Redbox vs. Netflix’s Red Envelopes

Netflix is one of the few companies today that continues to enjoy success despite the tough economy. However, there’s another rental company run by one of Netflix’s former lieutenants that’s giving the company some good competition: Redbox.

Redbox began as an experiment at McDonald’s restaurants. The group running Redbox grew from 12 machines to about 900 in three years. By the middle of 2005, the company was itching to expand beyond McDonalds. McDonalds then agreed to let Redbox seek another partner. In 2005 and 2006, Coinstar invested $37 million in Redbox and took majority ownership. This year, Coinstar agreed to buy out the rest of the company from McDonalds and other investors.

Today, Redbox has emerged as the largest operator of DVD-rental kiosks. The company currently operates more than 15,400 vending machines and is opening an average of one kiosk per hour. Last quarter, sales from DVD kiosks rose to $154 million. The DVD kiosks account for more than half of Coinstar's sales and profit. This quick growth, as well as with Redbox’s low rental fees, has Netflix CEO Reed Hastings concerned.

"By the end of the year, kiosks will likely be our No. 1 competitor," Hastings said in a recent conference call. "There are already more kiosks in America than video stores."

According to research from PricewaterhouseCoopers, Americans spent less money buying DVDs and more money on rental services last year. That trend is expected to continue, which means that DVD-rental companies such as Netflix, Redbox, and Blockbuster have even more incentive to fight for the attention of today’s consumers.

Netflix offers a huge variety of titles, but Redbox offers a low fee and quick access. In terms of library size, Netflix wins by a long shot, offering more than 100,000 movie titles. For comparison, each Redbox machine carries about 700 discs with about 200 titles.

The companies also use different business models: Netflix pays postage for each DVD rented, so it does best when customers opt for ambitious subscription plans but are slow to watch and return movies. Redbox’s profits depend largely on renting each disc as many times as possible before the demand for that title decreases. Although a Redbox rental costs just $1 per day, many people end up keeping the disc for two to three days.

If Redbox continues to succeed in challenging Netflix, it will have accomplished something that two much larger companies, namely Blockbuster and Wal-Mart, could not. Both companies have attempted to copy Netflix’s DVD-by-mail offering. Wal-Mart later quit the business and gave its customers to Netflix. Blockbuster still offers a DVD-by-mail service, but it trails in comparison to the popularity of Netflix.

While it’s likely that DVDs will disappear someday and be replaced by streaming content, Redbox is capitalizing on the current market dynamics. Russ Crupnick, an entertainment analyst for NPD Group, said almost 90% of U.S. homes have a DVD or Blu-Ray player. Only a few of those households regularly download movies to their computer or stream them over the Internet. As a result, Crupnick expects that it will take a few years before streaming services fully catch on. In the meantime, Redbox is likely to enjoy great success.
Tags:  Netflix, Movies, Redbox