[…] Redbox’s announcement follows a similar announcement by DVDXPress last month, who started offering their own web reservations on the first of September. With technology starting to come together and with burn-on-demand kiosks beginning to appear on the horizon, it’s a very exciting time for the DVD kiosk industry. With Redbox and TNR both preparing to quadruple their locations next year, 2007 should turn out to be an important year for the DVD kiosk industry. […]

Mr Freeberg

My comments start with TNR. Are their kiosks making an operating profit, or are expansion funds being used to generate the “increasing recenues” that their “supermarket partners” are realizing. I’m not sure I am buying into their hype, although it appears that the investment community is, so my opinions don’t really count. I’m just glad I am not a partner in one of the companies pumping money into TNR. How can an informed investment community get excited about putting capital into TNR when Red Box announces an almost concurrent expansion? Who do I like, Red Box or TNR. The answer is Red Box. And pay careful attention here, I may have a few tidbits you aren’t aware of. Yes, TNR can expand with Kroger. And Red Box has McDonalds. But did you know that Red Box will also wind up with WalMart. Or did you know that RedBox is doing a beta test with Wal-Mart which runs through the end of this year and involves 40 some geographically dispersed DVD kiosks. So we have TNR in supermarkets with Kroger its principal growth channel, and we have Red Box with McDonalds and its thousands of US locations, and Wal-Mart with their 4,300 US stores. What I see is TNR positioning to merge into or be acquired by Red Box. And I have some reasons for saying this that I am not at liberty to disclose, one of which has to do with a failure on TNR’s part to capitalize on some obvious leverage opportunities with the supermarkets that they have established relationships with. When deciding who wins a shoot out or if Red Box is TNR’s exist strategy, remember one thing. McDonalds is the best operated retailer in history. Walmart would rank second. So Red Box has No. 1 and No. 2 retailers. TNR, can’t compete on the basis of quality of retail partners. Think back further, to the first run up of a really exciting movie rental concept - Blockbuster Video. When Scott Beck and Wayne Huzienga put Blockbuster together, where did they recruit all of there executives. Can you say “McDonalds”. You couldn’t sell me a nickels worth of TNR stock, but I will buy Red Box stock when I have an opportunity to do so, provided that it doesn’t dilute its value through an incestuous relationship with Red Box. And also is everyone overlooking VOD, and didn’t Netflix announced 5.7 million members now. And Blockbuster is touting 2 million by years end. Whether in stores or in kiosks, the fixed based movie rental companies, other than Red Box, are going to suffer. I see VOD, Netflix, and DVD kiosks are aggregately comprising the “swan song” for Blockbuster Video. And BB looks healthy compared to Movie Gallery. And don’t both BB and MG have loan calls coming up in the not distant future. Let me tell you who may be the beneficiary of all this. No, I don’t think so. I see the opportunity in all this, and I plan on capitalizing on it. So thanks to all the foregoing. Oh, and did you know that TNR is using a shot gun strategy to try to acquire smaller DVD kiosk operations, which could do nothing for them except increase revenues, at the expense of manageability.

Sam Oliver

Mr. Oliver,
I don’t think you’ll have to worry about buying a nickel’s worth of TNR stock. It’s extremely unlikely any of their shareholders would offer you even a nickel’s worth. They have every reason to be very pleased with their investment.
You seem to have gathered a fair amount of information about the DVD kiosk business, but it’s clear you don’t understand it. With fast food, high traffic drug stores, and supermarkets there are probably between 50,000 and 100,000 viable locations for DVD kiosks. Even if Redbox puts kiosks in every McDonalds and every Walmart, there are many thousands of good locations for other kiosk companies. There’s no “shootout”. The surface of the market has barely been scratched; it is years from maturity, when it might make sense to talk about a zero sum game. TNR has contracts with excellent companies; it has capital and it has momentum. It appears to be following a fairly straightforward and sensible strategy. It is not in a shootout with Redbox. The market is big enough for Redbox, TNR, and maybe another large player or two. There are no monopolies in American business, unless you consider Microsoft a monopoly. But even with Microsoft, a company called Apple has managed to get by.

I live in Manhattan and I have only seen one machine at a Gristedes supermarket. After checking online with Redbox and DVDXpress I noticed that there are very few of these machines in Manhattan. Doesn’t it make sense to plaster the most densly populated areas first? Does anyone know when Manhattanites will be able to stop into the local Rite Aid, Duane Reed, McDonald’s, Supermarket etc and see one of these machines?

Can you email updates on Redbox and TNR?

Raz at Cinekiosk.com was kind enough to share the following comment:

I have read this blog with great interest and wanted to share some of my
thoughts. I have been following the development of the DVD kiosk industry over
the last 2 years and my assessment of the Redbox vs TNR debate is as follows:

REDBOX
——

Background
———-
Redbox started their trials with vending machines supplied by DVDPlay.
According to my sources, DVDPlay were not able to meet certain obligations and
as such, Redbox subsequently obtained rights to the technology themselves and
improved upon it through their partnership with contract manufacturer
Solectron. All of the DVDPlay machines were then replaced by the new Solectron
machines. Redbox continues to rollout new sites rapidly.

Competitive Advantages
———————-

Apart from the advantages associated with being related to McDonalds, having a
professional and experienced management team and quality partners, as mentioned
earlier in this blog, Redbox also has the following advantages:

- A scalable infrastructure that will allow them to expand rapidly and
effectively;

- A lower capital cost of acquiring machines (in my opinion) since they
manufacture them directly (via Solectron) rather than acquiring the machines
through a traditional supplier/distributor. Therefore they have the potential
for a better return on investment;

- Superior software: The user interface of Redbox machines are easy to use and
intuitive. The backoffice management software is “enterprise scalable” meaning
that a network of thousands of machines can easily be supported and monitored.
The necessary enterprise reporting functionality is also present to allow
management to make effective decisions;

- Professional website: Although the website is not a key driver of the
business, the professional design of the site is a reflection of the commitment
to quality of the company;

- Web reservations: although this is not a critical advantage, it is
functionality that Redbox has made available to customers, unlike TNR who is
not likely to be able to ever offer this option due to their system’s technical
limitations;

- Ability to pickup a movie from one location and return it to another: again,
like web reservations this functionality may not be used prolifically by
customers but at least the option is available.

TNR Entertainment
—————–

Background
———-
TNR commenced operations using machines supplied by an Italian company
Videosystem Italia (VSI) and subsequently also trialed machines from the
US-based Touch Automation. After raising 45 million dollars for an aggressive
expansion plan, TNR has recently undergone a change in their management and
scaled back their aggressive expansion plans as described in the following
articles:

http://www.videobusiness.com/article/CA6490436.html?nid=2705
http://eastbay.bizjournals.com/eastbay/othercities/houston/stories/2007/09/03/story9.html?b=1188792000^1514546

Competitive Disadvantages
————————-
In my opinion, TNR has absolutely no competitive advantages over Redbox. Its
disadvantages are as follows:

- An infrastructure which is not easily scalable. The VSI machines are not
very sophisticated, both from a customer perspective and an enterprise
perspective. The system is very basic by today’s standards and only allows a
maximum of 300 machines to be networked and managed together. As such the
system is not “enterprise scalable” and cannot easily support the management of
thousands of machines. It is presumably for this reason that TNR hired IBM to
integrate the SAP software package to manage their backoffice operations.
However, given the basic nature of the VSI software, it is unlikely that TNR
have been able to achieve the desired level of integration with the SAP
software. As for the Touch Automation machines, their software certainly
appears to be more sophisticated than VSI’s, however I understand that their
machines have been prone to mechanical glitches.

- A higher cost of capital of aqcuiring the machines: Since TNR does not
manufacture their own machines their acquisition costs are likely to be higher
than Redbox, even if we take into account volume discounts on large orders;

- Basic software (VSI machines): The user interface is adequate but not as user
friendly as Redbox. As mentioned above, the backoffice software is also based
on very outdated technology making it difficult to manage the machines at an
enterprise level;

- Amateur Website: Despite the fact that TNR have raised millions of dollars in
funding, it amazes me that they have not made the effort to develop a
professional-looking website. Again, this may not be a key driver of the
business but impressions do count and the Redbox website certainly portrays a
more professional impression.

- Lack of web reservations: web reservations have been in a status of “coming
soon” for at least the last 2 years on the TNR website. The reality is that
the standard VSI reservation system is functionaly and technically too basic
for the North American market and I assume it is for this reason that TNR has
not implemented it. It appears unlikely that TNR will develop a new
reservation system of their own either;

TNR Exit Strategy
—————–

Previous discussions have put forth 2 exit strategies for the TNR venture
capital investors: An acquisition by Redbox or an IPO. My assessment of these
two strategies are as follows:

1) Acquisition by Redbox
————————
The only benefit to Redbox of acquiring TNR would be to takeover their location
contracts. However, with TNR’s recent scale back of expansion plans, I believe
such benefit is significantly diminished. Furthermore, in order to ensure a
seemless integration with the Redbox network, the TNR machines would have to be
replaced with Redbox machines (as was the case when Redbox replaced their
originally deployed DVDPlay machines), which would not be justified from a cost
perspective. Ofcourse, Redbox could just manage the TNR network as a separate
entity but this would not be the most efficient option. Additinally, it is
unlikely that Redbox would value TNR high enough to allow the VC investors to
realise the large “exit profit” that they would be targeting. The reality is
that the TNR financials will not justify a huge valuation, for reasons I will
explain in the next point.

2) IPO
——
An IPO is the preferred way to raise additional funds while also allowing the
initial VC investors to exit with a “spectacular return”. Because of all of
the “hype” surrounding the DVD kiosk industry the VC investors may well be able
to exit at a profit via an IPO, at the expense of uninformed individual
investors. However, it is my opinion that after such an IPO, once the dust
settles, the general investment community will realize that the TNR valuation
is simply not justified and the stock price is likely to fall below the IPO
price. TNR may well be generating a significant amount of REVENUE now but what
is more important, is OPERATING PROFIT (as Mr. Oliver pointed out earlier) and
CASH FLOW. Taking into account the high capital cost of the machines, the
practical limit in the number of rental transactions that can be achieved per
month, the low movie rental prices and the cost of content, achieving an
operating profit that also provides an adequate return on investment is a tough
balancing act that requires a very efficient operation. I believe that this is
why TNR has recently scaled back their aggressive growth plans to focus on
optimizing profitability. Simply placing a kiosk in every location of a
supermarket chain as quickly as possible doesn’t translate into optimal
profitability. I believe current investors of TNR have realized this and are
now focusing on trying to improve the financials in order to extract the
greatest value when it is time to exit.

CONCLUSION
———-

In my opinion the ultimate winner will be Redbox because they have the
management, technology and infrastructure to support a rapid expansion while
also optimising profitability. It is again my opinion that TNR has been
“over-hyped” and that their financials are not as healthy as Redbox’s.
Furthermore, for the reasons I have mentioned earlier, I believe that if TNR
continue to deploy machines supplied by VSI they will remain at a significant
disadvantage to Redbox.

For now, it will be interesting to continue to watch developments. Time will
tell…

What is Redbox ticker?