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Six Questions: Joe Malugen, President and CEO of Movie>Q

25 Jun, 2010 By: Erik Gruenwedel

Joe Malugen

Joe Malugen, co-founder of recently shuttered Movie Gallery and Hollywood Video, is now president and CEO of Movie>Q, an automated rental/retail chain for DVD/Blu-ray Disc movies.

Using robot technology and one employee on site, Movie>Q can rent and sell 10,000 to 15,000 DVD and Blu-ray Disc titles and video games via eight terminals in 24-hour retail locations from 1,000 square feet.

Movie>Q opened its first store in April in Westminster, Calif., with subsequent openings (May 31) at two more Southern California locations in La Mirada and Costa Mesa. Movies and games rent for $1 per day and retail from $19.99 with a credit card. Membership is not required.

Point.360, a Burbank, Calif.-based post-production film company specializing in digital distribution, visual effects and media management, owns the retailer.

Home Media Magazine caught up with Malugen, who, at the time of the Gallery/Hollywood Video merger, owned the largest DVD rental company in the country, to see if lessons learned from the merger will help in a rental business increasingly dominated by kiosk vending and by-mail subscriptions.

HM: Redbox kiosks are as ubiquitous as Starbucks. How does Movie>Q become successful in the automated rental business with a fraction of the locations and visibility?

Malugen: Redbox and NCR (Blockbuster Express) have shown that video customers value price, selection, convenience and service, in that order. Before Redbox, price was marginally important because all video stores charged an average $4 per transaction, making rental one of the most profitable industries.

Redbox turned the industry on its head with its $2 average rental. There’s no magic in that. Customers like low prices. You just have to figure out how to compete and profit with a $2 average transaction. Brick-and-mortar stores could never compete with that price because of the overhead of leases, labor and other costs. I believe conventional video stores are all going to close before long because they simply cannot compete with a $2 rental.

Netflix, Redbox and NCR have won that fight. The only thing left is the fight between Redbox and NCR over kiosk leases with grocery, drug and convenience stores coming up for renewal over the next couple of years. We will see which of them is willing to pay the most for those locations. … There is still $2 billion to $3 billion of rental revenue up for grabs.

HM: Does Movie>Q buy titles via third-party retail or are there studio deals in place similar to what Blockbuster has that circumvent the 28-day embargo on new releases?

Malugen: We are doing business with our friends at VPD Distributors, just like many other video stores. Movie>Q has absolutely nothing to do with kiosks and their 28-day deferred release window. It is a conventional, manned video store just like Blockbuster and mom-and-pop stores. We are using electronic customer browsing and ordering along with the convenience of offering new-release cover art displays. We operate an automated 10,000-copy inventory retrieval, delivery and self-service checkout system, rather than relying on store clerks.

HM: What went through your mind when Movie Gallery/Hollywood Video threw in the towel? If you could do it all over, would you get into a bidding war for Hollywood Video or other national chain?

Malugen: It was heartbreaking for me to see Gallery/Hollywood Video come to this. The most difficult thing for me to accept was the loss of the thousands of jobs. They were doing everything they could to succeed faced with an impossible rental-pricing situation. For whatever reason, be it investor fatigue, lack of a growth model for the future, fear of kiosks, or whatever, the new investors were unwilling to operate hundreds of remaining profitable video stores.

If I had it to do over again, I would never invest in any company that required a $4 rental transaction to be profitable. I just never believed the studios would let the $2 rental get off the ground. The problem for conventional stores began with Netflix subscription pricing.

Movie Gallery was the first video rental chain to test kiosks in 2002. We had 100 of them in test markets. Customers would not use them at $4 a transaction. When we changed it to $2, customers flocked to them just as they did when we priced conventional video store rentals at $2 as a temporary test. They didn’t really like the kiosk; they just liked the price. The only problem was that the video store could not make a profit at $2 per transaction. We liked the kiosk business model, but we had thousands of conventional stores that required a $4 average transaction to be profitable. The mistake we made was betting on brick-and-mortar in the face of emerging kiosks. We figured the studios would do something about kiosks and prolong the life of the $4 rental, compared to charging $1 to $2 a rental with no revenue sharing. It seemed to me like simple arithmetic.

We turned down a chance to partner with a kiosk company in 2004 because we believed the studios would never let them get away with that low price. In fact we were convinced that they would do then what some are doing now: Create a 28-day window for Netflix and Redbox because by-mail delivery and kiosks are a different class of trade as defined under federal antitrust laws and, therefore, a delayed window would be clearly legal. Redbox would never have gotten off the ground had that happened.

The current 28-day window to try to save Blockbuster is too late, in my opinion. … The $2 rental is ingrained in the consumer’s mind. Now, anything over a $2 rental is a rip-off. It is affecting not only video stores, but also transactional VOD, pay-per-view, streaming and downloading services. You better figure out how to make money on $2 rentals if you want to play in this video sandbox!

HM:  What lessons were learned during your reign at Gallery that you bring to Movie>Q?

Malugen: To compete with kiosks, Netflix and the remaining video stores will have to become low-cost operators. We are confident the Movie>Q business model allows us to do that. The only way is to use technology and automation to cut costs. Of course, you need good people, and I know a few who have extensive video experience. Also, we know how to open stores quickly.

HM: How did you come up with automated robotic technology to manage kiosk vending?

Malugen: Again, we are not a kiosk vendor. We are a next-generation, 24/7 video store with customer service. We have acquired ownership of a variety of intellectual property models to put together the Movie>Q system. We can deliver a disc to the customer in about 25 seconds with one fast robot. Our robot picks up the movie return, puts it back in inventory and sends an e-mail receipt. You can go online to MovieQ.com and reserve a movie for store pickup, you can create your queue of favorite movies or games to rent or buy, and we will even send you an e-mail if a title you wish to rent or buy comes back into the store. We’re also looking into an iPhone app.

HM: How important is Blu-ray in packaged-media rental? Is there greater interest in renting Blu-ray rather than buying it?

Malugen: Packaged media is going to be around for a long time, so Blu-ray and 3D Blu-ray are very important to the industry and to Movie>Q. It’s just priced too high for the average consumer to get very excited about. They are used to low-priced DVD sellthrough and rentals. Unfortunately, you can’t put that cat back in the bag. People who want the better quality of Blu-ray will pay only a small premium for it. Blu-ray is doing very well on some sellthrough titles, but we still see less than 15% Blu-ray rental demand compared to DVD.

When the price comes down, people will get excited. I still have trouble seeing how the studios are going to get the consumer to pay $15 to $20 for electronic sellthrough, with consumer demand for Blu-ray and 3D HDTV picture quality increasing. It seems logical that Blu-ray can handle these large digital data files more efficiently than broadband for many years to come.

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