Redbox Going Digital?

12 Feb, 2010 By: Erik Gruenwedel

Despite renting 1 million DVD movies a day in 2009, and staking nearly 17% market share in the business, Redbox is exploring electronic distribution via SD cards, USB drives, and portable media players, says an analyst.

The day after parent Coinstar Inc. reported a 50% increase in 2009 revenue to $1.1 billion, due largely to rental kiosks, John Kraft, analyst with D.A. Davidson & Co. in Lake Oswego, Ore., said Redbox would not "sit on the sidelines" regarding digital delivery.

"We believe there is, and will be, a broad base of customers for DVDs," Kraft wrote in a note to clients. "Nevertheless ... we believe the company is testing options, including a partnership with another digital vendor."

Indeed, rival NCR Corp., together with MOD Systems, earlier this year bowed digital kiosks capable of delivering DRM-free MP3 music downloads with the option for movies when that market develops.

Richard Greenfield, analyst with Pali Capital in New York, said forays by Redbox, or other kiosk vendors, into digital distribution would require obtaining content directly from studios since the “first sale doctrine,” which allows consumers to rent or sell legally purchased packaged media, does not apply to the electronic format.

“We believe a direct digital relationship with at least three studios (Fox/Universal/Warner) will be impossible until Redbox agrees to a window for its DVD rental business,” Greenfield wrote in a note. “While Redbox can survive with low inventory of DVDs via workarounds, in a digital world low-inventory goes to ‘no inventory’.”

Blockbuster, which is rolling out Express kiosks with NCR, is also considering digital distribution via SD cards and USB drives, but does not plan to make it a priority, according to Kevin Lewis, SVP of digital entertainment.

In a recent Home Media Magazine interview, Lewis said that while mobility remained key to the multichannel consumer, Blockbuster would not put the focus on hardware.

“Our message … is not so much about the device, rather we are making the ability to interact with Blockbuster in a multichannel way [in-store, by-mail, kiosk and streaming] part of the mobile experience,” Lewis said.