Weekly Update

Redbox Success Means Netflix Should Consider Kiosks

Given Redbox got its start with movie rental kiosks in local McDonald’s franchises, it’s perhaps not surprising that both businesses have been remarkably successful in recent years selling goods for a buck. Both the golden arches and the red kiosks have not only weathered down times remarkably well, but also found new wind in their sails thanks to the power of dollar pricing in an economic storm.

No doubt, the psychological appeal of low prices is high. But while both companies have employed value menu pricing to their advantage in the down economy, recently McDonald’s execs have considered changes to their value menu strategy as rising commodity prices make selling food for a buck less attractive.

Redbox is considering no such changes. That’s because, while McDonald’s purchasing power goes down, the kiosk company’s has gone up, as quarter after quarter of sales growth gives Redbox the power to strike deals with studios for better wholesale DVD prices.

But that doesn’t mean the home entertainment kingpins are happy about it. While a farmer can easily raise prices for its beef and McDonald’s can de-emphasise that beef on its value menu, movie-makers fear – and rightly so – that Redbox’s value pricing means permanent changes in consumer behavior. The thinking goes like this: Not only will Joe Consumer get used to the idea of $1 rentals, over time he’ll start buying less and renting more due to the compelling economics.

If this theory holds true, what does this mean for Netflix?  While both primarily serve movie-renters, Netflix’s business isn’t threatened today because it and Redbox currently serve different constituencies. Redbox is for the less tech-savvy consumer who wants convenience and great value, while Netflix targets tech-savvy consumers who, well, want convenience and great value.

So as less tech-savvy consumers migrate online over time,  Netflix can simply ignore the growth of Redbox, right?

Not really. Given that the online transition and move to predominantly over-the-top video rental could take as long as 10 years, that gives Redbox a lot of time to seek out these bargain hunters and make permanent customers out of them. Netflix was able to make loyal customers out of its early patrons and has held onto them as they move to instant streaming; it should be worried about Redbox owning the customer as the kiosk company possibly moves online in the future.

So, while Netflix may not want to outright acquire Redbox parent Coinstar (though such a move is not out of the question given Netflix’s healthy market capitalization today), it needs to at least consider how to tap into the kiosk business.

Otherwise, it may find it’s missing out on a long-term opportunity to own the next generation of consumers growing up on a movie rental dollar menu.

Question of the week

Do you think Redbox customers would follow the company online if it decides to expand into streaming?