Redbox’s Strategy in the Movie Rental Industry Case Study

1) Which of the five generic competitive strategies discussed Chapter 5 most closely fit the competitive approach that Redbox is taking? Why did you select the strategy you selected?

The two main strategies Redbox focuses on are a combination of low price and convenience as well as increasing kiosk locations with high traffic. Compared to its competitors, Redbox’s offers a rental fee as low as $1.20 per day, which is $3 cheaper on average. Redbox is also extremely convenient. All kiosks are placed in high traffic locations such as supermarkets, drugstores, and McDonald’s. Since mid-2009, the number of Redbox locations has increased from nearly 20,000 to 34,600. With its 34,600 locations across the country, anyone could easily locate a Redbox kiosk near them.

The competitive strategy most closely fit Redbox’s approach is the low-cost provider strategy. Redbox’s kiosk strategy is very unique and cost efficient. Among the many movie rental companies, Redbox is the only one that uses kiosks rather than an actual store. This not only reduces the initial investment, but also the operating cost. Redbox locations also generally use the low-cost strategy; therefore, Redbox is effectively taking advantage of pre-existing price-conscious buyers. These locations also communicate convenience. Instead of making a trip to a movie rental store, customers can pick up movies while going to the store. Therefore, for a buyer to switch to Redbox, he/she actually saves money and time.

2) What does a SWOT analysis of Redbox reveal about the overall attractiveness of its situation and future prospects?

Strengths
– Extremely low rental price
– No monthly obligation
– Convenient locations
– Online reservation
– Number of locations
– Smartphone app
– Can be returned to any kiosk
– Takes ½ to a minute to checkout or return
– Constant addition
– Open 24 hours
– Good movie selection – newly released/popular

Opportunities
– General expansion – more kiosks
– Video game industry expansion
– Offer online video streaming
– Offer purchasable online movie downloading
– Sell music albums
Weaknesses
– Limited titles – usually only newer movies
– Limited machine capabilities
– High acquisition cost to purchase newly released movies from retailers
– High cost of content acquisition and license agreements
– Must employ field staff to move copies to different machines to ensure availability

Threats
– Blockbuster’s increased online services
– Online movie streaming – Netflix/Hulu

Based on this SWOT analysis of Redbox, the company is in a quite unique position. With the low rental price, the convenience, and the unique product delivery method, Redbox almost stands alone in the movie rental industry. All of Redbox’s strengths listed above are the company’s competitive advantage. No competition even comes close to what Redbox has to offer. Redbox is very adaptive and has tried to counter some weaknesses through technology. The smartphone app and online reservation allow customers to check the availability of a specific movie at a specific location and gives them the ability to reserve a movie. However, some of Redbox’s weaknesses need special attention. Redbox has successfully signed licensing agreements with six major movie studios. However, the acquisition cost is very expensive and several studios have terminated early. Another major issue Redbox faces is limited availability. To somewhat counter that, Redbox hires field staff to move movie titles to kiosks with a low inventory. Despite Redbox’s weaknesses, the company has plenty of room to expand, both nationally and internationally.

To expand the product line, PC games or music albums can be added. Redbox has many great opportunities and open market for expansion. As more people, nowadays, choose to stream movies online, Netflix and Hulu have become Redbox’s major threats. Redbox is adaptive to the change in consumer need and is working on online movie streaming on its website. As Gregg Kaplan, Coinstar’s chief operating officer stated, “Redbox’s growth is not dependent upon a flat or growing DVD rental market.” Although the consumer interest is changing, there is still a huge market for the physical DVD rental market and DVD’s are not going to be phased out anytime soon. Redbox will be sustained for a long period of time, especially with all of its competitive advantages. 3) What strategic issues or problems does Redbox management need to address? Draw upon the discussion on p. 125 in Chapter 4 to develop your “worry list.” (1 page)

From a consumer’s perspective, Redbox’s strategy may seem cost-effective because it does not require human operation and the low rental price attracts a large number of customers. However, there are many deeper issues with Redbox’s management that need to be addressed for the company to continue to succeed. A big challenge Redbox faces is limited availability. Redbox is able to keep track of the number of each title in each kiosk; however, when a title is completely unavailable at a kiosk, the company hires field staff to move movies around. Is there a more effective way to deal with this problem? The biggest expense Redbox incurs is content acquisition and licensing agreement. The company spends hundreds of millions of dollars on license agreements with each movie studio. Therefore, my first concern is “How to reduce the company’s content acquisition cost?”

In addition to movies, Redbox kiosks currently carry video games for the three major game consoles, Xbox, Wii, and PS3. Redbox could potentially expand into the PC video game industry and even expand its product line to music albums. Thus, whether to expand the product line is something to consider. There are currently 34,600 Redbox locations across the United States, some with dual kiosks. The number continues to go up. For an even bigger expansion, Redbox could consider the foreign markets.

There are many countries with a similar movie matching market as the United States that may be attracted to Redbox’s service. As the Internet continues to develop and people spend more time online, online movie streaming has become a substitute product to Redbox movies. Although Redbox is very convenient, it is more convenient to stream a movie right at home. So what to do about the growing buyer interest in substitute products? 4) What recommendations would you make to Redbox management? At a minimum, your recommendations should cover what to do about each of the strategic issues/problems identified in question 3. In addition, each recommendation should be supported with convincing arguments based on your analysis of Redbox’s situation.

First of all, Redbox needs a better content acquisition strategy. The current cost is simply too high. In addition to well-known movie studios, Redbox should consider partnership with independent filmmakers and smaller production companies. There is a lot of well-made and valuable content that people do not know about. Redbox can feature a few of those movies or documentaries each month. With Redbox marketing for the filmmakers, the acquisition cost should be relatively low, which results in a win-win situation for both parties. I believe this strategy will succeed because many Redbox customers do not have a specific movie in mind going to a kiosk and most people are willing to rent a featured movie at $1.20 per day. To determine whether to expand the product line to PC games and music albums, Redbox must conduct surveys to see if there is a potential market.

I think there is a market for PC games, but not as much for music albums. PC games can be added since Redbox already carries video games for other gaming consoles. However, I would only carry popular PC games, either for its exclusivity or as a backup when inventory is low. As for music albums, they can only be sold to avoid illegal downloading. Redbox kiosks are generally located in supermarkets that already sell music albums and they easily offer a much wider selection than a Redbox kiosk can. Expansion into foreign markets is a big opportunity of growth for Redbox. The initial cost may be relatively high because the company needs to hire local marketing analysts to conduct market research and acquire partnership. It is easier to first enter other English speaking countries as well as countries with a similar culture. Overall, the process should not be too difficult or costly. If Redbox kiosks in smaller U.S. cities are profiting, then a Redbox kiosk in a foreign populous city should generate even more profit.

Redbox has already taken steps to going digital. The new Redbox Instant by Verizon charges an $8 monthly fee for unlimited movie streaming plus 4 DVD rentals. The price is comparable to that of Netflix and Hulu, which is $7.99 for both. However, Netflix and Hulu both offer a wide range of TV shows as well as movies. Netflix is unique in that it has a large selection of older classic movies, while Hulu has access to the latest episodes of TV shows. In order for Redbox Instant to stand out, it must offer something different from its competitors. Since Redbox already has partnership with movie studios to get the newly released movies the same day it is offered in DVD, that could be Redbox Instant’s selling point. Unlike Netflix and Hulu, Redbox Instant customers have access to the latest movies.