Wall Street Journal
Redbox Automated Retail, the company behind the $1-a-night video-rental kiosks springing up in groceries and convenience stores around the country, is on a tear. Last quarter, it took in $198.1 million, almost double its year-earlier revenue.
Its rental kiosks have mushroomed to almost 21,000, up from about 12,000 a year ago.
While some Hollywood studios have inked deals with the company, others see low-price Redbox as a red menace, a threat to lucrative businesses such as DVD sales and the cuts it gets of higher-priced rentals at companies like Blockbuster Inc.
Universal Pictures, Twentieth-Century Fox and Warner Bros. have tried to block Redbox's access to their new DVDs unless Redbox agreed to terms like delays for new movies. Redbox, a unit of Coinstar Inc., is firing back with lawsuits against all three studios.
In an interview, Redbox President Mitch Lowe discusses what it is like to run a business that many people in the industry would prefer didn't exist.
Excerpts:
WSJ: What have you done right when it comes to managing your company through the current recession?
Mr. Lowe: Several years before the recession started hitting we designed a product that has enormous value. Any time you find a product that cuts the cost by more than half, you're in a very good position. When you compare what customers spend at Redbox versus Blockbuster and all the alternatives, we're saving consumers $50 million to $60 million dollars every month.
WSJ: So are you hoping the economy stays bad to help your business?
Mr. Lowe: No, no. You know, we were doing really well before the economy started having trouble. A good value is a good value when the economy is doing well or when it is doing poorly. I think our recognition— the awareness level of Redbox— has benefited from the poor economy. But the business itself is just one of those things where it's still a great product when the economy comes back.
WSJ: DVD sales are set to decline again this year after a 9% drop last year. How much responsibility do you take for that?
Mr. Lowe: [Studio executives say] 80% of the decline in DVD sales is due to the economy. That leaves the 20% which would be Redbox and all the other factors. If you are a standard-def DVD owner, not only is the economy affecting your purchasing, but you're also concerned about Blu-ray, and (thinking) 'Should I wait? Should I buy?'
On top of that, you have peoples' libraries. Almost everybody I know has bought almost all the kind of classics and all the things they've always wanted to own. Then maybe on top of that you put Redbox. We believe that we are a very small portion of it.
I just think this whole idea about the dollar price point is the studios looking for a scapegoat.
WSJ: Many film buffs argue that providing DVDs at low prices hurts filmmakers, because studios count on certain revenue streams to fund their big-budget movies. Do you worry that with declining revenue from DVD sales Hollywood won't be able to produce the same quality of movie?
Mr. Lowe: I think that's a faulty argument.
Every time an industry is faced with challenges, you should be looking for creative new markets to sell your product to, or expanding markets.
You've got to remember, back in 1997, the sell-through business for movies which DVDs is a part of was half what it is today. The studios were very smart and they said, 'You know what, maybe one of the reasons why people aren't buying movies is the average cost was $45 a movie. Let's see what happens if we lower the suggested retail to $24.95.' People were able to say, OK, for twenty bucks, I can build a library, I can collect films.
What we're doing—and I think some of the studios recognize this, some don't—we're expanding the ability for more people to watch more movies. This is really just a model change that they need to get on board with.
WSJ: Many people are predicting the demise of DVDs as other types of technology, like digital delivery, take hold. What kind of future do you see for discs?
Mr. Lowe: The DVD is an incredibly efficient and portable piece of product for movies and health videos. DVDs you can take from upstairs to downstairs. You can loan to a friend. You don't have to worry about erasing the title off of a big database. It's very inexpensive to manufacture and distribute. We easily see many years ahead of the disc being the primary format.
What we look at is what are the future competitors to discs? And those as everybody knows are digital deliveries.
WSJ: Could you see going into your own digital business?
Mr. Lowe: If any of these new revenue streams work, we would add them to Redbox. The trick is going to be not just being another service. We need to always make sure that what we deliver to the customer is unique and incredibly valuable.
It is going be a big question, whether it's integrated into the box [in the form of movies customers could download onto thumbdrives] or it's delivered straight to your home [via the Internet]. Those are the kinds of things we need to test.
I'm a little skeptical about the delivery at the box itself. Only because it will create the need for people to have a USB drive input on their televisions. I don't think people are going to watch a lot of movies on their computer or on their laptop. Once televisions are [widely] manufactured with a USB drive or a direct Internet connection, then I think everything changes. And you are just starting to see the first televisions being manufactured that have both an Internet connection and a USB drive.
WSJ: What about getting the digital licensing agreements you need from the studios? It seems like some would be very reluctant to cooperate.
Mr. Lowe: I don't think so. I think the studios are always looking for different ways to sell their product. They love to have a retailer out there with the footprint we have to sell digital product. I think a lot of [the studio reluctance] is positioning. If we were buying a lot of content in that manner, the studio would have to think about it.
WSJ: You have said you don't want to increase prices over the $1 a night for rentals, but you recently started testing $1.50 and $2 rentals in two different markets. Why?
Mr. Lowe: We have probably 20, 30 tests going on around the country, trying to understand what's really driving the consumer. We measure everything. We're always being asked the question, 'Why don't you raise prices?' I need to explain why we go down one path versus another. So far it's too early to say just how much [business] is down. It is down [in those markets], but it's hard to say how much.
Its rental kiosks have mushroomed to almost 21,000, up from about 12,000 a year ago.
While some Hollywood studios have inked deals with the company, others see low-price Redbox as a red menace, a threat to lucrative businesses such as DVD sales and the cuts it gets of higher-priced rentals at companies like Blockbuster Inc.
Universal Pictures, Twentieth-Century Fox and Warner Bros. have tried to block Redbox's access to their new DVDs unless Redbox agreed to terms like delays for new movies. Redbox, a unit of Coinstar Inc., is firing back with lawsuits against all three studios.
In an interview, Redbox President Mitch Lowe discusses what it is like to run a business that many people in the industry would prefer didn't exist.
Excerpts:
WSJ: What have you done right when it comes to managing your company through the current recession?
Mr. Lowe: Several years before the recession started hitting we designed a product that has enormous value. Any time you find a product that cuts the cost by more than half, you're in a very good position. When you compare what customers spend at Redbox versus Blockbuster and all the alternatives, we're saving consumers $50 million to $60 million dollars every month.
WSJ: So are you hoping the economy stays bad to help your business?
Mr. Lowe: No, no. You know, we were doing really well before the economy started having trouble. A good value is a good value when the economy is doing well or when it is doing poorly. I think our recognition— the awareness level of Redbox— has benefited from the poor economy. But the business itself is just one of those things where it's still a great product when the economy comes back.
WSJ: DVD sales are set to decline again this year after a 9% drop last year. How much responsibility do you take for that?
Mr. Lowe: [Studio executives say] 80% of the decline in DVD sales is due to the economy. That leaves the 20% which would be Redbox and all the other factors. If you are a standard-def DVD owner, not only is the economy affecting your purchasing, but you're also concerned about Blu-ray, and (thinking) 'Should I wait? Should I buy?'
On top of that, you have peoples' libraries. Almost everybody I know has bought almost all the kind of classics and all the things they've always wanted to own. Then maybe on top of that you put Redbox. We believe that we are a very small portion of it.
I just think this whole idea about the dollar price point is the studios looking for a scapegoat.
WSJ: Many film buffs argue that providing DVDs at low prices hurts filmmakers, because studios count on certain revenue streams to fund their big-budget movies. Do you worry that with declining revenue from DVD sales Hollywood won't be able to produce the same quality of movie?
Mr. Lowe: I think that's a faulty argument.
Every time an industry is faced with challenges, you should be looking for creative new markets to sell your product to, or expanding markets.
You've got to remember, back in 1997, the sell-through business for movies which DVDs is a part of was half what it is today. The studios were very smart and they said, 'You know what, maybe one of the reasons why people aren't buying movies is the average cost was $45 a movie. Let's see what happens if we lower the suggested retail to $24.95.' People were able to say, OK, for twenty bucks, I can build a library, I can collect films.
What we're doing—and I think some of the studios recognize this, some don't—we're expanding the ability for more people to watch more movies. This is really just a model change that they need to get on board with.
WSJ: Many people are predicting the demise of DVDs as other types of technology, like digital delivery, take hold. What kind of future do you see for discs?
Mr. Lowe: The DVD is an incredibly efficient and portable piece of product for movies and health videos. DVDs you can take from upstairs to downstairs. You can loan to a friend. You don't have to worry about erasing the title off of a big database. It's very inexpensive to manufacture and distribute. We easily see many years ahead of the disc being the primary format.
What we look at is what are the future competitors to discs? And those as everybody knows are digital deliveries.
WSJ: Could you see going into your own digital business?
Mr. Lowe: If any of these new revenue streams work, we would add them to Redbox. The trick is going to be not just being another service. We need to always make sure that what we deliver to the customer is unique and incredibly valuable.
It is going be a big question, whether it's integrated into the box [in the form of movies customers could download onto thumbdrives] or it's delivered straight to your home [via the Internet]. Those are the kinds of things we need to test.
I'm a little skeptical about the delivery at the box itself. Only because it will create the need for people to have a USB drive input on their televisions. I don't think people are going to watch a lot of movies on their computer or on their laptop. Once televisions are [widely] manufactured with a USB drive or a direct Internet connection, then I think everything changes. And you are just starting to see the first televisions being manufactured that have both an Internet connection and a USB drive.
WSJ: What about getting the digital licensing agreements you need from the studios? It seems like some would be very reluctant to cooperate.
Mr. Lowe: I don't think so. I think the studios are always looking for different ways to sell their product. They love to have a retailer out there with the footprint we have to sell digital product. I think a lot of [the studio reluctance] is positioning. If we were buying a lot of content in that manner, the studio would have to think about it.
WSJ: You have said you don't want to increase prices over the $1 a night for rentals, but you recently started testing $1.50 and $2 rentals in two different markets. Why?
Mr. Lowe: We have probably 20, 30 tests going on around the country, trying to understand what's really driving the consumer. We measure everything. We're always being asked the question, 'Why don't you raise prices?' I need to explain why we go down one path versus another. So far it's too early to say just how much [business] is down. It is down [in those markets], but it's hard to say how much.
