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Despite growth of streaming, Redbox CEO sees future in DVD rentals

July 31, 2017 


CHICAGO — Redbox DVD rental kiosks, a seeming throwback to a simpler technological time when videos were something you held in your hand and late fees loomed over your head, are mounting a comeback.

Last year, Redbox removed nearly 1,000 of its kiosks amid slumping sales and increasing digital competition and was looking like it might follow Blockbuster into the graveyard of corporate obsolescence.

Fast-forward to 2017, and Redbox, based in suburban Chicago, is adding 1,500 kiosks back into circulation, with new ownership projecting a long-running future as the last man standing in a declining video rental industry.

Galen Smith, 41, the former CFO of previous owner Outerwall, took the helm at Redbox in September after Apollo Global Management bought the struggling company for about $1.6 billion. Smith, who started working with Redbox eight years ago as an investment banker at Morgan Stanley, now oversees an empire of 40,000 kiosks dotting storefronts across the country.

Founded in 2002 by hamburger giant McDonald’s as a vehicle to drive traffic to its restaurants, Redbox installed its first fully automated DVD rental kiosks in 2004. Outerwall acquired Redbox in 2009.

Redbox sales have slid in recent years along with the rest of the video rental industry. In 2016, physical video rentals fell by nearly 18 percent year over year, according to the Digital Entertainment Group.

Blockbuster announced in 2013 it was closing its company-owned stores, while Netflix has reinvented itself as a booming internet streaming TV network. Redbox failed with its own digital initiative three years ago, but Smith is banking on convenience, low prices and a dwindling but die-hard market to keep its video rental business model in the black.

The following interview has been edited for length and clarity.

Q: Who is the typical Redbox customer?

A: We skew a little bit more family because they want that great new content at a great price. We have video games, so we are able to attract the male or female video game consumer. And we tend to, relative to other options, skew a little bit lower on the socioeconomic scale.

Q: Why would anyone drive to a store to rent a video when they can click a button on a remote and never leave the couch?

A: For lots of hard-working families across the country, this is how they consume entertainment. They would rather drive to a kiosk and save money, which they still see as very convenient.

Q: At $1.50 a night for DVDs, Redbox rentals are generally cheaper than digital video on demand, but what’s the value proposition for customers after you add in time, gas and the energy expended just to watch a movie?

A: They care about saving that money. A five-minute drive is not going to be that much gas or time. In 11 minutes, you’ve got that movie at your house.

Q: Last year, the company announced it was removing 1,000 kiosks. Now you’re putting in 1,500. What changed?

A: We see real opportunity to reach more consumers and drive more top- and bottom-line (revenue) by installing more kiosks. Our focus is really on driving profitability and cash flow, and to do so, we want to install more locations.

Q: Is there something different about the locations you’re choosing this year than the ones you removed last year?

A: We continue to see where consumers want to go shopping. We continue to see real demand at Walmarts — also in the drug(store) channel and the dollar (store) channel. So we’re expanding in all of those.

Q: How many titles are in a Redbox kiosk, and how much business does a good kiosk do in a typical day?

A: Typically it’s 150 to 200 different titles that are in a kiosk. Obviously, for newest releases, you’re going to have multiple copies of each movie; we want to make sure that we satisfy demand. An average kiosk in a year will do $50,000, $60,000 in revenue.

Q: Millennials have been leading the cord-cutting charge in favor of streaming. Are they renting DVDs?

A: They are renting DVDs. Millennials see us as a great access point to watching new release movies. They may not be able to afford being able to spend $5.99, $6.99 or more for a (video on demand) rental, and instead they’re able to access it through us. Contrary to what people think, we actually skew a lot younger in terms of our age makeup.

Q: How big a part of the business are video game rentals?

A: Game rental is about 4 percent of the business today, but we’re focused on really growing that business. We see a real opportunity in allowing consumers to try a game before they buy it. So we’re expanding that as we go.

Q: Netflix transformed from a DVD by mail company into a streaming TV network. What went wrong with Redbox Instant?

A: I think our consumers are transactional in nature. They want to be able to buy a movie when they want to see a movie. We continue to look for ways to serve those needs. Today, we do it through our physical kiosks.

Q: Do you see a new digital strategy in the offing for Redbox?

A: We listen to our consumers, and we want to serve what they want. So we continue to look at opportunities to be able to serve it both physically and digitally. It could be something down the road that we offer if it helps to satisfy consumer demand.

Q: Can consumers buy DVDs from your kiosks?

A: We actually are now offering the ability to buy video games and movies, and because they’re used product, they can actually buy it at a discount. We can have movies that are as low as $3.99 up to $11.99.

Q Are all the movies available for sale?

A: No, they’re not all available for sale. We’re very focused on curating really attractive movies that we think consumers will want to purchase.

Q: The glory days for video rental stores are long gone. Why do you see a future in this model?

A: Consumers still want it. They like being able to have the latest content. DVDs and Blu-rays are a great way to access them through their players at home. So we continue to serve that need. We provide the best value. And we’re able to offer them video games and give them an entertainment night at home. We continue to see a very long curve for the business going forward.

 

 


McClatchy-Tribune Information Services