Redbox Threatens Netflix in Video-Rental III: Rise of the Vending Machines!

Netflix has long been recognized as the top online video-rental business. Despite competition from perennial business-model imitator Blockbuster, the competition continues to be stymied. But wait – one decidedly low-tech business Redbox, is growing at such a rapid pace it poses a serious threat to Netflix. This relatively new competitor has been quietly laying red vending-machine boxes all over America, over 15,000 by its latest count and its growing fast.

Yes, Netflix has changed the way many of us rent movies. Doing it by mail seems like such a no-brainer that you’d think it would have been around a long time ago. And Netflix seems poised to stay ahead well into the future with a video on demand service. The mail-order-movie-rental biz has former heavyweights like Blockbuster re-tooling for a new business model by imitating Netflix.

But Redbox does video rental a little differently with red kiosks, essentially vending machines that can stock up to 200 movie titles on DVD. The red boxes are popping up at an alarming rate for Netflix CEO Reed Hasting.

"By the end of the year, kiosks will likely be our No. 1 competitor," Hastings said in a recent conference call. "There are already more kiosks in America than video stores."

Redbox is a true budget minded video rental option and we now have exactly the kind of economic climate to help its business to grow. And growing it is – at an average of one new Redbox kiosk per hour, dispensing $1 per-night DVD rentals to members.

Expect the video rental biz to continue heating up this year. People are staying home rather than going and renting rather than buying disc media. According to PriceWaterhouseCoopers Americans spent less buying DVDs and more on rentals last year. The trend is expected to continue.

Redbox is in an interesting business story. It began largely as an experiment by McDonalds when it was trying different things to help it grow beyond burgers. In 2002 it was testing out a new business strategy it called “automated retail”. Essentially vending machines, the fast food chain tested vending machines of every ilk, it even tested a vending machine that could make its signature French Fries.

In 2005 and 2006 Coinstar Inc. bought out McDondalds and other businesses share of the Redbox coin-op video-rental business. Coinstar’s strategy seems to be to places its red boxes everywhere. With a capacity for only 700 discs and 200 different titles, Redbox isn’t making its mark with a huge inventory of discs. But all it needs are the top, most rented movies – the ones everyone wants to rent anyway.

Now Blockbuster (the Microsoft of the video rental biz) is going to copy Redbox by trying its hand renting movies through its own kiosks. The brick-and-mortar video giant promises 10,000 DVD kiosks to be unleashed on the public in April through a deal with NCR Corp. the company that makes ATMs and cash registers. Who wants to take bets that Blockbuster is going to fail to take over Redbox’s market share?

It’s interesting that in an era of high-speed digital content downloads and streaming video on demand – the humble vending machine is making a comeback.

What’s next – vinyl record albums?