[Editor’s note: If you’d like to read the backstory to this post, see Redbox’s Growth (and even Survival) Facing Strong Headwinds.]
by Kenneth Rudich
Unlike its chief competitors, who have online streaming as a core competency, Redbox required outside help in the quest to follow suit. This may partially explain why it was a latecomer — or in marketing jargon, a laggard — to online streaming.
The company had hoped to overcome this deficiency by forging a strategic partnership with Verizon; but as noted in the backstory installment, their combined effort to create a new venture, Redbox Instant by Verizon, got shut down less than two years after its launch because of anemic subscriber growth.
As of now, it appears the DVD/Blu-ray/game rental company has no hope whatsoever of making inroads as an online streaming service. In fact, the only carrot that’s still dangling ahead as a possible revenue source belongs to the one core competency it has always enjoyed – namely, its investment in the self-serve kiosk business model.
It’s the same core competency that its parent company Outerwall relies on, which additionally owns the Coinstar kiosks (machines that turn pocket change into gift certificates or cash), ecoATM kiosks (that turn old smartphones, MP3 players, and tablets into cash), and also produces machines that provide prepaid credit cards, cellular phone cards, tickets to concerts and e-payment kiosks.
The real matter at hand, then, is for Outerwall to decide if Redbox’s kiosk model might yet survive amid the rapid rise of numerous content-streaming alternatives?
More specifically, is it conceivable that a sustainable market niche opportunity still exists, and will the demand be strong enough to permit the recourse of turning Redbox into a cash cow for Outerwall?
Redbox Decision Time
Outerwall said it expects Redbox’s 2015 revenues to come in between $1.750 billion and $1.765 billion, versus the prior range of $1.790 billion to $1.815 billion. Though these adjusted numbers do represent a decline from the original forecast (which also translates into a drop in earnings per share), it’s hardly a radical or precipitous fall. Nor are these revenue numbers to be scoffed at or written off as mere pocket change, even with the decline.
Moreover, if this downward trend can be arrested before it gets worse, and if sales can be stabilized thereafter, then cash cow status may well be within reach.
Further support for this train of thought stems from the recognition that Redbox largely appeals to a niche target market with either limited Internet access or no access at all (customers with an insufficient amount of bandwidth for a good online streaming experience).
When one factors in the financial squeeze so many people find themselves in today, there’s a chance this particular market segment will actually continue to grow with the passage of time.
Consider, for example, this comparably interesting news about Netflix: dated January 4, 2016, a Marketwatch report says that Netflix shares are plunging after Baird downgraded the company’s stock to neutral. Based on a subscriber survey, Baird expects weaker-than-expected U.S. subscriber growth in Q4 2015, which would mark the second straight period of subpar domestic additions. In other words, Netflix is likewise facing a difficult bump in the same U.S. market.
If Redbox can live up to the image it wants to project — that is, consistent, cheap and, most importantly, hassle-free — it can vastly improve the odds of retaining old customers, and perhaps acquire new ones depending on how the economy goes.
That’s the good news.
The Rub for Redbox
A key implication of this Redbox scenario is that it must be carried out with a high degree of operational integrity and efficiency, because cost containment will be unusually critical for maximizing the profit margin.
The rub for Redbox is that its operational integrity in the recent past has been notably erratic and too often self-defeating.
One big challenge derives from the operational protocol of the Redbox model, which is somewhat more complex than Outerwall’s other kiosk models.
Whereas the other kiosks provide the customer with a simple transactional exchange, Redbox entails a sequence of events to be followed, and it depends a great deal on the virtue of people — millions of customers — to maintain the integrity of that sequence. This includes the responsibility of keeping track of the rentals and ultimately returning them to their source, on time and in good shape.
This physical handling of the product makes it subject to the same customer-related problems that the old bricks-and-mortar model had; but only worse, because the absence of customer service people to inspect the product upon return or departure, to discover a problem and intervene before it gets passed on, predisposes a problem to existing longer than it should. Instead of it getting caught early, it gets pushed on to one or more additional customers. This can lead to customer service issues that escalate (and propagate) all across the value chain.
As a matter of fact, Redbox finds itself in the midst of toiling with this now.
Let’s look at a short list of the operational integrity issues that have been hurting Redbox’s recent performance, as reported on the Consumer Affairs website portal:
- Scratched DVD’s that won’t play. Customer complaint example: “Out of the last 6 that I have rented, I have only been able to watch 4 of them. 2 of the discs were so scratched that they wouldn’t even play in my DVD player. I really didn’t care at first because I had only paid a dollar. But then I talked to some other people and they have had the same problem.”
- Kiosk problems, where it’s either not dispensing properly or inaccurately recording returns. Customer complaint example: “You look forward to watching the movie you just rented on the Redbox website and when you get there to pick it up something goes wrong with the machine. The only resolve offered is to drive to another location, pay again for another movie and chance not being able to get the movie you originally wanted. You get a credit for a movie in the future but the whole experience has already been ruined. Once or twice occasionally is fine but 3 times in a row is a problem.”
- Case switching, where the movies inside the case differ from the case titles or the cases are empty. Customer complaint example: “I’ve been trying to reach RB but so far I have not gotten a reply back. I rented 3 movies today and one movie was supposed to be ‘Spy’ but came out to be ‘Pitch Perfect’. Someone switched the sticker on the movie and kept the movie ‘Spy’. I’m pretty sure that’s illegal. Something must be done about this.”
- Billing problems, with complaints about overcharges and stolen credit card information. Customer complaint example: “I had to close another account back in 2010 due to outrageous Redbox fees. When trying to resolve that matter, I was told there were late fees, unreturned items or damage. I went back and forth with them until finally I just assumed someone had stolen my cc info and was using it. I cancelled that prepaid CC, got this one and this time I made sure to document every single Redbox interaction. These charges are inaccurate, exaggerated and illegal. Upon research I find that redbox has had at least two class action lawsuits resulting in a settlement of millions.”
You can see more complaints at the Consumer Affairs website.
Redbox being Blue
At the same time, it’s not without a fighting chance to turn things around.