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Redbox dominating DVD kiosk market

February 14, 2012 by Soheil Samimi — President, iMOZI

The DVD Kiosk business made significant headlines this week with the major announcements of redbox's acquisition of the NCR Blockbuster Express network of DVD kiosks, as well as a partnership with Verizon to extend their entertainment services into the Digital era. It had indeed been a while since redbox has been promising to deliver some sort of a digital strategy in order to address its longer-term future. Now in addition to making a step in that direction, redbox is becoming even more dominant by further consolidating its huge hold on the DVD kiosk market. In fact, until the sale, NCR was the only worthy competitor of size at the national level to the redbox kiosk empire.

For one thing, this news and the continued success of the DVD Kiosk industry demonstrate that the demise of physical DVDs, and its rental segment, was predicted too soon. The latest quarterly results displayed by redbox indeed surprised analysts' forecasts, with almost $500 million in revenues and a 33 percent year-over-year quarterly sales increase. However, it's important to note that the rate of new kiosks to be deployed in the coming year is expected to slow this year, as the U.S. market is getting closer to saturation. In that regard, for Coinstar to be able to grow through the acquisition of a competing install base makes sense. Especially in an industry where scale matters, along with kiosk density in order to leverage all the logistics associated to the maintenance and merchandising of the locations in each region. Additionally, it is worth noting that through this purchase, redbox is gaining a better foothold into some key retail chains such as Safeway and Publix, thus becoming even more ubiquitous to U.S. consumers.

"Physical is going to be around for quite some time, and we believe we can leverage that marketplace," said Gary Cohen, SVP of marketing and customer experience at redbox. "Streaming is great, but we're also looking at how we innovate in this automated retail space. We have more locations than McDonald's and Starbucks combined..."

This last statistic is in fact quite impressive when one thinks of it! So with such a large customer base interacting directly at its physical points of presence (which is basically everywhere that America shops every day), no wonder that Cohen concluded the statement by saying that: "When you put all that together, there's a lot of ways you can vector off".

Looking to the future

Cohen's view on physical media does not stop the company from understanding that on the long-term, there is a clear migration toward downloadable content within the home entertainment business. This explains the other major announcement by redbox, which is its deal with Verizon to develop an Internet video offering (principally aimed at competing against Netflix).

This new partnership will allow redbox to utilize Verizon's state-of-the-art infrastructure in IP network and advanced cloud computing to deliver video on-demand. Additionally, redbox can use its partners help to leverage industry relationships that are in place with content providers. And of course, Verizon in turn gains valuable access for marketing the new digital services to Coinstar's 30 million+ loyal customers at almost 45,000 kiosk locations.

But before considering this new joint venture by redbox and Verizon as a viable contender to Netflix (not to mention Amazon, Hulu and others), industry pundits are taking a cautious approach and await further details on the offering. At the end of the day, their success will be heavily dependent on how much the service costs and more importantly what type of content it will offer its users. Acquiring in-demand content will certainly come at a heavy price. In reviewing Netflix's foray into this segment over the recent years, this necessity has certainly been a primary issue. Therefore the question will be to see if redbox and Verizon are willing to invest the up to $1 billion a year on content that Netflix has committed to in order to convince Hollywood studios to participate and get a large library of programming.

A win for customer service

For redbox users however, this is overall good news. As long as the company executes well in delivering its new services, it should result in better customer experience. By offering instantly available online and mobile content coupled with immediate access to physical media through rental kiosks, a unique offering with the best of both digital and physical worlds will soon be available in the marketplace. Additionally, it seems that Coinstar also sees the online offering as an important way to grow its content selection beyond the 200 or so recent-released movies inside one of its kiosk at any given time. This also opens the door for new pricing and better monthly plans.

For example, a streaming member could pick up a recently released physical disk at the nearest major retailer without having to pay a transactional rental fee. This would provide a better service than Netflix in terms of physical delivery times and be more competitive than Blockbuster, wherever stores remain open.

What about Blockbuster?

Speaking of Blockbuster, it will be interesting to follow-up on DISH's strategy for the company. Until recently, speculation existed that they might be one of the primary suitors of NCR's Blockbuster Express kiosk network. And with redbox's acquisition leading to the automatic stoppage of the use of Blockbuster's brand on those kiosks, the company is now without any presence or offering within the kiosk segment (today representing the No. 1 source of rentals in America).

What about the international market?

There are, of course, other aspects to this purchase by redbox, and its consolidation to gain size in competing with the big players involved in the entertainment business. For example, one opportunity that has not received much mention is the International growth that Coinstar can now pursue. To that point, NCR's kiosk network brings redbox a small, yet respectful presence in new markets such as Canada. This can definitely help the company maintain good growth in kiosk deployments as it slows down in the U.S. Therefore, leveraging NCR's strong international presence and relationships must be a part of the equation.

And with each company now more focused on what they really are (i.e. a technology company vs. an entertainment company), it seems that their competition in the DVD Kiosk business has now finished with a mutually beneficial ending -- not to mention resulting into an even more dominant DVD Kiosk player ready to better handle the future.

Read more about DVD kiosks.

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