An easy pick

2007-03-01

An easy pick: Movies via cable, satellite or internet download threaten, but for now the automated dvd rental dispenser is still best for your thriller

The last thing Edmonton- born Greg Waring thought he would end up doing after he graduated in 1992 with an MBA from the University of British Columbia was work for a movie rental store.

But Mr. Waring does just that and a lot more as marketing vice-president for Redbox Automated Retai lLLC, which bills itself as the leader in the fast-growing U.S. market for DVD rentals. In fact, Mr. Waring runs several thousand DVD kiosks throughout the United States that kick out movies from automated soda-pop-like dispensers for a modest fee of US$1 a night.

Initially developed by Mc- Donald's Corp. in 2003 as a way of attracting late-day customers, Redbox was rolled out in 2004 in 120 restaurants in Denver but only now, three years afterward, has it been truly refined. Since then, the privately held company says it has emerged as the leader among DVD-kiosk sellers in a market that industry analysts say should hit annual sales of US$3- billion in two years -- equal to more than a third of the current total DVD rental market of more than US$8-billion a year.

''It's fascinating because Redbox was designed to find new ways of bringing customers to McDonald's, especially in the late afternoon and evening,'' Mr. Waring said in an interview from the company's headquarters in Oakbrook Terrace, Ill.

Redbox's bright red dispensing gmachines were an immediate success and the company, along with its rivals, have been on a roll ever since.

''We have 2,000 kiosks now and we will easily double that in coming months,'' Mr. Waring said. The goal, he said, is to have 10,000 DVD machines in the next three to five years.

It comes as no surprise in the hugely competitive home entertainment market that DVDs have quickly replaced VHS tapes as the prime source of home movies. But DVDs, too, may now be under threat from the latest upstarts -- digital cable and satellite delivery, as well as downloads from Internet sites to home computers.

While sales of DVDs rose just 1.8% in 2006 to US$16.6-billion, rentals continue to rise sharply. Last year, rentals were up 15.4% to US$7.5-billion from US$6.5- billion in 2005, according to the U.S. Digital Entertainment Group at the Consumer Electronics S h o w in Las Vegas. In addition, about 33 million DVD players were sold during the year, 11 million during the Christmas season alone. (More than 80% of U.S. homes now have a DVD player.)

But there are worries that DVDs sales and rentals may have peaked, especially in light of predictions that player sales will start to fall off this year by at least 1% to US$23.4-billion.

A recent report from Pali Research in New York said the film industry may be undercutting itself by pricing digital download rentals too low, forcing them to cut prices of DVD rentals as well to stay competitive.

''We are concerned about the long-term damage the industry could incur from expanding the rental market via digital downloads and/or video-on-demand,'' said Richard Greenfield, an analyst at Pali.

Entertainment distributors such as Netflix, an online service that delivers rentals by mail, are joining an increasingly crowded field that includes Amazon Unbox, i Tunes, Cinema Now, Movielink and Vongo.

But other analysts believe the days of widespread digital downloading are still far off.

''I'd say Netflix was stealing its rivals' thunder, but there's not a lot of thunder there to steal quite yet,'' said Joe Laszlo, a senior analyst with Jupiter Research specializing in online media. ''It's a market where everybody from the studios to the download companies is still trying to figure out what works well.''

''This is a very challenging time to be doing downloads,'' added Josh Bernoff, an analyst who covers entertainment at Forrester Research Inc. in Massachusetts. ''None of the other people who've made movies available through the Internet have been successful.

While debate continues over the benefits of downloading versus brick-and-mortar rental stores, Redbox -- now a jointly owned by Coinstar Inc. and McDonald's Ventures LLC -- has found a comfortable niche that appeals to certainmarkets.

''Where they will really succeed is in areas that have a captive audience like a university,'' said Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles.

Mr. Waring said Redbox, which manufactures its own vending machines, found that consumers liked the convenience and rental price available at an automated kiosk. So Redbox is expanding beyond restaurants -- McDonald's also owns investments in Chipotle and Boston Market chains -- into such grocery chains as the Giant Food Stores, one of the leading supermarket operations in the United States.

Redbox, of course, is not alone.

There are at least three other competitors trying to develop the DVD kiosk market in the United States. (Kiosks have been popular in Europe for several years but operate on a smaller scale.)

Four-year-old TNR Entertainment of Houston has more than 1,400 ''The New Release'' kiosks in grocery chains that include A&P, Food Lion and Kroger's in 30 states.

Richard Cohen, TNR's chief executive, said in an interview from Los Angeles that the technology has reached a point that makes DVDs kiosks ''a superior business model to bricks-and-mortar operations.''

All kiosks are linked to a central location that can analyze any technical problems instantly, he said. ''Ninety percent of the problems can be fixed remotely.''

Given that attribute, plus the convenience and pricing kioks offer consumers, Mr. Cohen, former president of MGM Entertainment division, believes TNR may be ''doubling or tripling'' in size this year, perhaps in Canada.

''And we are looking north of the border,'' he says. ''It is a very sophisticated market.''

Chuck Berger, chief executive DVDPlay of Campbell, Calif., said his company, which boasts sales growth of 200% last year, is pushing into Arizona. ''It's amazing how fast a machine catches on once we put it into a store,'' said Mr. Berger.

Vancouver-based DVDNow Kiosks Inc., which distributes its machines through partnerships, says it plans to have 1,000 locations by the end of 2007. (There are only a handful now.) Unlike its competitors, it will sell or lease the machine to a store owner. Typically, a kiosk costs about US$18,000 and DVDs are rented through a number of distributors.

''There's no question that Red Box and DVDPlay are experiencing phenomenal results, with growth many, many times the industry average of a traditional video store,'' said Scott McInnes, chief executive of DVDNow Kiosks.

''We make it easy for a smaller entrepreneur to participate and profit from the explosive growth of the DVD rental kiosk industry,'' he said in an interview.

The success of the DVD kiosks is based on a simple formula --convenience and pricing.

Redbox and others charge US$1 a night for maximum of 24 nights. If the DVD is not returned then, it is considered sold and a consumer's credit card is charge US$24.

Each kiosk, with a one-metre by two-metre ''footprint,'' holds about 500 individual DVDs of more than 70 titles. The kiosks, connected via high-speed Internet to head office, are maintenance free for the stores, which typically collect between 10% and 20% of the revenue in exchange for the space.

''In addition, consumers can go to the Internet site, lock in the movie they want and pick it up at any kiosk,'' says Mr. Waring. ''And the DVD can be returned to any kiosk.''

Food stores like the turn-key aspect of the operation since many abandoned their attempts to offer videos. ''It's just a really cumbersome operation to have a video department,'' said Nikki Daly, a spokeswoman for the Safeway food chain.

Hard numbers are difficult to come by since the DVD kiosk companies are privately held.

But Mr. Waring said the 150- employee Redbox has to date rented 30 million DVDs at the rate of three million a month to its four million customers. (So far, Redbox has no immediate plans to move into the Canadian market.) Co-owner Coinstar said DVD rental devices are among its most profitable machines, outranking its coin counting, vending and ATMs combined.

While the DVD kiosk competition is increasing, Mr. Waring said Redbox is ''clearly the leader'' -- its sales are more than double its rival. ''Our competition is the Blockbusters and Netflix,'' he said. ''Those are ones we're after.''