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Kiosk Building or Bust?

4 Oct, 2010 By: Erik Gruenwedel

Recent news that two companies plan to deploy thousands of $1 DVD rental kiosks in the near future in a market dominated by Redbox and Blockbuster Express brought mixed reactions from analysts.

Global Axcess Corp. said it had installed 300 of a planned 323 kiosks with an unidentified grocery store chain, and envisions diversifying its ATM business to focus on self-serve movie rentals, according to CEO George McQuain.

“We believe this early rental activity reinforces our cautious optimism that DVD kiosks will generate higher revenue … and represent a significant, largely untapped market opportunity for us,” McQuain said.

Los Angeles-based Public Media Works LLC, parent of upstart DVD kiosk rental company EntertainmentXpress, said it inked a deal to install 500 branded kiosks with an Asian retail group comprising more than 90,000 independent businesses. PMW in August signed an agreement with Modular Conversions LLC to manufacture movie, video game and 3D kiosks for rollout to 7,000 unnamed gasoline stations, according to a regulatory filing.

MOD Systems and NCR Corp., which operates Blockbuster Express, are installing separate kiosks that allow consumers to download movie rentals to a Secure Digital (SD) memory card, which can be inserted in a PC, laptop or related media device. Upstart Flix on Stix will alow users to download movie rental to portable USB drives.

Kiosk pioneer Redbox and Blockbuster Express collectively represent more than 27,000 kiosks, and cut a large swath of the country’s national retail footprint. Regional video store chains such as Family Video in Glenview, Ill., with more than 600 locations, are expected to expand their brand through kiosk vending. In addition, third-party ATM manufacturers such as New York-based Cereson Inc. market lines of generic kiosks that can handle several hundred DVD or Blu-ray Disc titles.

Clients typically include mom-and-pop franchisees in smaller towns and rural locations looking to supplement their stores’ revenue per-square-foot or establish standalone businesses in tandem with existing independently operated ATM machines.

Tom Adams, president of Adams Media Research in Carmel, Calif., said it is too early to dismiss newcomers to the kiosk rental market. He believes the market can handle 60,000 kiosks, underscored by meteoric growth that now sees kiosks representing 22% of all packaged media rentals, and 18% of all rentals, including video-on-demand.

Adams said that growth will comprise 26% of all rentals by 2014, including 35% of all packaged media.

“I think it’s definitely not too late to get traction and enough demand and revenue to overcome corporate overhead,” Adams said.

He said Redbox proved it could create a business model without studio support and even survive initial boycotts imposed by some studios since the wholesale price of new releases is typically the first-week retail price. Adams said that despite Redbox acquiescing to studio demands, it should not be considered an impediment to market entry.

“The bottom line is not that consumers are cognizant of brand,” Adams said. “[Kiosks are] a very simple business: Do they have a movie?”

Edward Woo, analyst with Wedbush Securities in Los Angeles, said PMW’s business model is predicated on retailers owning and operating the kiosks, unlike Redbox and Blockbuster Express, which operate turn-key solutions with revenue-sharing agreements.

“The problem with this model is that it shifts the cost and risk of the business to the retailers,” Woo said. “I doubt many retailers (especially the mom-and-pops) want to take the risk (about $20K per machine) especially with concerns about digital distributions popping up. Redbox or NCR Corp. (which owns and operates Blockbuster Express via license agreement) don’t have to worry much about these guys as I don't think these businesses will get much traction.”



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