of the home video rental market, according to Adams Media Research. Kiosk DVD rentals could reach $1.5 billion in 2013, or 18% of the total market, Adams says.
As of Jan. 1, there were 18,715 video rental kiosks in the U.S. vs. about 20,000 traditional video rental stores, Adams says.
Redbox faces challenges.
The company sued Universal Studios Home Entertainment last fall when the studio tried to restrict access by Redbox to its new-release DVDs. That lawsuit is pending.
Hollywood studios fear that $1 DVD rentals will hurt their DVD sales, Adams says.
Redbox has countered Universal's claims by saying its service is good for DVD sales. Many Redbox customers practice "try before you buy" when it comes to new DVDs, Kaplan says. Its polls show that Redbox users buy as many DVDs as Netflix or Blockbuster customers.
Redbox is testing rentals of high-definition Blu-ray Disc movies at a few locations. It's evaluating how quickly to roll out Blu-ray Disc movies and what to charge, Kaplan says.
Source: Investor's Business Daily