Redbox’s Strategy in the Movie Rental Industry

Business Strategy and Stakeholder Responsibility – MBA-688

Professor John C. Byrne, Ph.D.

Date: June 19, 2013

Executive Summary:

Problem Statement –
Overall Redbox has been happy with their success. However the problem is that there is a gradual shift to digital media, away from DVD’s and Redbox must be ready with innovative changes. Currently they do not have an online interface or platform where users can stream movies directly.
Redbox also has a very limited amount of movies per Kios (200). If customers wanted movies that were from the 1990’s or 1980’s, it was harder for them to obtain. In a way, Redbox was limited in terms of their range. Also due to their contractual agreements with Universal Studio, Warner Bors, 20th Century Fox, etc., they had to sell their movie only 30 to 45 days after the release of the movie.
Redbox is able to keep track of the number of each title in each kiosk; however, when a title is completely unavailable at a kiosk, the company hires field staff to move movies around and fill in empty slots; which seems a little inefficient and an unnecessary cost.
The biggest expense Redbox incurs is content acquisition and licensing agreement. The company spends hundreds of millions of dollars on license agreements with each movie studio. Therefore the question to be asked is “How to reduce the company’s content acquisition cost?”

Summary of Facts –
Redbox is leading the way in the premier industry of DVD rental kiosks. With Coinstar as its established parent company, Redbox is currently surpassing its competitors with its number of self-service kiosks. “At the time of the February 2009 acquisition, Redbox had some 12,000 kiosks in supermarkets… with plans to add 6000 to 8000 kisosk locations during the remaing of 2009.” Redbox’s growing popularity is facilitated by its physical distribution, which places the kiosk in high traffic locations such as Wal-Mart, Kroger, McDonalds and Walgreens. However, having a Kiosk poses various problems. The numbers of movies that are able to fit into that Kiosk are very limited“…machines could hold 630 discs representing up to 200 titles.” Also once the movies are sold out; it takes manual labor to refill those DVD’s. “Redbox management estimated that during 2009, its inability to secure ample copies of certain titles resulted in lost rental revenues to $15 million to $25 million.” This is due to either late releases of movies, or maybe the movies the viewers wanted to see were out of stock at that given point.

Analysis of Facts – The two main strategies Redbox focuses on are a combination of low price and convenience as well as increasing kiosk locations with high traffic. They are also focusing on superior ability to serve a market niche or specific group of buyers, the convenience of purchasing, time efficiency for customers and low operating costs. “it rented more than 365 million DVDs in 2009 and generated revenues of $773.5 million from rentals and sales of DVDs at it kiosks.”
They are concentrating on a narrow buyer segment, movie renters, and out-competing rivals on costs. They are offering their rentals for $1 in high traffic areas; Redbox is trying to achieve a low cost competitive advantage. However, this advantage may not be sustainable. It is only sustainable if it is an advantage over market rivals that persists despite efforts of rivals to overcome it. The low cost advantage may be easily copied by vendors who can find other ways to lower their costs. For example, a vendor may offer movies at .95 cents if they can cover their operating costs and make a good profit from the price. Buyers have a strong presence in this industry mainly because they are picky about how much they will pay to rent or stream a movie.
After doing the math, Redbox spend around $800 million dollars in contractual agreements with the big 6 studio establishments.
The structure of the industry is one that consists of a large number of big companies. Redbox competes in a highly competitive industry that is quickly advancing. There has been an enormous change to digital media recently. Successes of competitors such as Netflix show how a movement towards online digital media services will continue to flourish in the near future. Redbox needs to reposition and reevaluate their strategy in order to be able to server that market segment. People are able to stream movies form home or even watch online. Redbox has an app that can tell you what movies are available in the nearest location, but unfortunately do not have an app or online facility where the consumer can stream this from home. Redbox’s operating income dropped 2% from 2008 to 2009. Coinstar management stated the following regarding the decline, “…was mostly driven by higher product costs, offset in party by the favorable effects of leveraging general and administrative expenses. The higher product costs resulted from the decrease in DVD salvage values, as well as the increase cost associated with purchasing certain DVD titles from alternative procurement sources.” A decline in sales can be concluded from this statement. Redbox is struggling to resell the DVD’s that are out dated at the Kiosk and are not getting any money in return and they are not able to obtain new movies from their distributors/ or from their contracted studio establishments; hence they have to rely on buying the DVDs at retail price.
Recommendations
First of all, Redbox needs a better content acquisition strategy. The current cost is simply too high. They should negotiate better on payment and the availability of new releases. Redbox should not wait 28-30 days after a movies is released. Redbox should charge it’s customer a few dollars extra on recent releases, but should have that as an option to attract their attention.
In addition to well-known movie studios, Redbox should consider partnership with independent filmmakers and smaller production companies. There is a lot of well-made and valuable content that people do not know about. Redbox can feature a few of those movies or documentaries each month.
Redbox needs to make a presence online; they need to have a interface similar to Netflix where you can users rent online by the hour, or by the movie or by the month.
To determine whether to expand the product line to PC games, PS3, Xbox, Wii and music albums, Redbox must conduct surveys to see if there is a potential market. Redbox must look into promoting foreign films in their kiosk; this is a big opportunity of growth for Redbox. Depending on the area, they can promote Chinese, Indian, Korean, Spanish, movies in their kiosk as well. Redbox should go international; the initial cost may be relatively high because the company needs to hire local marketing analysts to conduct market research and acquire partnership. It is easier to first enter other English speaking countries as well as countries with a similar culture.

Redbox has already taken steps to going digital. The new Redbox Instant by Verizon charges an $8 monthly fee for unlimited movie streaming plus 4 DVD rentals. The price is comparable to that of Netflix and Hulu, which is $7.99 for both. However, Netflix and Hulu both offer a wide range of TV shows as well as movies. Netflix is unique in that it has a large selection of older classic movies, while Hulu has access to the latest episodes of TV shows. In order for Redbox Instant to stand out, it must offer something different from its competitors. Since Redbox already has partnership with movie studios to get the newly released movies the same day it is offered in DVD, that could be Redbox Instant’s selling point. Unlike Netflix and Hulu, Redbox Instant customers have access to the latest movies.

After doing th

The appeal of Redbox to the buyer is low-cost convenience without membership requirements. Market access is attained through low capital investment in distribution kiosks, strategically positioned in underutilized retail space such as entrances to grocery stores, drugstores, discount retail stores and some chain fast food outlets.

Since mid-2009, the number of Redbox locations has increased from nearly 20,000 to 34,600. With its 34,600 locations across the country, anyone could easily locate a Redbox kiosk near them. The competitive strategy most closely fit Redbox’s approach is the low-cost provider strategy.
Redbox’s kiosk strategy is very unique and cost efficient. Among the many movie rental companies, Redbox is the only one that uses kiosks rather than an actual store. This not only reduces the initial investment, but also the operating cost.

How the facts influenced the decisions.

Analyze the facts as they apply to the issues you are addressing. Surprisingly, many will write a short paragraph somehow believing that the “analysis” was really addressed under facts, that the issue is obvious, or that there was nothing left to say. These are errors. The analysis is where you demonstrate comprehension of the issues.

Recommendations – As Manager/Executive/Consultant - What would YOU do, WHY, and critically HOW you will achieve it. You need to do so objectively and no personalization.

This is the most important item; assuming that you were able to state a problem. First, if you do not make recommendations, the report is not accepted, or the grade will be lowered significantly. Next, do not state that the company should keep doing what is doing. Nor should you state such mundane items like “The company should do market research to see what the market is like….” Do not simply rehash the material – your thinking and problem solving abilities are most important. Also, leave out phrases akin to “As a consultant…manager… I recommend….” Further, you must state HOW you plan to achieve the results, this almost always means a quantitative analysis. So, if you say, hire X people, advertise more, etc., you need to show How you plan to pay for this and the anticipated results, i.e., what benefit will the company garner.

The point here is that you need to demonstrate you not only understand the problem at hand (or one of the problems) but “costs” involved.