Michael Greeson, Founding Partner, Research
October 29, 2010
You knew it was bound to happen. Redbox could only stand by for so long watching Netflix’s stock price and streaming service continue their skyward expansion. For us at TDG, it’s surprising it has taken Redbox this long. In fact, at times we thought the company was going pull a Blockbuster – talk about the “digital future” but fail to articulate a convincing plan because of an antiquated disc-based conviction and head-in-the-sand corporate arrogance.
On Thursday, Redbox announced that 2011 would see the launch of a new offering that combined its successful $1-per-day DVD kiosk rentals with a web distribution strategy.
According to CEO Mitch Lowe, “The disc business is still very strong and will continue to be for some time, but we need to get into this space to take advantage of the gradual transition to digital.” Funny how corporate pencil pushers still call this a “gradual transition. Given the success of Netflix (it will end the year with close to 20 million households in service, 200+ devices supported, and tremendous momentum), one can persuasively argue the transition is no longer “gradual” (words that came back to haunt Blockbuster, for sure).
Then again, it is difficult to argue with the success of Redbox. Since 2006, the company has become one of the largest DVD rental companies in the U.S., with close to 30,000 rental kiosks in place and Q3 2010 revenue up 54% over last year. As The LA Times noted, however, kiosk growth is slowing and investors are becoming a bit anxious, thus forcing leadership to more aggressively pursue a digital strategy. However, as Ryan Lawler points out in GigaOm, Thursday’s corporate PR event failed to offer any new specifics on the planned service.
Regardless of its specific plans, it is highly unlikely Redbox will be able to repeat Netflix’s streaming success (the base business models are entirely different and Redbox can’t [yet] afford to cut individual studios billion-dollar checks), but the two companies have one thing in common. As with Netflix, Redbox has a large base of existing DVD customers to which the new service can be sold. Netflix, however, had an enthusiastic, growing base of all-you-can-eat subscribers asked to pay no more for its new streaming service. Conversely, Redbox has a bunch of $1-a-day disc renters that will likely be asked to cough up money to enjoy a web-delivered service. Consequently, Redbox’s streaming model will likely resemble pay-per-view services like iTunes and Vudu, though at prices closer to the $1-per-rental model Redbox users have come to expect.
And what about Redbox’s hardware strategy? Is this another embedded play (a la Netflix, Vudu, Amazon, Blockbuster, etc.)? If so, the field is already crowded with much more powerful brand names with much greater flexibility. This is one of the reasons Redbox said it needed “major partners” to support the new service.
Which partners? Interestingly, Wal-mart is being mentioned, which seems a bit odd given that Wal-mart already owns Vudu (which will soon be the proprietary electronic sell-thru client on all Wal-mart-sold Vizio HDTVs). Why not just forgo a Redbox partnership and revenue split and instead expand Vudu’s arsenal of $1 titles? Then again, Vudu doesn’t have the sizable user base that Redbox does, meaning a partnership may prove mutually beneficially.
Details on this new service are scant, but we’ll definitely keep you posted. This will get much more interesting the year comes to an end.
One thing for sure: it appears that Redbox has seen the writing on the wall and, unlike Blockbuster, can actually read.
Related Reading:
The Los Angeles Times
GigaOm (brief but informative attempt to compare possible partners)
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