The Rental Revolution: How Redbox Revitalized the Movie Rental Industry

February 26th, 2014

In 2002, a small startup company began offering DVD rentals through automated kiosks. The company aimed to revolutionize the way people rented movies. Few took notice of the company at first, but customers loved the ease and convenience of renting movies at the cheery red kiosks. The company quickly blossomed from a small market in one city to thousands of locations across the United States. Redbox is now one of the largest players in the movie rental business, with more than 34,000 locations across the United States and Canada and a market share of the physical rental market of more than 47 percent.

Success was not always guaranteed for Redbox, however. The company was initially funded by McDonald's, and started with four automated kiosks to sell grocery and convenience items such as milk, eggs and sandwiches. It also had 11 DVD rental kiosks. It placed the kiosks throughout the Washington, D.C. metropolitan area. While the DVD kiosks did well, customers did not seem to respond well to the convenience kiosks, and the company quickly dropped these to focus solely on the DVD rental market.

Coinstar, a company that runs automated kiosks to count loose change and convert it into bills and gift cards, saw an opportunity and, in 2005, bought 47 percent of the company for $32 million. Redbox continued to grow, and in 2007 its number of locations surpassed that of chief competitor Blockbuster (at that time a struggling company looking to reorient itself by also moving into the kiosk business). In 2008, Coinstar exercised an option to up its share of the company to a controlling 51 percent. The following year, it purchased the rest of the company for approximately $170 million.

Redbox did not settle for this success, however, and in 2010 began renting both Blu-ray discs and video games for all major platforms. That same year, Redbox surpassed 1 billion rentals. In 2012, it purchased its former competitor, Blockbuster Express, which was foundering, for $100 million, and acquired that company's 10,000 kiosks. Success for Rebox continued to accelerate, and by 2013 the company announced it had surpassed 3 billion rentals.

Looking for new ways to expand its business, in 2012 the company set its sights on streaming video service, a market previously dominated by Netflix. This move was not surprising because a co-founder of Netflix, Mitch Lowe, had worked for Redbox since 2003 and had steadily moved up through the company, eventually becoming an executive. The new streaming service, called Rebox Instant, was formed as a joint venture with Verizon, and the service went public in early 2013, offering users an unlimited streaming service that also included four disc rentals from a kiosk. Titles can also be rented and purchased on demand without a subscription.

This mixed bag of offerings has truly proved to be the reason for Redbox's success. It can be argued that very little, if anything, that Redbox has offered is original. The true secret to the company's success has been in offering speedy DVD and game rentals in a variety of ways. This versatility allows customers to pick the most convenient option for them, and to seamlessly switch from one rental mode to another without switching companies. Redbox kiosks are convenient, quick and easy to use, and do not require paying an employee to staff. This low overhead has made it easy for Redbox to add locations because all that is required is power and space for the small kiosk. Many businesses find it helpful to have a Redbox located at their business because it may influence where a consumer chooses to shop and thus drive additional sales.

The company was involved in protracted lawsuits with some film companies over when it could offer new DVD releases. The companies expressed concerns to Redbox that immediate rental availability could harm sales of new releases. These lawsuits were eventually settled, with Redbox agreeing to not rent new releases from these studios for 28 days after release. Other major studios have happily partnered with the company to allow it to immediately rent new releases, and these deals seem to be profitable.

With these potentially crippling distribution issues largely settled, the future looks bright for Redbox. More than 70 percent of the U.S. population lives within a five-minute drive of a Redbox kiosk, and the company plans to keep expanding its domain. The company is also beginning to move into Canada. Other countries may also offer easy pickings for Redbox, as the company reportedly has plenty of capital on hand and a proven business model. This model of convenient, fast and automated physical rentals appear to be secure for the near-term future. With the addition of Redbox Instant, the company appears to be secured against the eventual and inevitable decline of physical rentals. In the end, the true revolution of Redbox was to show the business world that small improvements to existing models can have major effects. Paradigm-shattering innovations have their place, but sometimes all a company has to do is build a better mousetrap, and as the saying goes, the world will beat a path to its door, or, in this case, its bright red kiosk.

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