Marcy Magiera

Redbox on a roll, now

Like it or not, Redbox is a service consumers really like. They like it even more when they don’t have to pay even $1 and get rentals for free, but more on that later.

Based on the kiosk operator’s growth, the non-video-specialty retailers that host the machines like Redbox too. So much so that the company says it is taking 2,800 locations in H-E-B, Albertson’s and another retailer from a competitor, and is adding 1,000 locations in Circle K and The Pantry convenience stores.

At this moment, Redbox is in more than three times as many locations as Blockbuster, and it is on track to have five times more locations than Big Blue by the end of the year. It expects to grow its share of the entire U.S. rental market to 13% this year, from 9% in 2008. In isolated mature markets, like Houston and Salt Lake City, Redbox claims much higher share, of 24% to 26% and 32% to 40%, respectively.

Redbox is now the largest business of its parent, Coinstar, expected to generate revenue of $690 million to $750 million and cash flow of $100 million to $120 million this year. Coinstar’s second-largest segment, coin machines, is expected to account for $265 million to $280 million in revenue. Though profit in DVD kiosks was up 138% in Coinstar’s first quarter, coin profit fell 43%. Perhaps Americans are holding on to their pennies.

But despite its fierce momentum, Redbox does face challenges.

Based on the volume of rentals done in its stores, Blockbuster still has three times Redbox’s market share nationally. And the largest bricks-and-mortar chain is poised, through its partnership with ATM maker NCR, to potentially explode in the kiosk space.

The studios, by and large, don’t like Redbox, and neither do rental competitors. Both feel that $1-per-night kiosks devalue packaged media, and they’ve got a point. Nevertheless, consumers are going to get entertainment on their own terms and at whatever price suits them, particularly in this economy, which is fueling the growth of cable and satellite VOD and Internet streaming and downloading in addition to Redbox. But studios are not of a mind to help Redbox, and if the courts side with Universal in its attempt to impose a vending window 45 days after general DVD release, other studios will surely follow.

In recent months, Redbox has built traffic to its machines, in part, by distributing to its members special codes for free rentals on Monday. It is now tapering that program to offer the free rental codes only once a month. The weekly free rentals were always scheduled to be for a limited time, and they did their job, Redbox execs say, by building the service’s popularity. Ya think? Redbox couldn’t have been giving away too many free nights?

But while Redbox may find its profit-per-transaction better when it offers fewer freebies, it remains to be seen if its volume will decline.

Redbox’s retailer partners certainly will not like fewer people walking into the stores. But who knows, consumers really do like Redbox.

Posted by Marcy Magiera on May 8, 2009 | Comments (1)