DVD sales losses feared in growth of movie kiosks

04/01/2009 7:14 PM

04/01/2009 7:15 PM

The hottest thing in movie rentals is as old as the Coke machine — and just as red.

Redbox movie kiosks, which stock DVDS that rent for $1 a day, are popping up by the thousands in supermarkets, drugstores, restaurants and convenience stores.

Consumers are pulling DVDs out of Redbox kiosks in record numbers, undermining longtime economics that have propped up the movie business — and triggering a backlash from a major studio that has sought to cut off Redbox's supply of hot new DVDs.

"We have grown at a phenomenal pace over the last six years, and that growth is continuing, even in the midst of the recession," said Gregg Kaplan, chief executive of Oakbrook Terrace, Ill.-based Redbox Automated Retail. "We're not seeing anything that's slowing it down."

Redbox operates nearly 12,900 kiosks throughout the United States — four times as many locations as Blockbuster Inc. — and plans to introduce 7,100 more by the end of the year. Each machine holds as many as 700 DVDs and 200 movie titles.

Consumers rent a DVD from the machine using an ATM card, which enables Redbox to charge an additional day's rental if the DVD is not returned within 24 hours. A typical kiosk can earn about $50,000 annually in revenue per machine in operation after three years.

Blockbuster might be going green with envy. The Dallas-based movie-rental giant started rolling out its own DVD-vending kiosks last summer and is testing dollar-a-night rentals at 600 stores, with plans to roll out the new pricing at 4,000 outlets.

The discount DVD rental business worries Hollywood studios because they fear it is undercutting DVD sales, which dropped 13 percent in the fourth quarter and were projected to fall at least an additional 6 percent in the first quarter, according to analysts.

In recent years, DVD sales have been the means for studios to earn a profit on movies, because ticket sales are barely enough to offset production and marketing costs.

In the early part of the decade, when DVD sales were booming, Hollywood paid little attention to Redbox. The company was owned by fast-food giant McDonald's Corp.

Market testing by McDonald's in 2004 showed that consumers were willing to use the vending machines as a cheap and quick alternative to the video store. The kiosks caught on, especially in supermarkets.

The consistent flow of customers, and the convenience of renting a movie while shopping to fill the cupboards, proved advantageous: By the end of 2005, Redbox reported that it was renting more than a million DVDs a month out of 1,200 locations.

McDonald's ultimately sold control of Redbox to Bellevue, Wash.-based Coinstar Inc., an operator of coin-counting machines, coin- operated games and kiddie rides. (Last month, Coinstar announced that it would acquire full interest.)

Coinstar's strong relationships with supermarket operators soon had the Redbox kiosks springing up in chains such as SaveMart, Walgreens and even Wal-Mart, which accounts for 40 percent of DVD sales.

Coinstar does not disclose earnings for Redbox. But its automated DVD rental business reported operating income of $73 million on revenue of $388.5 million in 2008. The company expects sales to nearly double this year to between $690 million and $750 million.

Video-industry analyst Tom Adams estimates that the kiosk rental market, which totaled $519 million last year, will reach $1.4 billion in five years, or about one-fourth of Blockbuster's 2008 revenue.

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