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Redbox Considers More Price Tests

26 Feb, 2014 By: Chris Tribbey

Redbox will continue to test new pricing models with the possible hope of upping the company’s operating income, executives from parent company Outerwall said Feb. 26 during an analyst event.

While Redbox’s operating income has enjoyed continued growth year after year, it has slowed considerably from 2012 ($386.8 million) to 2013 ($401.7 million). In 2011 Redbox’s operating income was $284.9 million.

Redbox hasn’t raised its prices since late 2011, and some analysts have suggested consumers would accept a small increase in the daily rental price at Redbox kiosks.

“We do bits and pieces of price testing all the time, and we’ll do more price testing,” said Outerwall CEO J. Scott Di Valerio.

Redbox already is the cheapest option by far for new-release rentals ($1.20 a night for DVD, $1.50 for Blu-ray Disc), with the average DVD rental bringing in $2.40, and the average Blu-ray rental bringing in $2.95. Brick-and-mortar store disc rentals average $4 for a new release, while Amazon and iTunes run about $5 each. The most expensive new-release rental in the category is usually cable VOD ($6).

The fourth quarter of 2013 saw Redbox holding a 50% share of the physical disc rental market, and 38% of all paid movie transactions in the industry. In terms of total consumer spending on entertainment (without including cable) for rental and streaming, Redbox ended the third quarter of 2013 with a 16% share, second only to Netflix’s 18%.

Meanwhile, Outerwall executives shared that for several studio partners who supply discs to Redbox, revenue from the kiosk operator is either the second- or third-largest source of home entertainment profit, and that the studios are having a bigger hand in marketing for Blu-ray Discs and cross promotions.

“We’ve worked incredibly hard over the past several years to build out our studio relationships,” Di Valerio said, adding that Redbox spends about $1 billion a year on content. “Think about four years ago, we were in a very different place.”

Michael Pachter, analyst with Wedbush Securities, noted that one of Redbox’s biggest strengths has been its outreach to consumers, with 15 million monthly visitors to Redbox.com in the fourth quarter, 24 million app downloads, 4 million phone numbers signed up for SMS messages, 5.5 million fans for Redbox on Facebook, and more than 32 million people getting Redbox emails.

"Redbox continues to focus on its high-frequency renters (four rentals or more per month), which are only 20% to 25% of its customers, yet they account for roughly 60% of revenue,” Pachter wrote in a note to investors. "The company will attempt to bolster spending by these customers through customer relationship management, Blu-ray upselling (already available on mobile and the Web with a 7% to 12% take rate, and a second-half 2014 introduction expected at kiosks) and slot and title optimization."

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