Why All the Rage at Redbox?

The dollar-a-night kiosks are more of a threat to rental stores and mail subscription services than the studios.

Last Updated: September 9, 2009 @ 6:54 PM
Redbox, the dollar DVD rental kiosk company, is the “rage” of both consumers and Hollywood. With cheap rentals and convenient locations, consumers are rewarding Redbox with phenomenal growth.
 
Inciting a different type of rage, with DVD sales down by 12 percent to 18 percent, many movie studios view dollar rentals as a primary culprit that is cannibalizing movie sales.
 
Redbox has an innovative business model. For a dollar a night, its vending machines rent the latest Hollywood releases, as well as an eclectic mix of past hits. With many locations (there are 10 within a five-mile radius of my home), movie-watchers can conveniently rent from one kiosk and return to another. Retailers love hosting Redbox machines as it drives traffic to their stores.
 
Many movie studios are in a tizzy because they feel that consumers who would have ordinarily paid $20 or so to buy a DVD are now foregoing these purchases in favor of renting the movie for a dollar. This, studios claim, is slowing sales and lowering the value of DVDs (prompting some to wonder if DVD prices should be reduced to retain customers).
 
With DVD sales accounting for on average 70 percent of a film’s profits, the palpable anxiety of studio executives is understandable.   
 
Do you really believe that dollar rentals are causing consumers to think, “I would have purchased but now I am going to rent?” Sure, some might, but I’m not convinced that Redbox is a major factor in the demise of DVD sales.
 
Those who purchase DVDs do so in large part to be able to repeatedly watch the film in the future. Dollar-a-night rentals do not provide this key attribute that movie buyers highly value. Actually, consumers who would have purchased are more suited to rent from a subscription service such as Netflix (which has experienced a 26 percent growth in subscribers in the last year) since there is no return due date, and it is easy to re-rent a movie (just put it at the top of your queue).
 
Redbox is more of a cannibalization threat to physical rental stores and mail subscription services.
 
So what should studios do right now?
 
Chances are that DVD sales have fallen victim to the recession and increasing entertainment options for consumers. One step to further reduce general “rental versus purchase” cannibalization is to ask rental companies to only stock the “basic” DVD.
 
This will further encourage aficionados, who highly value, say, the director’s cut, to purchase. Additionally, given the shift from purchases to rentals (due to the economy), paradoxically studios should consider raising DVD prices. Higher profits will be earned from sales to diehard home viewers, as well as to rental companies.
 
While only a full data analysis can tell the full picture, my feeling is that the home entertainment divisions of movie studious are facing far more serious problems than dollar rental kiosks located at local Ralphs grocery stores.

Rafi Mohammed, Ph.D. is a pricing strategy consultant and author of pricing strategy books, "The Art of Pricing" (Crown Business, 2005) and the upcoming "The 1% Windfall" (HarperCollins). He wrote his economics Ph.D. dissertation (Cornell University, 1994) on rock-concert ticket pricing and bundling. For more pricing-strategy insights, check out his website.