Redbox to Add 1,500 Net DVD Rental Kiosks in 2017 (EXCLUSIVE)

Redbox, now privately held, is doubling capital spending in 2017 to expand its nationwide DVD-rental kiosk footprint — and new CEO Galen Smith says the company intends to be around for the long haul with its unique value proposition for movie fans.

This year, Redbox will spend $40 million (up from $20 million last year) to roll out a net 1,500 new kiosks across the U.S. in strategic locations, adding to its current base of 40,000, along with other technology investments. It’s planning to add even more in 2018. The moves are a reversal for the company, which took 1,800 kiosks out of service in 2015 and retired less than 1,000 last year.

“There’s no other distribution channel like us,” said Smith, formerly Outerwall’s CFO before he was named CEO last September. “Redbox lets [studios] reach a consumer they wouldn’t be to get otherwise.” The 41,500-kiosk footprint, he noted, puts Redbox in more U.S. locations than Starbucks and McDonald’s combined.

Redbox revenue had been on a downward trajectory for the last several years, as rental volume has dropped — and analysts expect the business to continue to shrink in the years ahead.

But according to Smith, Redbox remains a highly profitable business that offers an unparalleled value for new movie releases at $1.50 per day for DVDs (and $2 per day for Blu-ray titles). The next best option is $5 or more for video-on-demand rentals on cable and satellite services. “We’re focused on the freshest content at the best value,” Smith said.

And as a private company, Smith said, Redbox has the latitude to invest in its operations in a way that isn’t focused on meeting Wall Street’s financial expectations. Redbox’s parent company, Outerwall, was acquired by private-equity firm Apollo Global Management in a $1.6 billion deal that closed last fall. Since then, Apollo has split up Outerwall’s three segments into distinct businesses, so Redbox is now entirely separate from Coinstar and ecoATM.

As part of a public company, Smith said, Redbox was focused on driving toward the highest margin percentage per kiosk — hence, it removed several thousand “underperforming” machines over the last four years. Now, he said, “we care about cash flow.”

Redbox has direct output deals with Lionsgate and Paramount for same day as home video release and with Universal and 21st Century Fox for a 28-day delay after home-video release. It currently does not have agreements with Sony Pictures Entertainment or Warner Bros. but Smith said those are in the works. Disney has not had a deal with Redbox since 2012. For movies from studios with which it doesn’t have a direct deal, Redbox purchases DVDs on the open market for its kiosks.

Even if studios decide to move toward early-release premium VOD windows — an idea Disney chief Bob Iger dismissed on Tuesday’s earnings call as unattractive — Redbox will still be well positioned with the lowest-cost option for access to the newest releases, Smith said. And if Hollywood keeps holding firm on home-video release windows, those titles will never be on Netflix, Amazon Prime, Hulu or other subscription VOD services, he noted.

Redbox last year began testing Redbox Digital, a transactional VOD service. That’s still on the roadmap, but there’s no plan to commercially roll that out in the near future, according to Smith. “Consumers tell us they want us to provide more entertainment options,” he said. The transactional streaming service is “still in the plans but there’s nothing imminent.”

In the coming months, Redbox will launch a marketing campaign — featuring its new, slightly modified logo — to “reintroduce” consumers to the brand, said Ash Eldifrawi, Redbox’s chief marketing and customer experience officer, who joined in January from in-flight Wi-Fi provider Gogo. “We’ll be refreshing our overall branding and positioning,” Eldifrawi said.

About 94% of U.S. consumers have heard of Redbox (and 59% have at some point used the kiosks) but nearly 25% of those have no idea where the closest kiosk location is. The ad push is designed to help address that. Redbox also will lean into the video-game titles available through its kiosks, which let users try out games before they buy them.

Redbox will be exploring new locations for its kiosks, including movie theaters, mass transit, schools, gyms and libraries. Currently its two biggest retail partners are Walmart and Walgreens, and it also has Redbox kiosks at 7-Eleven, CVS, Kroger and McDonald’s locations.

Founded in 2002, Redbox has processed more than 5 billion rentals to date. Today, it averages about 39 million disc rentals monthly. About 60% of Redbox renters also subscribe to Netflix, and 44% have an annual household income of less than $50,000.

A team of about 1,000 employees provides service and support for the Redbox kiosk network, to replenish DVDs and make repairs.

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