The Slow Death of Redbox: Why the Kiosk Colossus Is the Next Blockbuster

Redbox Failing
C.J. Burton for Variety

In November 2007, Redbox had exciting news: Its brick-red DVD vending machines were in more locations nationwide than industry leader Blockbuster.

“Redbox offers a level of service and convenience that our competitors simply can’t provide,” Redbox founder and then-CEO Gregg Kaplan said at the time, boasting of the company’s 6,000th automated kiosk installation.

Today, Blockbuster is essentially dead, living on as a token brand name under Dish Network. Kaplan is now a partner with Pritzker Group Private Capital. And Redbox — with its parent company, Outerwall, still making healthy profits on relatively cheap DVD rentals of new releases — is shrinking, ultimately destined for the same fate as its erstwhile foe.

“It’s a certainty that at some point consumers will no longer be renting movies out of Redbox kiosks,” says Piper Jaffray analyst Michael Olson. “It could be five years from now or 15 years from now. But at this point, it’s about managing the decline.”

Redbox’s revenue for the fourth quarter of 2015 dropped 17%, to $407 million, as movie rentals plunged 24% year over year. For 2016, Outerwall expects Redbox rentals to decline 15%-20%, and the company plans to remove up to 2,000 underperforming kiosks after ending last year with 40,480.

Former Redbox CEO Mark Horak, shown here at last year’s Press Play: Variety Home Entertainment and Digital Hall of Fame event, departed the DVD rentals company after less than two years in the job.
Rob Latour/Variety/REX/Shutterstock

Outerwall blamed a variety of factors for Redbox’s ongoing woes. Those included “successive quarters of weak content” and the effect of price hikes enacted in December 2014, which increased the daily rental rate for standard DVDs from $1.20 to $1.50.

But the fundamental factor pushing Redbox downward is that people are increasingly consuming entertainment on digital outlets like Netflix, Hulu, iTunes, Amazon, Comcast and other pay-TV ops rather than via DVD. Just as Redbox hastened Blockbuster’s demise, the kiosk operator is losing share to services that offer more convenience, value and selection — with instant viewing across multiple devices.

“We are facing challenges from changes in the marketplace and how consumers access content in various formats,” Outerwall CEO Erik Prusch acknowledged on the company’s earnings call this month. “Levers that worked in the past, such as investing in more content or certain marketing promotions, are no longer sufficient as a counterweight.”

Investors have punished Outerwall’s stock, pushing it to a six-year low of $27.04 per share on Feb. 6 after the company’s weaker-than-expected 2016 outlook for Redbox. Some analysts believe the reaction is overwrought, arguing that Redbox has a sustainable position with its broad network and low-cost model. Movie titles are available on Redbox at some 33,000 locations, including Walgreens, Walmart, Kroger and 7-Eleven stores, typically 28 days after release on disc and digital sell-through, and before they hit subscription services like Netflix.

Redbox’s business peaked in 2013 — and now faces years of declines as DVDs slowly fade from the home-video scene.
Source: Company Reports

Short of piracy, there’s no less expensive way to watch, say, Disney’s “Bridge of Spies,” 20th Century Fox’s “The Martian” or Sony’s “Hotel Transylvania 2” than an overnight rental from a Redbox machine.

“There’s a big delta between a buck fifty for a Redbox DVD and $6 or $7 for (a new release rental on) VOD,” says Eric Wold, an analyst with B. Riley & Co. “It’s going to be a huge cash-generating company for quite a while.” Wold maintains a “buy” rating on Outerwall stock.

Indeed, despite lower sales, Redbox posted an operating profit of $255.9 million for full-year 2015. The unit’s operating margin was 14.5% last year — up from 13.6% the year earlier and 13.1% in 2013.

Redbox has raised fees only twice in 13 years, and Wold suggested the operator has some pricing power that would allow it to further boost revenue per rental. “Movie theaters raise prices every year,” he noted.

Outerwall’s Prusch, on the earnings call, said Redbox is testing higher price points, but didn’t provide details. “We’re going to continue to look at price as one of the levers that we have with the business,” he said. In Q4, net revenue per Redbox rental was $2.98, compared with $2.73 in Q4 2014.

“It’s a certainty that at some point consumers will no longer be renting movies out of Redbox kiosks. It could be five years from now or 15 years from now. But at this point, it’s about managing the decline.”
Analyst Michael Olson

With Outerwall’s market cap now below $500 million, down from more than $2 billion four years ago, one possible scenario for the company is to go private. Last week, activist investor Engaged Capital disclosed that it had amassed a 14.1% stake in Outerwall. Engaged has urged Outerwall to consider selling itself to a private-equity buyer, per a Bloomberg report. The premise is that a new owner would be able to further streamline operations and potentially separate Redbox from Outerwall’s Coinstar business and the money-losing ecoATM recycling kiosk unit. “Outerwall welcomes the opinions of its shareholders, and is always open to constructive input toward the goal of enhancing shareholder value,” the company said in a statement.

Redbox declined to make executives available for an interview for this story.

Prusch, a former wireless-industry exec whom Outerwall named CEO in July, has promised to make changes at Redbox to maximize profitability. In December, he booted out Redbox president Mark Horak, a former top exec at Warner Bros. Home Entertainment, who had been with the company for less than two years. Among Horak’s moves was to pull Redbox out of Canada, where it had 1,400 kiosks, in early 2015.

But Prusch’s hands are tied in building a bridge for Redbox to a streaming-video future — for one thing, it already tried and failed to make the leap. In March 2013, Outerwall, in a joint venture with Verizon Communications, launched Redbox Instant, a Netflix-style subscription service with about 6,000 movies. After meeting with little traction, the companies shuttered the new venture in October 2014. Verizon has since invested heavily in go90, a free, ad-supported mobile video service.

“Redbox’s customers have tremendous price-sensitivity,” says Peter Csathy, CEO of investment and consulting firm Manatt Digital Media. “Moving them onto a monthly subscription plan just didn’t work.”

Redbox’s business peaked in 2013 — and now faces years of declines as DVDs slowly fade from the home-video scene.
Source: Company Reports

Blockbuster also was unable to navigate the shifting digital tides. Notoriously, the retailer passed on the chance to buy Netflix in the early 2000s. The struggling company filed for bankruptcy in 2010; Dish bought Blockbuster a year later for $320 million, but eventually closed all remaining stores and shuttered its DVD-by-mail biz. Separately, in 2012, Outerwall (then known as Coinstar) paid $100 million to acquire NCR’s DVD kiosk business—which had operated under the name Blockbuster Express — and folded it into Redbox.

Despite both Blockbuster’s and Redbox’s reliance on physical DVDs, analysts see huge structural differences between the two models that were the very reasons Redbox outflanked its rival. “Blockbuster was inefficient,” Wold says. “They had a big retail footprint, and Redbox was the much cheaper option.” Redbox now enjoys the network effect of having 40,000 boxes, which would be out of the question for a would-be competitor to consider replicating. Netflix, for its part, still runs its dwindling (but still profitable) DVD-by-mail business in the U.S., with 4.9 million subs at the end of last year.

Another point in Redbox’s favor: Major studios now see the DVD kiosk service as a sizable source of revenue for their home-video divisions. Over the past 12 months, Redbox renewed short-term licensing deals with Universal, Paramount, Sony, Warner Bros. and 20th Century Fox (with Disney the only significant holdout). In recent years, Outerwall has been one of the biggest wholesale buyers of DVDs and Blu-ray discs, after Walmart. “The studios don’t want Redbox to go away,” Csathy says.

It wasn’t always this way. Redbox started life in 2002 under the wing of McDonald’s Ventures, and once it gained a large user base, Hollywood execs fought the company because they thought 99¢ DVD rentals would destroy their sell-through businesses. When Fox, Warner Bros. and Universal refused to sell DVDs to Redbox until 28 days after home-video release, Outerwall filed antitrust lawsuits against them in the late 2000s before coming to terms with the studios in 2010.

“Going back to the origin of Redbox, there was a ton of resistance. The studios hated it,” says John Calkins, former exec VP of digital distribution at Sony Pictures Entertainment.

Sony was the first big player to reach a distribution agreement with Redbox to stock its titles. The decision to do so was influenced by the classic “prisoner’s dilemma,” according to Calkins: “If we didn’t do it, somebody else would be in that box.”

From here on out, the industry stands to reap less coin from Redbox: While 2016 box office grosses for Redbox titles are expected to be $10.2 billion, an increase of 3% over 2015 based on company estimates, Outerwall is predicting a double-digit decline in rentals for the year.

“I don’t think it will hit a wall and people will stop using Redbox all of a sudden,” Piper Jaffray’s Olson says. “But the war they’re waging is one they will lose longer term.”

ANNUAL U.S. FILMED ENTERTAINMENT REVENUE BY CATEGORY (PROJECTED) (in Billions)
Source: PwC’s Entertainment & Media Outlook report, June 2015

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  1. Bill says:

    It never ceases to amaze me that while we have the ability to watch higher quality video than ever before in our homes, people now watch horrific quality streamed video, often on their phones and tablets.

    Truly sad in so many ways.

  2. Vick Patel says:

    I own couple of gas stations in South Atlanta. I have been trying to contact Redbox franchise to get DVD kiosks for my business. They haven’t even replied to my request. I am assuming they are too going out of business. If they give a chance to small business owners like us, they might hold on to their business for longer. It is a win-win situation for both of us.

  3. AlbertG says:

    I found the best DVD renter of them all.. It’s free and you can reserve on line.. The local public library.

  4. Robert says:

    Companies like Redbox lose their way because they set up the rules then break them after the consumer gets used to them. It was an Awesome deal to pay $1 for an overnight new movie. Customers got used to the deal. It doesn’t matter that theaters raise their prices every year they’ve been around longer. What Redbox was introducing was revolutionary and customers felt Redbox was on their side for providing such a convenient service at such a “steal” of a price.

    But then it happened, they raised their price, not by much BUT enough for customers to notice. Then it worsened when Redbox decided to offer a higher price point for Blu Rays. WHY? By this time Blu Rays have been around long enough to start seeing great deals being offered in every Best Buy or Target. So why the distinction by Redbox? Who cares that it’s “new” technology it’s already been established as the CURRENT STANDARD! So another poke in the customers eye from Redbox. It’s not a coincidence that 2015 saw the lower profits than the year before, Redbox raised their prices. Now customers are watching closely.

    Think about this, Netflix hasn’t changed their pricing structure since it started, that’s a significant point. Notice what happened to Netflix when they split the cost of their mail in movies from their streamed in movies. Almost half of their customer base left. Netflix set the rules that customers liked and followed but then Netflix broke their own rules, or format. What saved Netflix was the increase interest in streamed in movies by a growing number of other services plus grandfathering the prices for their current customer base at the time. However back to Redbox. When customers start to realize that if they rent 2 Blu Rays from Redbox for $2 dollars each for a sum of $4 dollars, they’ll quickly realize that at that rate if they purchased 2 Blu Rays every weekend for a month the cost will be $16 dollars a month. How is Redbox going to compete with Netflix and other streaming movie services that only charge $8-9 Dollars a Month FOR BLU RAYS? THAT’S something for Redbox to think about! If Redbox wants to stay in the game and be competitive they’ll HAVE to go back to $1 Dollar movies EVEN for Blu Rays!!! At that rate they’d at least equal the cost of Streaming movie services.

    THINK ABOUT REDBOX!!!!

  5. Censorship is alive at Variety when you critize the author to much says:

    This article is skewed to fit a narrative that the author per-conceived that physical media is dying because digital is now here. Physical media is still superior in blu-ray to even 4K streaming especially in the audio department.

    Redbox is and will need to scale back but it’s death pronouncements are as silly as saying 3D Movies are dead simply because you don’t like them.

  6. I would like to see more Blu-ray options and eventually Ultra Blu-ray. Getting into Ultra Blu-ray early on could help spur the new format and give Red Box another way to charge a premium. I don’t want to have to buy every Ultra Blu-ray movie I watch at $30 a pop. I would definitely rent UHD as I want to take full advantage of my new 4K TV and my Samsung UHD Player. (UHD discs have over 100Mbps bandwidth vs streamings 14-16Mbps.) For many types of movies I will chose quality (Redbox) over convenience (streaming).

  7. wise56 says:

    Someone didn’t do their due diligence. VidAngel is streaming and cheaper than RedBox. It even has additional filters you can apply to movies.

    FALSE: “…there’s no less expensive way to watch, say, Disney’s “Bridge of Spies,” 20th Century Fox’s “The Martian” or Sony’s “Hotel Transylvania 2” than an overnight rental from a Redbox machine.”

  8. Keep relying on those streaming services because eventually the Cable companies are going to put hard caps in place and put a big damper on those HD streams everyone loves.

  9. Partner with Hulu Amazon and Netflix to offer Episodes of hot new shows not just movies. There are tons of folks who have no access to online streaming. Plus offer a drive thru kiosk for pick ups or returns. I would rather wait in line in my car than walk ups.

  10. Ruth edmark says:

    The day redbox stole my personal DVD that was accidentally deposited and charged me $17 rental fee for returning a wrong dvd
    …that was the day I quit redbox

    • dallas says:

      haha wow. I love how u said they STOLE your dvd, when your the one who made the stupid mistake of putting YOUR DVD in the kiosk. that’s YOUR fault. and ONLY YOU. wow , nobody can take responsibility anymore for their actions. if I had done that, I would be like oh crap, now that movie is gone forever. But I realize that your an average American these days

      • Anonnnn says:

        You meant “you’re”, not “your”. Twice. You are = you’re. (Examples from your post: “you’re the one who made the stupid mistake”, “you’re an average American”).

  11. TheBigBangof20thCenturyPopCulture says:

    Consumers who cling to old tech distribution outlets do so because of the content quality that went with it. Redbox is destined to share the fate of Blockbuster because most modern movies suck so bad that the selection is not good enough to support the business model. For it to work, this would have to be the 1970s or 80s when dream factory output thrived and was not devolved by dystopian media or toxic pop culture.

  12. jack says:

    If Redbox goes away digital rental prices will go up.

  13. Jr says:

    The problem with Redbox is that their blu-ray support is barely even token. Even Oscar winners like Birdman and Whiplash are represented only by DVD and not Blu ray at Redbox kiosks. It is 2016 and we have Blu ray, 3d at home, and now UHD. But Redbox still concentrates on standard DVD, especially the smaller titles. Today, that’s the same as pushing VHS.

    • The ONLY reason I use Redbox is specifically for the Bluray since Netflix will not allow Bluray rentals unless you shift your entire account that way. which reduces the number of available titles. I don’t need everything in BluRay, I just want the heavy CGI titles for best effect. HD streaming does not compare to BluRay disc in my opinion, so they will maintain my business until then.

    • acouvis says:

      It’s a bit ironic. Redbox’s dvd business can’t really compete with streaming – It’s cheap, but the convenience factor makes streaming faster and easier. A better option would actually be refocusing on BlueRay and Ultra HD. The choice would then be between quality and convenience. Most people’s bandwidth is still slow enough that blue-ray and ultra hd stutters or lags, so the quality factor could mitigate the changing market for some time to come.

      That, and just stop stocking crap like Norbit in the boxes in the first place.

      • Jpe says:

        Too early to stock UHD since no one even has a player. And it’s mostly old titles. But since they didn’t carry 3D (which has hundreds of titles new & old) I don’t think they will carry UHD as the discs would be sitting in the kiosks forever. But they can and should beef up Blu-ray. Why they haven’t is beyond me.

  14. Hellbent says:

    I use to brag on Redbox to my friends like free advertising before 2013 because the price had me renting a DVD at least twice a week plus they use to reward you with a free DVD about once a month just for being a loyal customer but all that has stopped. The free DVD reward is now half price. So, now I use Redbox a whole lot less like once a month or less because there is a trade-off when you increase the price. Low price means rent more. Increasing the price means you rent less. The balance is self-aware. In marketing you learn that low prices increase clientele but when you increase the price your clientele declines. Sometimes it only takes a 5 cent increase to lose 2% of your customers. That’s why they came up with the term “They’re nickel and diming us to death” . At some point the company will take a gamble on greed and higher prices and start a downward spiral that they can’t recover from. Why? The market has lost trust and confidence in the price savings and start looking for alternatives. Some never come back. They know that any price drop now is just a temporary gimmick just to raise the price on you again after they think you are hooked which actually forces you to leave for good.

  15. Jake says:

    They need to put it a fast food chain. It still is the cheapest way to watch movies

  16. greg says:

    Thats a shame. Redbox usually has more recent and better titles that Netflix has had on a weekly basis. If anything, Netflix is dropping the ball by offering less and raising their prices.

  17. Jo Mama says:

    Who cares about standard DVD rates? When they raised blu-rays to $2 per rental it was a sign. Still the cheapest way BY FAR to see something at that phase of the release, though! The problem is that the 5 good movies at any given time are gone, and the other 100 aren’t really needed.

    • dallas says:

      That’s why they have this thing called the “world wide web” and you log on Tuesday morning, and you can RESERVE a copy of your favorite NEW movie. I get NEW movies the FIRST day they come out EVERYTIME.

  18. Mike Weiner says:

    I don’t think its going to be 5 to 15 years of decline as the article states. Once people stream a show and realize how fast and easy it was, not to mention being able to view it on their phone, PC, tablet, or Smart TV, they aren’t as easily going to go to the trouble of renting and then returning physical media.

    Renting or buying and streaming is so much faster and easier, I think they’ve got no more than three years (at the most) before they’ve gone the way of Blockbuster.

  19. Ian says:

    I rented movies a lot last year, but the problem was there was a period of a couple months were I wouldn’t rent movies from them, because the lack of good movies in those certain periods of time, so thanks a lot studios.

    • TheBigBangof20thCenturyPopCulture says:

      Thanks for confirming my point. The only way Redbox can survive is if they feature DVD movies from the past good old days of Hollywood. Modern films just aren’t good enough for them to survive much longer.

  20. mcvegan says:

    I like the streaming ones for movies and the series are good too. my husband loves the just released movies from Red Box for $1.50! see that, you can’t get them as quickly on your Netflix so Red Box is really great

  21. Hi says:

    I stopped using them after the latest price increase. It’s just not worth burning gas, waiting in a line and finding out the movie you want isn’t available or if it is available it’s scratched and won’t play.

  22. david says:

    Been on the decline since they half-heartedly launched with Verizon, and failed to have the courage of Netflix.

  23. Jonathan says:

    It’s more like people prefer being lazy and not having to make more body motions than absolutely necessary throughout their day, streaming requires a fat lazy american family to use only their thumbs, obviously more convenient than moving their arms up and having to WALK AROUND….I mean who has the strength left to do that in thos country?

    • Betty says:

      Amen Jonathan, that’s what I was going to say!!
      Everything is done on the computer so much now, that’s why stores are having financial problems.
      Soon there won’t be any stores left either, just warehouses to fill online orders!! Sad!!

    • Ian says:

      I’m glad that I get exercise from renting at redbox, I ride my bike to a local gas station, so I both get exercise and entertainment unlike these lazy hacks.

  24. Bill says:

    It’s sad that with Blu-ray and now UHD Blu-ray available quality had never been higher but people are content with the comparably poor quality of streaming, just as they are willing to listen to audibly inferior MP3s or streams.

  25. James Dodson says:

    I am now and will for as long as I am able be a purchaser of movies on DVD and Blu-ray and the upcoming UHD Blu-ray. I don’t mind streaming services but I prefer to own the movie I buy so I can watch it when and where I want.

  26. I believe The Red Box sales are down due to the switch of people viewing content from movies to TV shows and Original content from Netflix,amazon etc. People are not paying more for movies on VOD. People just do not want to pay more, They are now watching TV Shows Redbox does not offer.

  27. Stevens says:

    We love Redbox and were sad to see them leave Canada. The price is right, the convenience is great and should you ever have a problem, I have found their people on the phone get it fixed FAST and to the customer’s benefit.
    If we want Redbox to survive here in the U.S., we better start USING THEM more often. If not, it’ll be all over for them.

  28. Alex says:

    Kind of odd…there are multiple locations very near to me, and if I ever want to watch a new release I always get from redbox. Why would you pay $5+ from a VOD service when you can pay $1.50 – that’s even cheaper than Blockbuster and other video stores used to be!

  29. Bill B. says:

    I miss not having any video stores.

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