Blockbuster to Challenge Redbox with Kiosk Outlets

Blockbuster, once the reigning champ of video rentals, is aiming to shore up DVD rentals by opening kiosks to rent out DVD films. While it will take time to ramp up to Redbox's 14,000 outlets, the lure of a projected $1.3 billion total kiosk rental revenue by 2012 is too attractive to pass up. It plans to make a bold bid for the DVD rental market by installing 10,000 kiosks in 2010.

The Blockbuster kiosk will be in Blockbuster blue to contrast with the bright red of Redbox's kiosks. The will bear the name "Blockbuster Express".

Blockbuster has been in such a serious business slump that in April, securities rating agency Standard & Poor's downgraded Blockbuster debt into junk territory. Not only has it faced inroads from Redbox and Netflix, but customers also have the option of instant downloads from cable operators, and streaming movies on certain internet sites. Turning to the kiosk market seems like the quickest and easiest way to pump up its revenue stream.

This growth market has become attractive to the mergers and acquisitions business, too. McDonald's share in Redbox was recently bought by Coinstar in a cash and stock deal worth a reported $134 to $151 million. Similarly, NCR, the manufacturer of ATMs, recently bought a majority stake in TNR Holdings. NCR is apparently hedging its bets with a deal to partner with Blockbuster in its bid for the movie-rental kiosk business.

NCR developed the software behind the kiosks.

In contrast to the burgeoning kiosk rental business, the brick-and-mortar stores' business is in a deep slump. The negatives from the point of view of the customer are that lines can be long and time-consuming, plus the cost is usually higher. Sales hit a high of $10.4 billion in 2001, and have now fallen to around $8.2 billion as of 2008. From 2001 to 2008, about 3800 specialty DVD retail stores closed and over 16,000 non-specialty DVD retail stores also closed. The non-specialty stores were usually a department inside a supermarket or convenience store.

An advantage for a retailer to install a kiosk inside their business is not only do they receive a share of the revenue, but they also make fewer demands on staff, and take less space.

While the kiosk business is dominant in the sale of physical DVD rentals, the whole business model could change very quickly. Industry research and consulting firms expect that soon, customers will be able to download movies onto their SD cards, and play them on a variety of devices.

NCR will be a key player in developing the kiosks that can perform speedy downloads. It will begin testing units in 2009, and hopes to roll out the units in 2010. The advantages are obvious; while an NCR unit can hold as many as 1000 titles and a Redbox can hold about 700 titles, a digital unit could theoretically hold an infinite number of titles. A unit could hold a retailer's entire catalog instead of just the hot new titles. And, it can rent that hot title to any number of customers.

Digital downloading also means that one will not need to reserve copies of a physical DVD.

SD downloads also protect against piracy with an electronic key code which encrypts the downloaded content. A customer would have to have the key code to copy it off the SD. The fact that the rental is so affordable provides little incentive for anyone to steal the content.

Redbox accounted for 77 percent of DVD rentals in 2008, of a total market worth an estimated $485 million.

In view of the expected growth in kiosk DVD rentals, why would McDonald's sell their share of the Redbox business? First, it is common in tough economic times for companies to focus on their core business. Second, Redbox got involved in a lawsuit with Universal Studios Home Entertainment LLC over film distribution; Redbox countersued over alleged violations of antitrust laws and misuse of copyrights.Total Kiosk Rental Market: 2008

Redbox: 9 percent market share of total DVD rentals, 14,000 kiosks with up to 8000 more planned for 2009; mainly located in McDonalds and Walgreens

TNR Holdings: 2100 kiosks, mainly in Albertson's, Ralph's and Kroger supermarkets