Davis Freeberg’s Digital Connection

I’ve had friends refer to Netflix as the little red pill, but Walgreen is betting on a different DVD prescription in the latest development for the DVD industry. Instead of trying to sell the next Blockbuster drug, Walgreens is instead trying to become the next Blockbuster by partnering with Redbox to bring DVD rentals to their customers. According to the Chicago Times, over the last month Walgreens has been silently testing Redbox kiosks in 19 stores in the Chicago area and another 19 stores in the Houston area. The program is still in a testing phase, but according to Walgreen Spokesman Michael Polzin, “If it does well, we could look at other markets.”

This is a big development for the kiosk industry on two fronts. First it’s expands DVD rentals into the pharmacy, which is a natural compliment for the kiosk business. More importantly though, it could potentially add another distribution partner for Redbox and a significant one at that. Walgreen’s has over 5,000 locations and if their testing proves sucessful, it’s possible that through Walgreens alone, Redbox could install as many video kiosks as Movie Gallery has video stores.

Perhaps the most interesting tidbit to be leaked in the article however was the disclosure that Coinstar, who currently owns 47% of Redbox, is still planning on making an additional investment of $12 million in Redbox next month. This will give the company a majority position in Redbox, assuming that certain growth targets are hit. The $12 million was originally negotiated last year when Coinstar paid an initial $20 million for their 47% stake in the company, but if they do go forward with the reinvestment, it would be a clear sign that the last 12 months have been very good for Redbox. Over the last year we’ve seen the number of Redbox locations grow from 800 to about 1,500 and considering the response that retailers are having for the technology, I fully expect Coinstar to move forward with the reinvestment.

So far Redbox has been deploying their kiosks on a regional basis. This makes a lot of sense because when you rent from kiosks, you want to be able to rent and return your DVDs from a number of different locations. Instead of deploying 1,500 kiosks spread out across the country Redbox has instead focused on entering specific geographical regions and then building it out from there. Chicago marks a new footprint for Redbox and as the video store market continues to struggle in the metropolitan areas, Redbox is positioned particularly well to benefit from customers who still want to be able to rent the top hits without having to wait a few days to receive them in the mail.

Posted on October 10th, 2006 by Davis
Filed under: Disclosure - I own stock in co. mentioned, Kiosks, Movies, Netflix