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Kiosks Catching On, But Still a Tiny Niche

28 Sep, 2005 By: Holly J. Wagner

Videostore USA CEO Ron Szuchy practices what he preaches at his own brick-and-mortar store.

The DVD vending field is getting crowded despite naysayers who think renting or buying discs from a machine will never catch on.

“When I got done speaking at the VSDA show in Las Vegas this year, I was mobbed on the stage,” said Ron Szuchy, CEO of Videostore USA. “The industry is going to really take off, and I am very excited about it.”

Most of the machines available have many of the same features. They accept credit and debit cards, can be monitored remotely over the Internet, and offer an easy and flexible way for consumers to choose hit titles to rent or buy.

Capacity determines machine cost, which ranges from $15,000 to $30,000 per machine. Machines hold anywhere from 100 to 4,500 discs, depending on the manufacturer. Most suppliers have machines in more than one size, and all agree that high-traffic areas such as grocers, student unions, gas stations and convenience stores are the ideal locations.

Opinions range on what is the best machine capacity. Touch Automation has just introduced a model with the capacity for 4,500 discs. The TA 10 takes 50 square feet of floor space but amounts to a store in a box. Some people think that's too many discs.

“I think the United States has sort of settled that a number between 300 and 500 copies is best,” said Oren Hon, CEO of ELO Media, which has 30 machines in nine metro markets. “Why put 2,000 copies in one place when you can spread them out and put them closer to your customer?”

Nobody knows exactly how many DVD vending machines are in operation in the United States today. Estimates run from 1,500 to 2,000, still a small segment of the market.

McDonald's has Redbox machines in all of its corporate stores and some grocery stores in eight markets, renting titles for $1. Customers can rent in one city and return in another from about 825 machines in the United States. The company plans to place a few more machines this year, but not in McDonald's stores, said Redbox spokesman Greg Waring.

Location, marketing and customer education are key, ELO's Hon said. He likens the adoption of video vending, which went through early iterations in the late 1980s and '90s, to the adoption of ATMs, which took years to evolve. He and Szuchy agreed that McDonald's venture into the space is going far to educate customers.

DVDPlay customers renting from machines at Safeway stores also can rent at one store and return at any other with the machine.

Price also is a key factor, said Don Webb, VP of retail operations at machine supplier DVDPlay. “The success of Redbox, DVDPlay and other kiosk-based DVD rentals comes as no surprise,” he said. “Blockbuster, Hollywood, Movie Gallery, etc., continue to ignore the fact that their rental prices are completely out of line in relation to cost.” Video store rental rates have remained at roughly the same levels or have increased, even as rentailers' cost per product has dropped from VHS pricing to DVD pricing, he noted.

“With DVDs in the area of $20 wholesale, a rental rate in the $1 to $1.50 is a fair price,” he said.

Movie Gallery has been testing non-branded machines in a variety of locations. Although the company won't disclose how many machines it has deployed or where, it is preparing to market Hollywood Video branded machines to non-video specialist chains including supermarkets, convenience store chains and big box retailers, said SVP of finance Thomas Johnson.

Longtime indies have a bias against kiosks because of the VHS days, and their expectations are too high, Szuchy said.

“Why is it that every machine we ever moved was to people who were never in the video industry? [Veteran indies'] objections are that people won't use it; they won't accept it,” he said. “They are not going to make money hand over fist right away. People have to get used to using it. People think they will have to see ROI within 90 days. Open up a video store, and tell me you are going to make your money back in 90 days. If there's a business where I can do that, I'm in the wrong business.”

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