McDonald's Supersizes Their DVD Program

By Davis Freeberg

When I was growing up there was a small theater in my hometown called the
Rainbow. It was your typical mom and pop cineplex, the kind of place you
would take the whole family to. They used to hold bingo contests before
the films started and would sometimes offer double features. They were a
fixture in the neighborhood for years until AMC came into town. The
Rainbow couldn't match the choice or efficiencies of the multi-plex business
model. AMC had discovered that they could make more money by increasing
the number of screens and by offering more choices to consumers.
Ultimately, the multi-plex went on to not only destroy the cineplex
business model, but also killed the drive-in.

Today the retail video store is facing a similar crisis. Whether it's
consumers buying more DVDs, the growing online rental market or the
emerging threat of VOD, this is clearly an industry that is under attack. When it comes to entertainment, consumers are offered substantially more choices and better value then just a decade ago. These different delivery options all have their unique advantages and disadvantages, but the biggest advantage that the video store has over these alternatives is the ability to provide instant gratification to their customers. You don't have to wait for the mailman to show up, you don't have to sacrifice video quality in order to stream the movie and you don't have decide what you want to see until you are ready to watch it.

Unfortunately for the video stores, this advantage is beginning to evaporate. Last week, Redbox announced that they have expanded a partnership with Royal Ahold NV and will be offering their DVD Kiosk's in most Stop & Shop and Giant's grocery stores. This is a big development for Redbox because Royal Ahold is currently the 3rd largest grocery retailer in the world. Only Walmart and Carrefour have more grocery locations. While initially the rollout will be focused only on their North East grocery stores, if the program is successful, we could eventually see the DVD Kiosk start to appear throughout Europe.

The program for Redbox is pretty simple. There are no membership fees and all consumers need is a credit card to sign up. You pay $1 for each day that you have the movie. If you don't return the movie, then after 25 days they stop charging you for the rental. You are allowed to return the DVDs at any Redbox location. Currently Redbox has about 1,000 locations nationwide. Most of these are located at McDonald's restaurants, but with this deal and Coinstar's $20 million investment last November, you can expect to see more Redbox locations very shortly.

The stakes are huge and competition is sure to be fierce. In the month of December alone, Redbox was able to rent about 1.1 million DVDs. Last year Blockbuster Video earned an estimated $6 billion in revenue and with the company beginning to aggressively shut down stores, DVD kiosk providers like Redbox, DVD Station and Moviebank USA are in an excellent position to capture customers who prefer the retail experience over online rentals. Traditional retailers like grocery stores and coffee houses will also benefit tremendously from the increase in traffic and the revenue sharing provided from their partnerships. As the retail-plex DVD rental strategy continues to evolve, it is certain to replace the traditional video store. In the same way that the multi-plex destroyed the Rainbow theater, the DVD kiosk will eventually make the retail video store just as irrelevant.