Redbox Likely to Seek Video Download Alliances, CEO Says

The DVD kiosk company doesn’t expect to have its digital strategy set before year-end, Davis said. But the service will likely involve downloads or streaming to a TV or PC, he said. While Redbox considered retrofitting its kiosks to offer digital downloads to a USB drive, “I can’t see our customers being interested in that,” he said.

While Redbox tested digital video download using Sonic Solutions’ RoxioNow platform, Sonic is just “one of many potential partners,” Davis said. Redbox earlier this year surveyed customers, asking if they would pay a $3.95 for a subscription that would include unlimited streaming with four kiosk rentals a month. Since Redbox titles typically rent for a $1 a day, that would mean free streaming with four rentals. “As we think how best to get into this space, it has to be congruent with our brand that is synonymous with convenience and value,” Davis said. “So we have to think how do we do that and be true to the Redbox brand. We believe there is a way in that space to differentiate and that’s what we're trying to figure out."

As it readies a digital video strategy, Redbox will expand its test of renting videogames through kiosks. Having piloted the concept with 250 kiosks in retailers in Reno, Nev., and Wilmington, N.C., Redbox will move into Florida, Investor Relations Director Rosemary Moothart told us. Moothart declined to disclose how many kiosks would be involved in Florida. With a $50-$60 cost, videogames are rented for $2 per night and typically “stay out longer” as the user plays the game, Davis said. The games are combined with DVDs in a kiosk, filling less than 50 percent of the slots, Davis said. A standard Redbox kiosk has space for 200 game titles and 600 DVDs, he said.

"The fact we are expanding into another market you could read as we're happy with the results, but we're not doing a full-scale roll out yet,” Davis said. With videogames carrying a higher deal cost, “we don’t feel that we have to have 100 games” in a kiosk “so we're being very targeted,” Davis said. “We have a pretty tall hurdle for the videogame guys to hit in that they have to at least match whatever revenue we were generating from the DVD slots” that games fill, Davis said. Redbox is continuing with plans to add Blu-ray titles to its kiosks by mid-year. The Blu-ray movies will fill about 10-15 percent of a kiosk’s slots, given that they typically carry a 25-30 percent higher dealer cost than standard DVDs, Davis said.

Redbox also will expand its test at airports, doubling the number of DVD kiosks deployed in them to 24 this year, Davis said. Redbox began the pilot in 2008 with two kiosks at Nashville International Airport and has since added them in Austin, Texas; Boston and Cincinnati. Redbox also is testing 3-4 other “seeds” for automated kiosks, including one for coffee with Seattle’s Best at Albertson’s grocery store in the Seattle area. The kiosk charges $1 for a 12-ounce cup of gourmet coffee, Davis said. Coinstar earlier tested 80 kiosks that were shutdown after proving to be too expensive, he said. While the Flextronics-made DVD kiosks cost $15,000 each, the coffee machine in the earlier test was about $50,000, he said. Coinstar’s DVD services depreciation and amortization rose to $22.2 million from $13 million due partly to $3.2 million in costs tied with the shutdown of DVDExpress kiosks it acquired, Davis said. The DVDExpress kiosks were smaller than a standard Redbox machine, containing 300 slots and 100 titles, Davis said.

In light of Movie Gallery’s plans to close its remaining 1,900 stores by mid-summer, Coinstar may revise its forecast for the size of the available market in the U.S. for DVD kiosks, Davis said. Coinstar initially projected a market for 60,000-90,000 kiosks, but later cut that to 40,000-60,000, Davis said. It has installed 22,800 kiosks in the U.S. thus far. Redbox has 2.9 kiosks within five minutes of a Movie Gallery/Hollywood Video store, Davis said. It has 3-4 kiosks within the same distance of a Blockbuster outlet, he said.

"When we adjusted that forecast we didn’t know what would happen to Hollywood Video nor did we anticipate Blockbuster’s issues,” Davis said. “Depending on what happens on the brick and mortar front we could change that number one way or another. We never plant a kiosk in a store unless we can see its way to maturity or three years and $50,000.” A Redbox kiosk breaks even with $50,000 in annual revenue and typically has 40-50 DVDs rented each day, he said. Redbox is deploying two kiosks at some retailers as means for offering a broader selection of movies and adding other products like videogames, Davis said. Redbox’s Q1 average revenue per transaction rose to $2.16 from $2.01 a year earlier, the company said.

Having recently settled lawsuits and agreed to 28-day windows with Universal and Fox, Redbox won’t be able to fully gauge the impact of the new agreements until late Q2, Davis said. Redbox also has similar pacts with Warner Brothers and other studios. Fox, Universal and Warner had stopped supplying titles directly to Redbox. Redbox sued the studios after they imposed rules stating that the company wouldn’t be provided new titles unless it agreed to a rental window. Coinstar settled with Fox and Universal in April, agreeing to pay them $394 million and $82.8 million over the life of a lease and rental agreement. The pacts with Universal and Fox run through 2012 and 2015, respectively. As a result of the new pacts, the value of DVDs Redbox bought under direct supply agreements with studios rose to 78 percent of DVD purchases from 25 percent a year ago, the company said. The value of those bought through distributors plunged to 13 percent from 73 percent, the company said.

"We did a lot of testing before we agreed to do the three 28-day window deals with not only our consumers, but those of our competitors as well,” Davis said. Redbox “held back” new titles 1-4 weeks to test the concept of a rental window, he said. While video has grown to account for 75 percent of Coinstar’s annual revenue, the company has no plans to separate the DVD business from its coin-counting operation, Davis said. “In a major retail space there are a lot of opportunities to network the two platforms together,” Davis said. “They share common retailers since in every case it’s the same buyer and category management team.”