Self-Serve Movie Rental Kiosks A Surprise Hit With Consumers (Investor's Business Daily)

DVD vending machines find national audience, put pinch on retailers

May.30, 2007 Investor's Business Daily| Automated kiosks for renting DVD movies are popping up in grocery stores, drug stores and fast-food restaurants nationwide.

The growth of these self-service machines has taken industry analysts by surprise. And their popularity could further weaken traditional video rental chains like Blockbuster.

Companies such as Redbox Automated Retail, TNR Entertainment and DVDPlay are racing to sign deals with supermarkets and other retailers with lots of foot traffic.

The number of DVD rental kiosks in the U.S. at the end of 2006 more than tripled from a year earlier to 3,700, said Adams Media Research. The number could reach 9,000 by the end of this year.

"They're really taking off," said Tom Adams, president of Adams Media Research. "The real question is: How far do they get?"

With 9,000 kiosks, Adams estimates the segment would generate annual sales of about $270 million, which is about 3% of the video rental market. Unknown is how many kiosks the market can support.

TNR said a survey it conducted points to potential annual sales of nearly $1 billion for self-service DVD rental kiosks in five years. It forecasts 25,000 or more retail kiosks over the next three years.

In the meantime, kiosk companies are battling for retail space. Redbox, owned by a joint venture between McDonald's (MCD) and Coinstar, (CSTR) has placed machines in McDonald's eateries as well as in Albertsons and other grocery stores owned bySuperValu. (SVU) TNR, backed by a group of institutional investors, operates The New Release kiosks in Kroger (KR) and other grocery chains.

Oakbrook Terrace, Ill.-based Redbox is the leading operator of movie rental kiosks, with machines in about 3,200 locations. It expects to have 4,000 kiosks in place by the end of June. Coinstar, known for its coin-counting machines, has set a goal of installing 10,000 Redbox machines in three to five years.

"We want to get as many locations as close to you as possible in places where you normally go," said Redbox CEO Gregg Kaplan.

The company ideally wants people to pass four or five Redbox machines between home and work, he said. Redbox lets customers return DVDs to any of its machines.

Houston-based TNR is the No. 2 player. It operates DVD rental kiosks in more than 1,600 locations.

DVDPlay of Campbell, Calif., has 1,200 kiosks in place nationwide.

All three firms use credit-card-enabled kiosks. Redbox and TNR charge $1 a day, while DVDPlay charges $1.49 for the first night and 99 cents for each extra night.

While industry bigwigs were focused on digital delivery of movies over the Internet as the next big thing, they missed the growth of DVD rentals by vending machine.

"Practically no one saw this coming," said Brad Hackley, vice president of business development for the home video group at industry trackerRentrak. (RENT) "The kiosks came out of nowhere."

Movie Gallery, (MOVI) the nation's No. 2 traditional video rental store chain, has taken notice. It has been testing 74 Hollywood Video-branded kiosks and plans to add 200 more this year.

Meanwhile, No. 1 movie rental company Blockbuster is focused on building a subscription-based rental business. Its Total Access plan allows for online DVD rentals through the mail and the ability to exchange discs at its stores.

Blockbuster and Movie Gallery have been hit hard by rival entertainment options, including cable video on demand, digital video recorders and online DVD rental leaderNetflix. (NFLX) Blockbuster has closed 600 U.S. stores, or 13% of its outlets, in just 2 years. Movie Gallery has closed 184 stores, or 4% of its total, in the last year.

The growth of DVD kiosks could force more closings, analysts said.

Convenience and lower prices are the strengths of the DVD kiosk business. Its biggest weakness is limited copies of hit movies.

Redbox is trying to lessen that problem with machines that hold more DVDs, Kaplan said. Current Redbox machines hold 500 DVDs. For hit titles, it has 10 to 30 copies each.

"Like everybody else in the DVD rental business, we can't necessarily get everybody's demands met for the top title after it just comes out on a Friday or Saturday night at 8 o'clock," he said.

Redbox also lets users go online and see the inventory of nearby machines and even reserve a movie. TNR plans to offer online DVD reservations soon as well.

Adams Media Research predicts that online DVD services will double to $3.4 billion in 2011. The total rental industry will rise only 1% to $8.5 billion in 2011, Adams said.