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Rental Evolving, Not Dying

29 Dec, 2005 By: Holly J. Wagner

I agree with the analysts at JP Morgan who say the whole “rental is dead” mantra is overdone. But the ostriches among us are the endangered species. Rental is changing, dramatically, and anyone who denies it will suffocate in the sand around his head.

Indies have, for a while, been able to enjoy the relative mobility of meeting the market quickly — it's much easier to turn a jet ski than a battleship. But there are some things only a corporation can do effectively, mainly because they're capital-intensive.

Online rentals are one example. Netflix started small, but can anyone still deny its impact on the rental market? Others have been around for nearly as long — Greencine, DVDAvenue, DVDBarn — but as market movers their subs are negligible compared to Netflix and Blockbuster Online.

By the way, that's not to diss the smaller services — I still believe that not all success is measured on the public company yardstick. If you have a sustainable company that takes care of its employees, everyone makes a decent living and the company pays its bills, then you are a good business. Those companies won't reach the scale of a Netflix or Blockbuster Online, but so what?

But I digress. I'm sure some of you will call me crazy, but I think DVD vending is the next major battlefront. The big-league teams are McDonald's(and now Coinstar)-backed Redbox and Movie Gallery's Hollywood Video-branded machines, just in the testing stage. Redbox is ahead, with a network of 800-plus machines that let you rent in one city and return in another.

Loose change converter Coinstar recently bought a 47 percent stake in Redbox. It's genius. The company with existing relationships putting small-footprint vending boxes in “the fourth wall” — the front of supermarkets and drug stores — is taking over placing Redboxes in that channel. Point goes to Redbox.

Now it gets tricky. Before the Movie Gallery-Hollywood Video merger, Hollywood had signed on with Coinstar in an affiliate program. Anybody with loose change can drop it into the coin exchanger and get exactly the same value in a Hollywood Video stored value card, good for rentals or purchases (if they got a cash voucher they'd lose 8.9 percent of what they put in).

But wait, there's more! Now Coinstar owns a big piece of Redbox, and parent company McDonald's is just rolling out the “Arch Card” this month. It's a McDonald's stored value card to replace the longstanding gift certificate coupon books.

So, follow to the next logical step. Soon we will see Coinstar machines offering Arch Cards, and they will be good for food at McDonald's and $1-a-night video rentals from that Redbox three feet from the Coinstar machine. Or at the nearest McDonald's. And customers will be able to rent at the machine by the Coinstar and return at the McDonald's, or some other market or drug store, and vice versa.

Meanwhile Gallery is trying to place Hollywood branded machines in grocers — so if their Coinstar cards work in the machines, they still get the benefit of their alliance, but not the advantage of a prior machine placement relationship. And they had better act now to be sure their larger, higher-capacity machines will take those Coinstar cards.

Meanwhile they will curb labor costs by putting machines at video stores to extend hours while trimming employee hours. (I don't care what the indies say, a mom who is showing up on the way home from work to rent the latest “Harry Potter” film cares only that it's in stock and how much it costs, not what the pimple-faced Quentin Tarantino-wannabe at the counter has to say.)

So you can all laugh at me now if you want, but don't say I didn't warn you. Those vending machines are going to take off. Rental isn't dead, but it's transforming in ways the indies will be hard pressed to manage profitably. And the path for even corporate interests depends on making the right moves now.

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