Redbox Unboxed

The video rental kiosk vendor is again thinking digital — just like that other disc rental service, Netflix, did 10 years ago. But what is now the dominant video rental company has a vastly different approach in mind — and a single-minded goal of satisfying both the customer and the bottom line.

 

A little more than three years after abandoning a failed SVOD venture with Verizon, Redbox, the country’s top video rental company, is once again going after the digital holy grail.

This time, however, the Seattle-based company — known for its more than 40,000 bright-red video rental kiosks outside Walmarts, supermarkets and drug stores — isn’t venturing into the subscription-streaming business dominated by Netflix, Amazon and Hulu.

Instead, round two of Redbox’s digital unboxing is focused on the transactional model familiar to users of its vending machines, where you pick a title and pay only for that film or TV show instead of a set monthly price for unlimited viewings of whatever’s available.

The company this past December launched Redbox On Demand, a digital distribution service with more than 6,000 movie and TV show titles available for on-demand streaming or purchase and digital deals with all major studios except for Disney.

On the disc rental side, Redbox has signed content deals with Warner Bros., Paramount Pictures, Lionsgate, Sony Pictures Entertainment, 20th Century Fox and Universal Pictures. The deals are for both DVD and Blu-ray Disc and, soon, 4K Ultra HD Blu-ray Disc.

“It’s very different from our partnership with Verizon,” says Galen Smith, who was appointed CEO in September 2016 just as the company went private. “Our customers come to us for that transactional experience — it’s Friday night, and they want to watch a specific movie. We try to satisfy them with our kiosk network, but there are occasions where you might not want to go out and rent a movie from a kiosk.

“So rather than lose that transactional occasion, we’re giving them the chance to get it online. We want to make sure we still capture that demand. It’s complementary to what we’ve been doing for years.”

“Redbox continues to make movies accessible in homes around the country through ubiquitous access to simple-to-use disc rentals, now expanding that ubiquity and simplicity through digital distribution,” says Mark Fisher, president and CEO of the Entertainment Merchants Association. “We expect to see many Redbox customers complement their kiosk movie rentals with additional digital consumption.”

Smith also says he sees Redbox On Demand as a way to transition consumers to the concept of bringing entertainment into their homes digitally. “As you know, transactional video-on-demand (TVOD) is down, and electronic sellthrough (EST) growth has slowed to the single digits,” he says. “We have a whole set of customers who might not have tried TVOD or EST, and we think we can transition them to this new form of content delivery that they’re not yet using.

“It’s a big opportunity for us to get them to stay within the Redbox ecosystem and serve their needs — and it helps the studios, as well, by getting consumers interested in doing a higher transaction.”

Redbox charges customers significantly more to stream a movie online ($3.99 to $4.99 for new releases, $1.99 for older films) than to rent a disc at a kiosk ($1.50). “The kiosk will always be the best value,” he says, “but if you want to watch it without leaving your home the value comes in the form of convenience, the ability to press a button on the remote and get the movie directly from the app.”

Redbox’s latest digital maneuver is not without its challenges. As Smith readily admits, TVOD hasn’t exactly set the world on fire. According to DEG: The Digital Entertainment Group, consumer spending on TVOD slipped 7% in 2017, while spending on EST notched upward just 5.7%, a significantly slower growth rate than in prior years. SVOD, meanwhile, rose an astounding 31%, the DEG reported. More telling are the actual numbers: TVOD and EST together generated an estimated $4.1 billion in 2017, less than half the money generated by subscription streaming.

Convincing consumers to rent a new movie online for $4.99, then, isn’t going to come easy, particularly since they need to download a Redbox app onto their TV that’s linked to Redbox.com. Isn’t that little complex for the average kiosk renter?

“The reality is, a majority of our customers have Netflix accounts,” Smith says. “And we’re OK with that because their subscription streaming services are focused on TV and catalog content, which is complementary to our a-la-carte, new-release movie offering. Redbox consumers want to watch the latest new movies, not wait months or even years for movies to appear on SVOD services.

“By entering the transactional video on demand market, we believe we can introduce a whole new set of consumers to TVOD, reigniting growth in the category which is good for all. It is really about consumer choice — you still have the best value around for new releases at the kiosk while you can choose to use Redbox On Demand for convenience.”

Smith says that while Redbox On Demand — as of January 2018, still in beta mode — is one of the company’s priorities, Redbox is just as focused on beefing up its core kiosk rental business. At the same time that the company is rolling out its online venture, it continues to add kiosks to its network — some 1,800 were added last year alone, bringing the current count up to more than 41,000.

Redbox has also been hard at work negotiating deals with studios to obtain DVD and Blu-ray Disc titles directly on the same day they are released, instead of 28 days later. “A large part of our business is about new movies,” he says. “Consumers want to see what’s new, and if we don’t have it, you might lose that transaction.”

The month-long holdback was initially a condition imposed on Redbox by Warner Bros., Universal Pictures and 20th Century Fox, under the premise that dollar rentals outside Walmart stores were cannibalizing the sellthrough business.

Smith says that premise is no longer valid. “We reach a different segment of the market, so I think there’s a better understanding today of the benefits Redbox provides to the studios,” he says. “This view that sellthrough is being hurt by rental, that’s a pretty outdated view of the world, I think. The studios understand it’s a great opportunity to serve a customer base they might not otherwise serve.”

This changing mindset was also spurred by Redbox agreeing to share rental revenue with the studios. Studios have been down that road before. More than two decades ago, when Blockbuster sought to increase its inventory of hot new releases at a lower up-front cost, revenue-sharing was the solution.

In May 2017, Warner was the first to cave on the 28-day holdback, agreeing to sell new releases to Redbox seven days after they come out. In July, Redbox cut a similar deal with 20th Century Fox. And in December, Universal Pictures came around, agreeing to make its Blu-ray Disc and DVD titles available for rental at Redbox kiosks on the same day they are available for sellthrough. (That deal, which took effect Jan. 2, also makes digital content available through Redbox On Demand).

Smith concedes revenue-sharing played a part in shattering the 28-day holdback. “I can’t get into the particulars,” he says, “but clearly we believe, and have felt for some time, that there was not enough economic benefit for studios from additional sellthrough by delaying a title’s release.” If consumers couldn’t find a new release at Redbox, that didn’t necessarily mean they’d go out and buy it either physically or digitally, Smith maintains. Nor did it mean they’d wait and rent it when it finally did become available. “You may have lost that transaction completely,” he says. “And over time, studios realized that by eliminating the window it was a way for consumers to win and for the studios to win by us generating more revenue — and them sharing in that.”

But revenue sharing isn’t the only reason behind the growing willingness by the studios to sell product to Redbox as soon as it comes out. “There have been big changes in how content has become available,” Smith says. “Subscription VOD didn’t really exist in 2008, 2009, but now consumers have come to embrace SVOD, and while there have certainly been some benefits to that, it’s also something that reduces the amount of money studios receive on a per-transaction basis.

“So we’ve found a way to make it work for us and benefit both our customers and the studios. We want to support this industry. We want to continue to see great movies being made.”

Like Netflix, now the single biggest force in home entertainment, Redbox began as a cheaper and more convenient way to rent DVDs. Netflix used the mail, while Redbox used vending machines stationed outside high-traffic discount stores and supermarkets. Both concepts attacked the No. 1 and No. 2 customer complaints about renting videos at the local rental store: return trips and late fees.

Redbox was initially funded by McDonald’s, renting DVDs from redeployed kiosks — which had originally sold a variety of products under the brand “Ticktok Easy Shop” — for a buck a day. Discs could be returned to any Redbox kiosk.

In 2005, Coinstar, known for its coin and bill-changing machines, bought half the company and began to rapidly expand the Redbox concept. Kiosks were placed outside high-traffic discount stores such as Walmart as well as supermarkets and drug stores. Despite competition from Blockbuster Video, with its fleet of Blockbuster Express kiosks, Redbox flourished. By February 2008 the company had chalked up 100 million rentals, a figure that grew to 1 billion by September 2010. In the meantime, Coinstar had become Redbox’s sole owner, and the company had begun renting Blu-ray Discs and video games as well as DVDs.

Much like the studios and independent video rental stores three decades earlier, Redbox’s growth came despite Hollywood’s best attempts to stop it. After 2005, DVD sales began to taper off, and the studios felt dollar rentals outside big DVD retail sellers such as Walmart would cannibalize sales even more. Lawsuits and countersuits were filed; Warner Bros., 20th Century Fox and Universal stopped selling their movies to Redbox, and Redbox sued on antitrust grounds. Redbox vowed to continue supplying customers with new releases, even if it meant buying them at retail, and began hiring workers to storm Walmarts on new-release Tuesdays.

Ultimately, the litigation was settled, with some studios agreeing to sell product to Redbox, but only after 28 days. Redbox, in return, agreed to not sell used discs.

Redbox rentals peaked in 2013, with more than 772 million transactions. That same year, Coinstar rebranded itself as Outerwall.

Before long the shift to digital — primarily subscription streaming from Netflix, once Redbox’s rival in the disc rental business — began to take its toll. Redbox rentals flattened, then began to fall — to some 587 million rentals in 2015, a 24% drop from the 2013 peak.

In the meantime, Redbox had launched a streaming service of its own, with Verizon, that included kiosk disc rentals as part of the package. Given Netflix’s meteoric rise as well as Amazon’s entry into the streaming game, it was too little, too late — 19 months after the launch the companies abandoned the venture.

Redbox’s fortunes continued to decline as management debated whether to continue pursuing digital or focus on the existing physical disc business. In March 2014 the company hired as president Mark Horak, a 20-year veteran of Warner Bros. who most recently was president of the Americas at the studio’s home entertainment group. Horak was a digital proponent who felt Redbox should take advantage of the vast amount of consumer data it was collecting, but effecting change proved difficult and by the end of 2015 Horak was out.

Less than a year later, in September 2016, Outerwall was sold to private equity firm Apollo Global Management, and its three business units — Redbox, Coinstar and mobile phone recycling kiosk operator ecoATM — split into separate companies. Smith, who had been Outerwall’s CFO, was named CEO of Redbox in September 2016, and promptly set about righting the ship.

“Actually, from my perspective, things may not have been as bad as you might assume,” he says. “We had a lot of leadership changes over a short amount of time, and our employees did a great job weathering that. But one of the priorities I had was to bring clarity to what we are about. We really wanted to go back to our core mission of satisfying consumer demand in a better way.”

Redbox CEO Galen Smith

Galen C. Smith was born in Olympia, Wash., in 1976. He spent two years at the University of Washington and then moved to Illinois to attend Wheaton College, graduating in 1998 with a Bachelor of Arts degree in political science. He initially worked in fundraising, raising money for various nonprofits. “I love meeting with people, building relationships, painting a picture of what could be and getting them to come along and invest with us,” he says.

In 2001, Smith enrolled in the University of Chicago’s M.B.A. program, earning his degree three years later. He briefly went into teaching, and then began working as an investment banker at Morgan Stanley in Chicago.

“I really enjoyed that,” he says. “One of my clients was McDonald’s, and they had this business they were looking to take public. The IPO never ended up happening, but when you’re in the investment banking business you get to know a lot of different companies and a lot of different cultures when you’re working with management. And as I was working with Redbox and then Coinstar, I met a great management team and company culture as well as a business founded on democratizing home entertainment for everyone, making it accessible for everyone. They had this great vision and mission, and I wound up calling the management team and asking for a job.”

Smith joined the finance team at Coinstar in May 2009 as director of corporate finance and by April 2011 had become SVP of finance for Redbox. “I loved being in the business,” he says. “I started negotiating studio contracts and building relationships.” When Coinstar became Outerwall in 2013 Smith was promoted to CFO, a position he held until the company’s sale to Apollo in September 2016.

“They asked me to stay on as CEO,” says Smith, who now lives in Seattle. “And I did. I have a deep passion for what we do, for our employees, for how we go about satisfying consumers and providing them with entertainment. Life is hard, and we give consumers a chance to escape for a couple of hours, laugh a little, watch a movie, play a game, do something that allows them to escape for a little bit.”

Smith says he also likes the relatively free hand he’s been given to run Redbox and take it in different directions. “One of Apollo’s thoughts was if they allow each individual business that previously operated under Outerwall to focus on the best opportunities for them, they’re going to excel,” he says. “It’s a challenge to break up companies, but we went through that and once we did, we’re now in the position to focus on what’s important to us, rather than what’s important to a connected but unrelated business.”

Ash Eldifrawi

Smith’s transformation strategy also included bringing in new talent. In February 2017, the company brought in Ash Eldifrawi as chief marketing and customer experience officer. Prior to joining Redbox, he served as chief commercial officer at Gogo, a global provider of in-flight Internet service. Before joining Gogo in 2010, Eldifrawi was chief marketing officer at Hayneedle, an online retailer of home and leisure products. Earlier in his career, he served as a senior director of brand advertising at Google, where he was responsible for all CPM-based revenue. He also spent time as a managing director at Wrigley, and in management consulting at McKinsey & Company.

Jason Kwong

Then, in October, the company appointed Jason Kwong chief strategy and business development officer. Kwong previously headed up content acquisitions for Fullscreen’s subscription VOD service. He was also VP of content and applications at Sonifi Solutions, which serves approximately 1.4 million hotel rooms worldwide in addition to health care facilities throughout the United States with interactive television, broadband connectivity and advertising. Kwong also worked at Netflix as director of content acquisition focusing on U.S. film deals. He has also held roles at Helio, Virgin Mobile and Warner Bros. Digital Distribution.

“With so much opportunity for Redbox’s future, we felt it was critical for us to add to our talented leadership team,” Smith says. “Both Ash and Jason have helped to enhance the business by refreshing the brand, launching a new loyalty program and bringing Redbox On Demand to market.”

Looking ahead, Smith’s next agenda item is to revamp Redbox’s loyalty program to enhance the company’s relationship with existing customers, to re-energize them — and at the same time step up social media and other marketing efforts to bring in new customers.

“We have customers who have been with Redbox for a long time, and we’re now in the process of launching a new loyalty program,” Smith says. “Our current program has about 27 million members, and we are looking at enhancing that — we’re going through a transition now. We also want to bring new customers in. There are consumers out there who don’t know we offer $1.50 movie transactions. And we’re being very thoughtful about how we go about doing that. We want to make Redbox new again.

“We are so special and unique in what we do, but we’ve been missing opportunities to tell people about it. Now, our marketing people are doing a great job in taking back our voice and explaining who we are, what we are. All of a sudden, I think both internally and externally, it’s starting to feel fun again.”

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