RedBox: A Hollywood Thriller!

Let’s imagine that you have an opportunity to spend a day with the chief executive officer of a major Hollywood film studio. Where would you go?

Breakfast, perhaps, with a famous director at the Beverly Hills Hotel! Lunch on a movie set with a beautiful actress! And then it’s off to the red carpet for a front row seat at the Academy Awards!

Sounds exciting, doesn’t it? In reality, though, a typical day in the world of film production is not quite that glamorous. And even the good days are now being threatened by a competitive risk that looms over the industry like a gigantic black storm cloud.

What is this great threat? Is it a shortfall of capital? A looming labor strike? Or the loss of the movie audience to some other entertainment medium?

Well … not exactly. In fact, believe it or not, this monstrous threat is (quite literally) nothing more than a big red box. And it doesn’t divert customer traffic away from films; instead, it brings them in to the industry. And yet this box, the latest incarnation of a century old retail distribution strategy, is now spreading terror throughout the film industry.

Bolted to the Ground

Much has been written about the imminent demise of traditional media due to technologically advanced on-demand distribution systems. According to Jeff Bezos, for instance, the goal of the Amazon Kindle is to deliver “every book ever printed in any language in under 60 seconds.”

Such a goal would undoubtedly put traditional book stores out of business. Nevertheless, book shop owners need not necessarily worry; after all, the movie industry has spent the last century surviving numerous technological innovations that were originally expected to put it out of business as well. Radio, for instance, was initially expected to drive movie theaters bankrupt because it brought live programs directly into the home. And television was later expected to do the same because it added the visual experience of film to the audio experience of radio.

More recently, the Video Cassette Recorder (VCR) and Digital Video Disk (DVD) were hyped as devices that could bring movies on-demand directly into the home, thereby eliminating the demand for public movie theaters. And many today believe that the internet will soon become the primary distribution system for all media products and services because of its ubiquity, cost efficiency, and interactivity.

Thus far, the film business has survived all of these technological threats … but it’s never faced a threat quite as quaint as RedBox. Why? Because this relatively small company is using sidewalk vending machines that are bolted to the ground – a technology that was first developed in the 1880s to sell postcards and chewing gum – to distribute films.

A Retro Business Model

Mind you, these red boxes are not like the machines that your great, great, great grandfather utilized to buy copies of the evening editions of his favorite newspapers before boarding streetcars for his voyage home each night. They are huge and sophisticated machines, capable of processing every major brand of debit and credit card, and able to accept products back from customers who only wish to rent them on a temporary basis.

Nevertheless, the RedBox business model is indeed a retro creation, one focused far more on the old fashioned notion of moving merchandise than on the contemporary concept of e-commerce. To describe it simply, RedBox purchases movie disks and stock them in self-service vending machines. Customers help themselves to the disks. And free of any other retail costs, RedBox can hold its price to an astoundingly low $1.

Truth be told, that is precisely why many film studios are apoplectic about the firm, refusing to do business with it and fighting in court to stop RedBox in its tracks. It’s not because the distribution system itself is rather archaic; the film studios don’t mind that at all. Rather, it’s because the $1 price point establishes a dramatic new expectation in the minds of customers about how little they might pay for the pleasure of viewing a film, and studio moguls are terrified that this expectation might eventually become the norm.

High Risk, High Returns

Risk managers who specialize in the development of business models will undoubtedly recognize numerous strategic threats that may lead to the collapse of the RedBox plan. Employees may be unable to maintain the vending machines in prime operating condition, for instance, especially if high demand leads to heavy usage. Managers may make mistakes in predicting the popularity of films. Customers may tire of driving to the local gas station or shopping mall to pick up and return their films, especially if gasoline prices return to their recently stratospheric levels. And investors may grow wary of a firm whose entire existence is predicated upon its ability to maintain a $1 sales price.

Nevertheless, if RedBox is able to convince these stakeholders that a profitable retail film distribution business can be built around self-service vending machines and a $1 price, it may indeed spell the end of the century old Hollywood business model. Will it or won’t it? Only time will tell … and we won’t need to buy a ticket to watch to the end of this tale.