Redbox: The Attack on Blockbuster

Earlier this summer I was walking into a McDonalds for lunch and I noticed a huge red box, sort of like a vending machine, just to the side of the door as you walk in. It advertises itself as renting DVDs at $1/day. It looked pretty shady at first but the more I looked into it the more ingenious I realized it was.

The way it works is you scan your credit card or debit card. From a touch screen you select a DVD from a list of 40 new releases that gets updated every Tuesday. You can select as many as you want. If you return it by 10pm the next day the cost is a whooping $1+tax. You pay a dollar a day plus tax for every day you keep it up to 25 days at which point you have bought yourself a $25 DVD. Once you return the movie the box emails you a receipt and charges your card.

If you are like me when you go to rent a movie it’s because you are planning on watching it that night. By the next day it has already served its purpose so the 3 or 5 day rental they charge you more for is all for not. Or say you do plan to keep it for 3 days. Find me a Blockbuster, Hollywood Video, etc where you can get a 3 day new release rental for 3 bucks. Another convenience is, unlike Blockbuster, you can return it to any Redbox location.

All of this out of an automated box. It's open 24 hours a day, all the costs of employee's wages, benefits, etc do not drive up the cost bc they don't exist. Redbox started last summer in Denver. They setup 105 locations around the city almost exclusively outside McDonalds. In less than 6 months they rented 1.7 million DVDs. 105 locations… 1.7 million DVDs. That’s impressive. That all started last June. Here we are its August 2005 and they have 1,200 locations across the country. They've grown 10 fold and expanded to 7 cities stretching coast to coast in one year.

So I started looking into the cities where they expanded. Vegas, Hartford and D.C. have a total of 37 between them. On the other hand Salt Lake City, Houston, and Minneapolis all now have hundreds. I found it weird they chose these cities. No New York, Chicago, Los Angeles, Dallas, Miami, Boston, etc. Hartford, Connecticut? I don't get it.

So then I start thinking it obviously has little to do with the city's population. I have narrowed it down to two factors. Factor #1 fat cities. Houston for the 4th time in the past 5 years was named the fattest city in the US. I have to believe there is a strong correlation between a fat city and the amount of traffic the average McDonalds gets. Factor #2 movie watching (renting) cities. I can't find any rankings as far as what cities rent the most movies but would it shock you that people in Minnesota rent and watch a lot of movies during those killer winters?

What I'm thinking is they chose cities and locations where they can make the quickest return on the investment they made in buying all the equipment that goes into the redbox and all the DVDs. That way the will be able to continue to grow quickly and won't run into cash problems.

My next question is who is paying who. Does Redbox pay McDonalds to set up shop on their property so they can take advantage of the customers the golden arches bring in? Or is it McDonalds who pays Redbox because every time a Redbox is installed outside the number of Big Macs they sell notches up? I am willing to bet it's Redbox who is shelling out the cash but if this idea really explodes maybe that should be reversed or at least an equal partnership should form.

Once upon a time it was Blockbuster who had the innovative business model and ran the movie rental industry. Ironically, it will be the innovative business models of Netflix and Redbox that run them out of town.

hj

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One Response to “Redbox: The Attack on Blockbuster”

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