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Tiny Redbox's DVD Kiosks Grow Pruitt, Angela . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]27 June 2007: B.5D.

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ABSTRACT (ABSTRACT) Redbox also has kiosks located in some 2,600 grocery stores, including Supervalu Inc.'s Albertsons and Royal

Ahold NV's Giant and Stop &Shop chains. Wal-Mart Stores Inc. is testing the Redbox kiosks in at least 10 cities and

Puerto Rico. In Denver, Redbox has seen its market share rise to about 20%, second only to Blockbuster, in just

three years.

A unit of McDonald's started the concept of Redbox in 2001 amid a push to drive traffic into the restaurants. It also

included "convenience store" kiosks that didn't take hold. The fast-food chain later partnered with Coinstar Inc.,

which owns a 47.3% stake of Redbox. The company's focus remains on DVD rentals, but [Redbox] said it will

continue to explore other categories.

"Most of the consumers in Blockbuster want to rent about 100 new release titles. Most of Blockbuster's square

footage is wasted on older titles, which often sit unrented," Mr. [Gregg Kaplan] said. Redbox also offers the option

of ordering rentals online. The kiosk holds 500 of the latest movie titles. They have to return the DVDs to any

Redbox location in a day or incur another $1-a-day charge on their credit card.

FULL TEXT As Blockbuster Inc. and Netflix Inc. duke it out for dominance in the video-rental industry, a tiny company called

Redbox wants to jump into the ring.

With about 4,000 automated DVD kiosks scattered across the country, Redbox has emerged as the nation's fourth-

largest renter of DVDs since it starting testing in the market in 2002.

Right now, Redbox is still a relatively small threat. But its growth comes as Blockbuster is fighting to remain

competitive. The dominant player in the market is closing unprofitable stores, propping up its online business and

undercutting the prices of Netflix, its chief rival.

Besides, Redbox has a formidable partner that knows something about growth by spreading out: McDonald's Corp.

has a 47% stake in the closely held company. And the fast-food chain has a multiyear revenue- sharing pact that

puts the kiosks in its restaurants, about 1,400 currently.

Redbox also has kiosks located in some 2,600 grocery stores, including Supervalu Inc.'s Albertsons and Royal

Ahold NV's Giant and Stop &Shop chains. Wal-Mart Stores Inc. is testing the Redbox kiosks in at least 10 cities and

Puerto Rico. In Denver, Redbox has seen its market share rise to about 20%, second only to Blockbuster, in just

three years.

The battle for customers is "really going to be location driven," said Michael Pachter, an analyst at Wedbush

Morgan Securities, of Redbox's growth. Redbox might gain marginal market share at Blockbuster's expense in

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select locations, he said. The $1-a-day price point benefits consumers who pass a kiosk and make the impulse

decision to rent a movie, he added.

And they become repeat customers. Doug Adcock, owner and operator of eight McDonald's restaurants in

Houston, said the kiosks have helped increase traffic. "When customers are making another visit to return a movie,

they make food purchases," he said.

A unit of McDonald's started the concept of Redbox in 2001 amid a push to drive traffic into the restaurants. It also

included "convenience store" kiosks that didn't take hold. The fast-food chain later partnered with Coinstar Inc.,

which owns a 47.3% stake of Redbox. The company's focus remains on DVD rentals, but Redbox said it will

continue to explore other categories.

Convenience aside, analysts say that both Blockbuster and Netflix offer a better deal if the consumer is able to

keep the rental for a week without late fees.

Redbox, of Oak Brook Terrace, Ill., projects that it will beat Blockbuster, which has more than 5,000 stores in the

U.S., on number of locations in coming months. Redbox already has almost three times as many locations as

automated DVD-rental companies The New Release and DVDPlay.

Redbox Chief Executive Gregg Kaplan said the company has been "growing under the radar" at a rate of 300% every

year during the past few years.

Mr. Kaplan, a former investment banker, said Redbox retooled Blockbuster's model by cutting the price, focusing

on just the top new releases, and replacing a 6,000-square-foot physical store with a 15- square-foot automated

kiosk.

"Most of the consumers in Blockbuster want to rent about 100 new release titles. Most of Blockbuster's square

footage is wasted on older titles, which often sit unrented," Mr. Kaplan said. Redbox also offers the option of

ordering rentals online. The kiosk holds 500 of the latest movie titles. They have to return the DVDs to any Redbox

location in a day or incur another $1-a-day charge on their credit card.

Redbox's operational costs include the DVDs, payment-processing costs, distribution to the kiosks, customer-

service expenses and revenue-sharing costs with the host retailer. After five to six months, the DVDs are sold back

to the distributors.

Sean Bersell, vice president of public affairs at the Entertainment Merchants Association, said kiosks make sense

where space is at a premium. Mr. Bersell added that he anticipated Redbox will expand its kiosks to markets where

Netflix has made heavy inroads such as the East and West coasts and among upscale suburban and urban

consumers.

Mr. Kaplan says the company will continue to examine its strategy in the next seven to 10 years. One big challenge

ahead: the expected growth of movie downloads and video-on-demand on cable.

The emergence of the new Blu-ray and HD DVD disc formats could "expand the lifespan of packaged media, and

that's good for us," he said. Mr. Kaplan declined to comment on whether the company would consider going public.

Blockbuster concedes that the vending concept is convenient. But "they don't generate significant revenue. They

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don't have the capacity to do that," said Randy Hargrove, a Blockbuster spokesman. The company offers 70,000

titles between its stores and online operations. "We think it makes more sense to invest our money where the

majority of customers want to rent," at stores and online, Mr. Hargrove said. He noted that 70% of the U.S.

population is within a 10-minute drive of a Blockbuster store.

Netflix spokesman Steve Swasey said that unlike the focus of Redbox, the bulk of its business isn't in new-release

rentals. "The breadth and depth of Netflix's catalog is what consumers really want," he said, noting that 70% of

shipped movies aren't new releases.

DETAILS

Subject: Rentals; Competition; DVD

Company / organization: Name: Redbox; NAICS: 512120

Classification: 9190: United States; 8307: Arts, entertainment &recreation

Publication title: Wall Street Journal, Eastern edition; New York, N.Y.

Pages: B.5D

Publication year: 2007

Publication date: Jun 27, 2007

Publisher: Dow Jones &Company Inc

Place of publication: New York, N.Y.

Country of publication: United States, New York, N.Y.

Publication subject: Business And Economics--Banking And Finance

ISSN: 00999660

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 399084396

Document URL: https://search.proquest.com/docview/399084396?accountid=30530

Copyright: (c) 2007 Dow Jones &Company, Inc. Reproduced with permission of copyright owner.

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