Every now and then a business model comes out that is so powerful and yet so obvious that I can’t help but think, how did I not think of that first? This was my response when I first found out about Netflix. The idea of unlimited rentals without any late fees seemed like such a no brainer that it still amazes me that BMG wasn’t doing this during the 1980′s, let alone that Netflix was able to get a patent on the business idea. Nonetheless, Netflix was the first one to come up with the idea and Reed Hastings has been able to build an impressive business around it.
With Blockbuster, Greencine & a host of other internet DVD companies jumping on the internet bandwagon, it’s no surprise that this business has changed the video store forever. These business ideas are rare, but when they come around they are truly special and they create quite a bit of turmoil for established businesses.
Over the last few years, I’ve taken a lot of interest in the DVD kiosk and having watched as the technology has gone from an experimental stage to one of the hottest growth areas in the DVD market today, I can’t help but think that we are on the precipice of one of the greatest developments in DVD rental industry to date. While the DVD kiosk business model is revolutionary by it’s own right, it hasn’t presented a challenge to Netflix’s business model because of the limited DVD availablity and because the technology hasn’t hit the mainstream just yet. Nonetheless venture capitalists have taken notice of the possibilities and we’ve seen strong demand for kiosk technology, especially by the grocery store chains and it’s only a matter of time before the DVD kiosk begins to replace the stand alone video store.
In the past, I’ve hypothesized that the DVD rental market would fragment into two pieces. The first would be people like myself who really want to watch unlimited longtail archived content and who were willing to give up access to new releases and spur of the moment rentals, in exchange for the luxury of not having to return a DVD to the video store. The second piece of this market will go to the video stores and more importantly the DVD kiosks which can provide consumers with instant gratification, if they don’t mind the limited selection and having to make a second trip back to return the DVD. Because of the vast differences between the rental styles, I didn’t feel like Netflix really had much to worry about from the DVD kiosks, but overnight everything has changed.
Yesterday, DVDXpress announced a new business model that I believe will send shockwaves through the DVD rental industry. Their business model is to allow consumers to rent an unlimited number of DVDs from any of their kiosks for a small monthly fee of only $12.99.
What makes this business approach so unique is that DVDXpress has figured out a way to combine the advantages of the fixed cost structure that the video store has, without the high variable costs that Netflix has to deal with. Because Blockbuster has certain expenses they have to pay no matter what, they must meet these fixed costs or else their business will suffer. These costs involve debt payments, lease obligations & salaries. The advantage to Blockbuster’s business model is that if they meet these costs, each additional rental is practically pure profit for the company. Compare this to Netflix, who must paying the post office for every DVD that you watch. While Netflix doesn’t have to worry about staffing 8,500 locations, they do pay high variable costs if their customers want to rent more DVDs. Because of this, you have an industry where Blockbuster wants you to rent as many DVDs as possible and where Netflix would prefer that you rent as few DVDs as necessary.
DVDExpress’ business plan is so powerful because their fixed costs are relatively low compared to Blockbusters and yet their transaction costs are almost non-existent compared to what Netflix has to pay to ship you a DVD. This means that if someone rents 30 DVDs in a month, it doesn’t necessarily cost them any more then if someone only rents 1 DVD a month. Compare this to Netflix’s strategy where they are forced to throttle their customers in order to maintain the profit margins. Considering that DVD kiosks cost anywhere between $20,000 – $25,000 to buy, one would need to rent 10 DVDS a day at $2.50 just for their initial investment to pay off in 2.5 years. With a $1 a day kiosk price war currently in place, this isn’t an easy task to achieve and even at some of the heaviest trafficked areas it can take at least a year to get to this level. On the other hand, if DVDExpress gets just 75 – 100 subscribers to adopt the monthly $12.99 pricing, then a kiosk could easily pay itself off after 2.5 years without having to place the machine in a heavy traffic area. Once the machine is paid off, the DVD kiosk essentially becomes a cash cow.
There is also a benefit to retailers to partner with DVD kiosk companies employing this strategy because it gives the consumer a reason to come back to the retail location again and again. It’s no secret that McDonald’s launched Redbox as a loss leader in order to drive more traffic to their store, but once a consumer returns a DVD, what incentive do they have to return to that McDonalds again? With a monthly subscription fee in place, consumers not only don’t have to stress out about having to return their DVDs, but psychologically they they are encouraged to come back to the business because they don’t feel like it will cost them anything to rent another DVD.
DVDExpress has clearly come up with a powerful business model that combines the upside benefits of Blockbuster’s fixed cost structure without the downside variable costs associated with Netflix’s business model. This innovation is so brillant that despite consumers being limited to only 200 unique DVDs at any given time, I think it could change the rental industry dramatically. Hopefully, DVDExpress has already moved to patent the business idea because as soon Redbox, TNR Entertainment, DVDPlay, DVD Station, and Moviebank get wind of this, they will undoubtably begin considering their own DVD subscription plans.
#1 by SPAM- MCGEE on October 5, 2006 - 5:44 am
Way to send out email’s spamming your sub-par video rental service. Netflix is great.
#2 by davis on October 5, 2006 - 5:54 am
Thanks Spam – McGee, I think Netflix is great too, in fact anyone who has read my site know that I think Netflix is a little bit tooooooo great. I’ve never used DVDXpress, so I can’t vouch for their service, but I think their business model is fantastic and I think DVD kiosk are going to be big. I’m not sure who you are, but I only sent this article to blogs I regularly read, so I’m sorry if you took it as spam. Thanks for the comments though, way to add to the conversation. Send me a personal email and I’ll drop you from my RSS reader if you would like.
#3 by Dave Zatz on October 6, 2006 - 12:06 am
“having watched as the technology has gone from an experimental stage to one of the hottest growth areas in the DVD market today. Nonetheless venture capitalists have taken notice of the possibilities and we’ve seen strong demand for kiosk technology, especially by the grocery store chains and it’s only a matter of time before the DVD kiosk begins to replace the stand alone video store.”
I don’t know… I’ve seen a few and they all have cobwebs – at least those that weren’t already removed.
“On the other hand, if DVDExpress gets just 75 – 100 subscribers to adopt the monthly $12.99 pricing, then a kiosk could easily pay itself off after 2.5 years without having to place the machine in a heavy traffic area. Once the machine is paid off, the DVD kiosk essentially becomes a cash cow.”
Movies and manpower have a cost, in addition to any space rental considerations. I’m not saying it can’t be profitable, but I don’t think most consumers in most of America are ready for self-serve machines. I don’t know why that is, but it sure seems to be that way.
#4 by davis on October 6, 2006 - 1:23 am
Dave – I think that you are right that consumers are reluctant to embrace kiosks on the surface, but think of how much people have embraced ATMs vs. going into a bank. 30 years ago, no one believed in the ATM either. One of the most telling statistics that I’ve seen is that Redbox reports that once they’ve had a DVD kiosk opened up for a year, they see a 105% growth in same store sales. This demonstrates to me that the technology is there, people just need to try it before they’ll get hooked on it. Don’t believe me though, look at what people who use the service are saying. Do a search for Redbox on Opinmind and you’ll see that they’ve get very high positive feedback from users.
As far as the additional costs go. The retailers are responsible for stocking the equipment, so that fee doesn’t exist. There is content costs, but in fairness, I didn’t include any sell through in my basic analysis of the profitablity and I believe that given the high margins on sell through, that it would certainly help to offset content acquistion costs. Finally, the retailers do charge for floor space, but this is typically done on a revenue sharing basis, so it doesn’t have the fixed costs that Blockbuster pays for rent. This isn’t to suggest that my math is spot on, but rather that with just 100 people, this thing becomes a cash cow, with 200 people the margins are insane with 300 people you start talking about real money. Retailers want this, Starbucks is exploring their own kiosks, Kroger is definetely expanding, Safeway has ordered more, Albertson is deploying more & Target and Best Buy are lobbying for burn on demand kiosks. If retailers didn’t see the benefit, they wouldn’t be pushing this hard to get these kiosks in their stores. Add to this a subscription based model and I think that the kiosk can rent movies at a price that neither Netflix nor Blockbuster can even come close to. Price won’t be everything, but it certainly will count for something.
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#5 by Eric Eklund on November 23, 2006 - 4:41 pm
Hey, i was just reading your article and one line caught my attention. “Considering that DVD kiosks cost anywhere between $20,000 – $25,000 to buy…”. how did u get this estimate? what company’s make these kiosk machines? I appreciate your help! Thanks!
Eric
#6 by davis on November 23, 2006 - 4:57 pm
Hey Eric – This is the range that I’ve seen from talking with a couple of different kiosk companies. If it has a smaller capacity you can find lower priced kiosks and if it’s a model designed to be outdoors then it will cost more. There are also typically software costs as well. I think Redbox pays $1,000 for their software if I’m not mistaken and of course on going servicing costs, but for the price of running one traditional video store per year, you could set up 10 kiosks and have pretty nominal on going costs involved. Kiosks are more limited of course and none of this includes the content you have to stock it with, but it’s still a pittance compared to what it costs to run a stand alone store.
#7 by chris on September 26, 2007 - 6:34 am
The cobwebs comment is definetly true in affluent areas. They are rolling these out in the hartford area and the better off towns do’t buy these. They do extremely well in hartford city. Go to the stop and shop or shaws on the hartford/west hartford line and you will almost certainly have to wait in line. These neighborhoods are predominantly filled with working class immigrants and first generation americans. They seem to have embraced this technology wholeheartedly. Soccer moms are not going to use these things becasue the price differential is not importatn to them. The money they save is not worth the extra trip to the grocery store in their already busy week. however someoen making minimum wage who spends a large portion of their income on entertainment is seeing this as a real cost saver.
#8 by carebear on October 31, 2007 - 11:42 am
how does the DVDExpress model beat out RedBox’s pricing strategy? if RedBox charges $1 per DVD per day, a consumer would need to rent several DVDs in order to make this strategy look more appealing. from what I’ve seen, the average customer rents 2-3 movies a month and holds them for 2-3 days.
#9 by davis on October 31, 2007 - 12:11 pm
I think that there are several advantages to the consumer from paying by the month, but will be the first to admit that DVDXpress benefits more than anyone from using this system.
Personally, I hate returning DVDs and feeling like I have to watch them right away, instead of on my own schedule. If rent 10 movies a month, I’d probably save by using Redbox, but I’d rather pay twice as much and be able to pick up or return a DVD on my own schedule. This option especially makes sense for people who are near a location. If I could walk across the street and rent a different DVD every night, this would be a much more attractive options.
Whether Redbox or DVDXpress is better for consumers depends on your preferences, but in order for kiosks to take off, there has to be a business model that supports them and I think that this it. The consumer doesn’t have to deal with late fees or transaction costs and the DVDXpress gets a reliable income stream coming in each month, regardless of how many DVDs a consumer rents. Because they have such a low variable cost associated with the model, I think that this could benefit everyone involved. I haven’t seen any developments since I first saw this a year ago, but still think that the business model is nothing short of revolutionary.
#10 by annie on December 12, 2007 - 2:48 pm
dvd xpress customer service is rude and they appear to be very threatened by redbox. i inadvertently returned a redbox movie into their RED machine (can’t imagine why i would even be able to do that) and they want to charge me $75 to get the movie out of the “back of the machine.” although the machines are serviced every week this is evidently a “special” request. the dvd xpress customer service rep was so rotten i will never use their service again even if they are the closest and most convenient as i was renting moving from them 4-5 times/week until today!
#11 by Davis on December 12, 2007 - 3:19 pm
Hi Annie – Sorry to hear about your troubles, I’m surprised by your experience because believe it or not Redbox owns DVDXpress. I could understand why it might cost them money to send out a tech, but my recommendation would be to contact Redbox and explain the situation. It might be a headache for them to get the discs from their partner, but at the very least, you wouldn’t have to pay more than the DVD. From the feedback that I’ve seen online, Redbox seems to do pretty well with customer service. Hopefully, they can help you fix the problem and figure out what’s misfiring with DVDXpress’ customer service.
#12 by Becky on December 24, 2007 - 10:04 pm
I don’t see how the DVDXpress 12.99 all you can watch could possibly be profitable. The machine would need an incredible copy depth. When I rent on subscription, I would always look for the newest release and after I watch it, I would leave it around the house until I am ready to get my next one (at least a week). If I am the typical consumer, then the machine will frequently be out of new releases, unless it has lots of copies – then its inventory costs will increase.