Chicago Sun-Times (IL)

September 26, 2007

A hit right out of the box
Redbox makes it easy, cheap to pick up a movie

Author: Todd B. Natenberg; The Chicago Sun-Times

Edition: Final
Section: Financial
Page: 57 / FRONT

Index Terms:
Business

Estimated printed pages: 3

Article Text:

When Mike Swafford recently decided to rent a DVD of the hit football movie "We Are Marshall," he didn't make up his mind until the last minute.

But unlike those who shop in video stores and simply can't decide among the vast selection, Swafford's delay was because he was busy doing his regular shopping for groceries.

It was not until he exited a Jewel-Osco store in Wrigleyville that he noticed a big red kiosk that looked like a combination ATM/pop vending machine. Seeing the words "Rent a DVD" and "Return DVD," on the screen window, Swafford opted to add the movie to his bags of food -- for $1 a night.

Welcome to the world of Redbox -- the latest in automated DVD rentals.

"I like it so far," said Swafford, 34, who works as an internal auditor for an accounting firm in Chicago. "It's convenient. It's here. It's cheap."

Those are exactly the three reasons the Oakbrook Terrace-based company credits for its success in the booming multibillion-dollar rental video market -- a success that ranks it among the top five DVD rental companies: Blockbuster, Netflix, Family Video and Hollywood Video, whose parent, Movie Gallery Inc., announced on Tuesday it will shutter 520 stores to save money and cut its debt.

Explained Gary Licana, vice president of marketing for Redbox, "The traditional video store model is that there's a retail storefront that includes an inventory of DVDs. You drive there, get out of your car, you select and you leave. The 'by mail' subscription model is built around not getting immediate gratification, using your computer, creating a list of movies you'd be interested in seeing, and waiting to see what comes in the mail.

"What Redbox does is create a different model for consumers that is very convenient, because we located our red boxes where consumers would be anyway -- at a McDonald's, at a grocery store, where they are shopping or where they are eating."

According to the Entertainment Merchants Association, in 2006, consumers spent $8.4 billion renting videos, with 96 percent of the revenue coming directly from DVDs. Each month, 27.1 million households rented a DVD.

Among rental videos, 82 percent comes from traditional public chain stores, like Blockbuster, while 16 percent comes from online rentals, like Netflix. One percent comes from kiosk rentals, like Redbox, while the rest come from other avenues, such as digital downloads.

"It's really amazing that just three or four years ago, kiosk rentals weren't significant. They just weren't a factor," said Sean Bersell, an EMA vice president. He added that while a 1 percent market share nationally appears small, in some areas of the country, this number could be as high as 7 percent.

"Now, they are a growing segment of the market and are going to continue to grow," Bersell said.

In 2002, Redbox deployed a modest 12 kiosks in the Washington, D.C., area. Today, the privately held company boasts 4,900 locations throughout the U.S. and Puerto Rico.

Originally created in McDonald's Corp.'s venture lab, executives at the fast-food chain thought by adding value to the restaurant, they could increase the number of visits.

"It was a simple premise -- dinner and a movie," Licana said.

Three years later, Redbox expanded the kiosks into grocery stores. The expansion was due in large part to Coinstar Inc., investing $20 million in Redbox. Coinstar now owns 47 percent of the company. McDonald's retains 47 percent, with outside investors making up the remaining portion.

Each Redbox kiosk holds between 70 and 130 titles, with a total amount of about 500 DVDs. New titles are available every Tuesday.

In addition to Redbox, the other two key players in the kiosk DVD rental market are DVD Play and New Release.

DVD Play charges $1.49 per night and 99 cents per night thereafter. New Release, like Redbox, charges $1 per night. Its selection, unlike the others, includes some older classics. If customers of all three companies hold a movie for 25 nights, they then own it, and their credit card is charged accordingly.

Todd Natenberg is a Chicago journalist.

Caption:
Photo: Rich Hein Sun-Times / Vice President of Marketing Gary Licana takes a DVD out of a Redbox kiosk.;

Copyright (c) 2007 Chicago Sun-Times, Inc.
Record Number: 200709260216