July 26, 2021
Digital transformation is the buzzword of the tech era, but for Redbox, it’s a mission statement, marching order and battle cry, all rolled up in one.
Since taking the helm of the Bellevue, Wash.-based company in September 2016, the same month the company went private in a sale to Apollo Global Management, CEO Galen Smith has been working on expanding the brand into the digital realm, gently easing its core value-conscious customers into transactional video-on-demand (TVOD), free ad-supported TV (FAST) and, most recently, ad-supported video-on-demand (AVOD). The latter is effectively a free alternative to subscription streaming services such as Netflix, Amazon Prime, Disney+ and HBO Max.
Up next: An SVOD platform, scheduled to launch in 2022, where Redbox will offer streaming subscriptions from other services directly to its customers.
Moving into the digital space may seem like a leap from renting DVDs and Blu-ray Discs for a couple of bucks a night through the company’s more than 40,000 bright-red kiosks, placed near the entrances of high-traffic supermarkets, drug stores, convenience stores, and mass merchants including Walmart. But as far as Smith is concerned, it’s a natural transition.
“Redbox is a home entertainment destination,” he says in an interview in the conference room of Redbox’s corporate headquarters in Bellevue, just east of Seattle. “Going back to 2016, the thesis that we had when Apollo bought the company was that the opportunity for Redbox was to invest in serving its customers better. That meant expanding the number of offerings that we have for them. And that included digital transactional and then moving on to free live TV and ad-supported on-demand, and now what we’re really excited about is building an SVOD channels platform — so you create this one-stop shop for home entertainment.”
Redbox’s twin aces in the hole: More than 40 million customer emails with data about what they like to watch, and a loyalty program that allows the company’s crack marketing team to cross-promote digital and physical.
“Our loyalty program is something that really differentiates us,” Smith says. “We’ve got 39 million members in our loyalty program, and you’re able to earn points whether you’re renting physically, buying a previously viewed disc, or renting or buying digitally. So this gives an incremental value to the customer, to allow them to consume more content through those loyalty points. And if you think about how this program underlies everything, that is key. Redbox has always been about value, simplicity and convenience, and what we really want to do with this decentralization of entertainment everywhere is find a way to bring it back to the consumer. It’s almost like the rebundling we know has to happen.”
On the TVOD front, Redbox in December 2017 launched Redbox On Demand, where consumers can buy or rent digital copies of the latest Hollywood movies as well as a deep catalog of classic films. During the pandemic, the service was boosted by studios shifting new releases from movie theaters, which were closed, to premium VOD channels, giving Redbox On Demand and other digital retailers a significant boost.
A free live TV service launched in February 2020 with 25 channels and has since expanded to 100, with a lineup of free movies and television, news, lifestyle and sports entertainment programming. With no subscription or even log-in required, consumers can watch anything from vintage “Johnny Carson” and “The Carol Burnett Show” episodes to hundreds of classic movies, from Cheddar News to Bloomberg Television, from “Unsolved Mysteries” to “The Bob Ross Channel,” from CourtTV to Crackle to Popcornflix, the latest addition.
Last December, Redbox announced its entry into the booming AVOD marketplace with Redbox Free On Demand, an ad-supported streaming video service featuring hundreds of movies and television series curated for Redbox’s kiosk-centric consumers. The company thus entered a market that according to Ampere Analysis is being enjoyed by 20% of all domestic Internet users. The most prominent player in AVOD is Fox-owned Tubi, with a content catalog said to be larger than Netflix’s. Redbox now provides access to such niche streamers as Crackle, Popcornflix and Shout! Factory TV, among others.
“We have this really unique customer base, we have 40 million customers, they’re value-conscious and they’re looking for a great entertainment experience,” Smith says. “And one of the things, even going back to 2017, when we launched the transactional video-on-demand service, was we needed to confirm, with our customers, that we have permission to be able to serve them digital content. And what we’ve seen from them is the answer is absolutely yes. There’s interest in streaming digitally from us. And so we’ve continued to build out that business. And then if you think about a value-conscious consumer, they really do care about free content, whether it be free live TV, or movies and TV shows with ads inserted in them. Ad-supported free content is on point for us and how we serve our customer base.”
Down the road, Redbox envisions partnering with SVOD players battling over customer acquisition and churn reduction. The company plans on selling subscriptions through its various platforms in return for a share of the proceeds — effectively acting as an aggregator. The incentive, especially to smaller, niche streamers, is a simplified consumer experience, with billing and playback in a single app. Customer acquisition and retention efforts could also be furthered through Redbox’s
“There are plenty of opportunities that consumers have to watch some kind of subscription video-on-demand,” Smith says. “We’ve seen, over the past few years, an explosion in the number of offerings. For us, we think we’re better served to be a retail partner to those SVOD services as opposed to launching something ourselves. We see an opportunity to really serve our customer base, these 40 million customers, by being able to create a very simple interaction where they can access all of this content in one place.”
Redbox can also help with the “discovery” aspect that continues to plague smaller streaming services. “We’ve helped customers discover content for years and years,” Smith says. “We know what people like based on their rental histories, and now we’re able to pull all this additional information together from our digital services — what are you watching at the kiosk, what are you watching on transactional, what are you watching on Free Live TV and AVOD, and then what channels are you subscribing to. And that gives us the opportunity to say to someone, ‘We know you probably have never heard of this particular channel, or you may have heard about it, but you are not subscribing to it, but based on your viewing history we think this is the perfect channel for you.’”
So far, Redbox’s digital strategy appears to be working. According to a May 2021 investor presentation, total digital revenue in 2020 doubled to $40 million, from $20 million in 2019, while the “legacy” part of the business, mostly kiosk disc rentals, fell to $506 million, from $809 million in 2019 — a drop Smith attributes largely to the dearth of new DVD and Blu-ray Disc titles. Looking ahead, Smith says he believes the physical business will bounce back as theaters reopen and studios start releasing new movies on Blu-ray Disc and DVD at a normal clip, while digital — led by the new additional PVOD window for digital retailers as well as explosive growth in AVOD — will continue its rapid ascent. Redbox projects that in 2022 legacy revenue will come in at about $712 million, nearly as much as before the pandemic, while digital revenue will mushroom to $193 million, for a total of $906 million — an increase of more than 9% from the pre-pandemic year of 2019.
Like the big streaming services, growth is the No. 1 priority on Redbox’s agenda. Hence the announcement in May that the company plans to go public through the formation of a “special purpose acquisition company,” or SPAC, a relatively new phenomenon that allows a private company to go public without going through the traditional initial public offering approach.
“If we think about where we’re going, and the opportunity ahead, one of the things that’s so exciting about our SPAC transaction is that it’s going to provide additional capital that will really allow us to accelerate this digital transformation, allow us to invest in more ad-supported content, allow us to market not only within our base but even beyond our base, because we know there are other value-conscious consumers out there who would love to watch content through us,” he says. “We just have to get our story out more and tell them that we’re here and that we can serve more and more of their needs.”
To feed its proliferation of platforms, Redbox in October 2019 announced the formation of Redbox Entertainment, a new label focused on acquiring films. One of its latest: The Last Son, set in the Sierra Nevada in the late 19th century and starring Sam Worthington as a murderous outlaw cursed by a terrible prophecy. The film will be released simultaneously in theaters and On Demand later this year.
Other acquisitions include Capone (Tom Hardy), Shadow in the Cloud (Chloë Grace Moretz and Nick Robinson), SAS: Red Notice (Sam Heughan and Ruby Rose), and American Traitor: The True Story of Axis Sally (Al Pacino and Meadow Williams).
Less than a year after the launch of Redbox Entertainment, the company in September 2020 announced a partnership with “John Wick” producer Basil Iwanyk to establish Asbury Park Pictures, an independent film production house charged with producing original movies. The movies will have budgets from $10 million to $12 million each and be shot primarily in Eastern Europe, South East Asia and Canada.
Smith says the whole process began as an attempt to capitalize on the vast amounts of data the company collects. “We have all this data about what our customers love — what genres, what actors — and we thought there was an opportunity for us to help program our own services,” Smith says. “So we picked up movies like Running with the Devil with Nicolas Cage and Laurence Fishburne, and The Fanatic with John Travolta, and those were our first entries.
“Then, about a year later, we partnered with Basil Iwanyk of Thunder Road Films to create a brand-new label, Asbury Park Pictures, and the goal there is to take something very similar to the Blumhouse brand but do it for action movies — because we know our customers love action movies. Our first movie, Black Site, was shot in Australia in February and is currently in post-production. It’s something we should deliver by the end of the year.”
Between Redbox Entertainment and Asbury Park Pictures, Smith says, he’s shooting for 36 movies a year, rolled out at the rate of three per month. Redbox typically acquires all United States or North American distribution rights, Smith says, which is why acquired movies are not limited to the company’s own platforms and services. Over the past two years, Smith says, Redbox Entertainment films have streamed on Netflix, Amazon Prime and Hulu, and some have been available for sale on DVD and Blu-ray Disc at Walmart.
“One of the disconnects that has happened with content releases is that if you sell your movie to a streaming service, then your distribution really is limited to that streaming service,” Smith says. “It may be big, but it is still limited. So what we want to do is make sure that this incredible content, this incredible art, is seen by as many people as possible, so we are releasing movies broadly across every digital transactional platform, then through our own kiosks and Redbox On Demand, and then we’re selling off the Pay 1 window to everyone you’d expect in the space. We’ve sold movies to Netflix, Amazon, Hulu, Showtime, Starz.”
He says Redbox follows a “very traditional” release strategy. “The films are first released on a number of screens, at movie theaters, as well as digital transactional,” typically at a premium rental price, he says. “Then it’s going to go into your typical home entertainment window, which will be Redbox, which will be sellthrough,” he says. “And then it will go to a pay-TV provider, typically a streamer, for some period, anywhere between 18 months and 36 months,” usually 90 days after its debut. On the physical side, Smith says, “We’ve created Redbox Entertainment as our label and we’ve partnered with various folks to release movies. One of our really great partners, particularly over the past year, has been Vertical Entertainment. With Vertical we’ve done Capone, Shadow in the Cloud, SAS: Red Notice, and we’re releasing them broadly. For instance Shadow in the Cloud, which we picked up at the Toronto Film Festival, has done tremendously well on sellthrough. We’ve really been pleasantly surprised at how well it’s done. In fact, we’ve seen really great sales at Walmart and it’s going to continue to be sold at Walmart because we’re seeing strong volume on it.”
Smith says Redbox released Shadow in the Cloud on Jan. 1 of this year “at a time when there was a lack of content” at a $20 PVOD price.
“As you can imagine, there was some demand from our consumer base, but that’s not as big a value,” he says. “But it did incredibly well on both Amazon and iTunes, in terms of that $20 rental price. And we’re happy to make sure that we’re able to create the maximum value per title, and then in May it started streaming on Hulu.”
Redbox’s biggest business is still its legacy business, a fleet of more than 40,000 kiosks where consumers can rent new movies and buy used ones on DVD, Blu-ray Disc and 4K Ultra HD Blu-ray. With the popularity of physical media on the downswing, Redbox’s kiosk revenue has been declining each year. It’s also gotten little respect in the mainstream press, and been subjected to repeated knocks by analysts.
But Smith says the business, while declining, is far from dead. “It’s a huge asset for us,” he says. “It is part of our legacy business, but it continues to serve a very important consumer base. Not everyone is going to stream, not everyone can stream. … They may not have the necessary broadband where they live in the country to use these services. So I think there’s an opportunity in terms of these great movies that are being made to make sure that America, all of America, can see them. And we see ourselves as the distribution platform to be able to provide that.
“Will the physical rental business decline over time as it has in sellthrough? Absolutely. But we also see a strong resurgence of titles — as movie theaters start to reopen we’ll have more and more titles throughout the year, so by Q4 we should be almost back to the normal number of titles, and then we expect the normal release slate in 2022. So we do see a huge resurgence in the physical kiosk business. It’s still a great way for a lot of consumers to be able to see movies the studios are distributing.”
Smith maintains there has always been a certain “disconnect” between studio executives, analysts and other entertainment industry thought leaders, who are typically clustered around the coasts, and middle America.
“We found this years ago when we were public,” he says. “There is a general misconception about how we may view content, ourselves, and what someone else might do. There are 40 million active consumers who shop at Redbox kiosks, so clearly someone is doing this — even though you might not be doing it yourself.”
To drive more traffic to Redbox kiosks, Smith says, the company in July is launching an annual subscription service in several test markets.
Consumers can sign up for either of two “loyalty subscriptions” at $9.99 or $19.99 a year. “We’re calling it Redbox Plus — and I promise we decided to do this well before everyone began adding ‘Plus’ to their name,” Smith says with a laugh. “For a one-time annual fee, you get certain benefits, all year round — things like one free movie rental a month, typically of a film that’s been out at least 30 days, and extra time to return movies. One of the pain points of Redbox is that if you return a movie after the 9 p.m. cutoff, even if it’s 9:05, you get charged for an extra night, and this plan provides an extension. It’s a great value, and it’s geared toward customers who we can help drive to come to our kiosks at least once a month.”
Smith notes that the fleet of Redbox kiosks have other uses, other value, beyond renting movies.
“These 40,000 kiosks not only serve our customers with the latest new releases, but they also serve as a billboard for all of our businesses, whether it be Free Live TV or other services we have down the road,” Smith says. “It’s an incredible asset to have all of these retail marketing placements.”
Through its kiosks, Smith says, Redbox has also partnered with subscription streaming services on a number of cross-promotions that capitalize on the company’s loyalty program.
“Think about the ability for us to drive subscriptions, or drive retention and reduce churn, for SVOD players by offering them access to our consumers,” he says. “We did a very successful promotion last year with Showtime in which we drove subscriptions for them by bundling nights at the kiosk with a Showtime trial, so you could see new movies through us and then you had access to all this great Showtime content as part of your subscription.”
Ideal SVOD partners, Smith says, aren’t the leaders like Netflix or Disney+ but, rather, “tier-one providers who might not have the same reach and could use our help in reaching our customer base.”
“One of the exciting things we built last year, but haven’t yet deployed, is the ability for us to offer subscriptions through our kiosks,” he says. “So now all of a sudden you have this new distribution channel through 40,000 kiosks. As someone is checking out and renting the latest new release at the kiosk, they can add a free trial subscription to a streaming service. Since they are transacting with their credit card, we can take the payment right there — and we’re able to start that customer off with a subscription.”
Further value from the kiosks will come later this year, with the installation of video screens atop 4,000 of the company’s 40,000 kiosks that are located inside stores rather than on the outside. ”Two-thirds of the screen time will be for advertising the business or mobile app — new content in kiosks, trailers of new releases, and so on — while the remaining third will consist of CPG ads for other merchandise in the store,” Smith says. “This gives us the opportunity to reach our customers in yet another way.”
Redbox’s legacy kiosks have also allowed the company to launch an ancillary service business, Smith says. “We have about 1,100 employees who live and work around the country who service Redbox kiosks, but they also serve the kiosks of other companies — and that’s becoming a real business, and a growing business for us,” Smith says. Clients include Amazon, with its nationwide network of lockers, and ecoATM, a former sister company of Redbox where consumers can get cash for their old cell phones.
“Any time there’s a technical issue or problem, either mechanical or break-fix, it’s my team that goes in there to make sure it’s running well,” Smith says. “It’s a pretty small segment of our overall business today, but it is something that is going to continue to grow. What I love about it is that we have this work force, and we are able to leverage it, as it is best in class. That’s how we were able to take on the Amazon locker business last June — because we could do it better and cheaper than others.”
These days, Smith is spending most of his time preparing for Redbox to go public through its merger with Seaport Global Acquisition Corp., a publicly traded special purpose acquisition company (Nasdaq: SGAM). The transaction will result in Redbox becoming a publicly traded company with an enterprise value of $693 million. Upon closing — the target date is sometime in the third quarter of this year — Redbox’s common stock is expected to trade on Nasdaq under the ticker symbol RDBX. Apollo Global Management, Redbox’s current owner, will retain its 59% equity stake. The process is expected to bring in $209 million in cash, with half the proceeds used to pay down debt and the balance to invest.
Apollo is actively involved in the process, Smith says. “One of the things that’s really important to note is that everyone is rolling their equity,” he says. “So, management, Apollo, any other current holders, we’re all rolling our equity into the new company. If you think about where we’re going, there is really an opportunity for fast, explosive digital growth. The places that we’re playing in — if you look at the growth in subscription on-demand and ad-supported VOD, these markets are exploding. We put out numbers in our investor deck, and if we can get to less than 1% of market share, we hit our numbers. So it’s this fast, explosive growing space. Apollo are value investors, and this is growth capital — hence, the opportunity to partner with Seaport. So for us, it was really a matter of finding the right partner — which we did, and we’re really pleased with Seaport — which will provide growth capital to really reach that next phase of growth.
“There’s four areas we’re going to invest in: obtaining more licensed AVOD content, building out that channels platform, increasing our marketing spend, and lastly, continue to grow the Redbox Entertainment acquisition and distribution business.”
He pauses, then says, “I think it’s really important to note that when we’re done with building this SVOD channels platform, we’re going to be able to offer consumers more choice between physical and digital than any competitor. And what we realized last year, as there was a lack of content for most of the year, was this multi-product offering, being able to offer different ways to satisfy the consumption needs of consumers, was this incredibly valuable tool. Those customers are worth five times the value of someone who just transacts at kiosks, so what we want to do is continue to lean into that and grow it.”
Hollywood Sees Redbox as Valued Partner
As Redbox undergoes a digital transformation, its relationship with Hollywood also has evolved into a mutually beneficial partnership — a far cry from the company’s early days, when studios slammed Redbox kiosks for allegedly cannibalizing the sellthrough market and refused to sell the company their DVDs, resulting in a flurry of lawsuits.
Today, Redbox is seen as a significant player in the physical media arena and a growing force in digital movie rentals and sales.
Eddie Cunningham, president of Studio Distribution Services (SDS), the joint venture between Warner Bros. and Universal Pictures to distribute physical media in North America, says Redbox “continues to be a strong and trusted partner and an integral part of the home entertainment business, highly invested in their advancement across both physical and digital. In the physical category, through their kiosks, they have remained steadfast in their commitment to keeping consumers engaged and transacting via innovative marketing and breakthrough collaborations.”
“Redbox is synonymous with movies and a first-stop choice for millions of U.S. consumers as a trusted source of what’s new and what’s trending,” says Mike Takac, EVP and general sales manager for Warner Bros. Home Entertainment. “Redbox’s loyal customer base has adopted hybrid consumption across disc rentals, digital transactional and streaming, and they’re meeting customer’s needs for where and how they watch content.”
Jed Grossman, EVP and GM of sales and distribution for home entertainment at Lionsgate, agrees. “Redbox continues to be an important partner and a major player in the home entertainment space at a time when demand for content is greater than ever across a wide array of theatrical, packaged and streaming options,” he says.
“Redbox continues to be a vital player in the home entertainment ecosystem,” says Jason Spivak, EVP of distribution for North America Television & Home Entertainment at Sony Pictures Entertainment. “They have a strong, loyal and engaged customer base at their kiosks as well as increasingly through their digital platform.”
Michael Bonner, president of Universal Pictures Home Entertainment, agrees. “Redbox continues to be an important and valued partner with a loyal and engaged customer base,” he says. “Their commitment and focus on the consumer, along with their marketing approach, has enabled them to maintain a robust physical business while expanding into the digital space, where they have seen strong growth and adoption from their customers.”
Bob Buchi, president of Paramount Home Entertainment, echoes the other executives’ words. “Redbox has long been a vital component of the home entertainment industry and continues to evolve to meet the changing needs of today’s consumer,” he says. “With their keen promotional prowess, they have been able to tap into their enormous database of consumers to continue to serve them with physical product or with their fast-growing digital businesses.”