A colleague pointed out an article in The Boston Globe ("Like Coke machine for DVDs") describing a new way to rent DVDs. The service is provided by a company called Redbox, which is a subsidiary of McDonald's. The concept is simple. Go to a kiosk, swipe your credit card, and receive a DVD. You don't have to be a member and are charged a dollar a day for each day you have the DVD. You can return the DVD to any Redbox kiosk.
Color me a bit skeptical about the viability of this approach. What are the potential benefits? Ultimately more convenience because kiosks might be everywhere (of course, having a DVD arrive in the mail is pretty darn convenient as well, but you have to pay monthly fees for that convenience). Lower prices, although if you keep a movie for a couple of days prices can add up. The downside? A limited selection of movies, and no guarantee that the kiosk you spot will have the movie you want.
To me, it just feels like Netflix can get the movie rental job done better than Redbox can.
Sure, there are some nice applications. If you are a business traveler, you could pick up a movie in your home city, watch it on the plane and drop it off when you stop by McDonald's to get breakfast. But it seems like the company's claim that it is "paradigm-shifting, business model crushing" might be a bit much.
Thoughts?
More Disruption in DVD Rental?
Scott D. AnthonyPosted by Scott D. Anthony in Comments (9)
Discussion
Posted: Wednesday, August 3rd, 2005 - 9:36 am EDT
Innoblog has an interesting comment on changes in the DVD market. The question they're asking is whether or not DVD vending machines can challenge the likes of Netflix for the DVD distribution market.
When it comes to distribution channels, cost i...
Posted: Wednesday, August 3rd, 2005 - 9:39 am EDT
I agree, these guys don't have a compelling enough offering to win the DVD market. And besides, I think the true disruption that will takeover the DVD market will be online downloading and viewing of movies (i.e. CinemaNow.com).
I think the article's title may point to where the company could succeed though. This could be a disruptive technology that eventually gives vending machines for beverages a run for their money. Once they get a foothold by offering DVDs, they may have everything setup to offer beverages and challenge those distributors that way.
Posted: Tuesday, August 9th, 2005 - 7:02 am EDT
I think that this should be considered a complement to NetFlix, just like vending machines complement Grocery Stores. However, the success relies on the fine selection (meticulously done). If the Kiosk is theme-based, then it might not sell, as you might have trouble locating the kiosk suiting to your theme. So, the ONLY WAY in my opinion this will fly, will be, if you have the 'cream of the latest' available in the Kiosk. So, the overwhelming majority of buyers would know instantly where to look for, to rent the latest movies and it will become POPULAR, if you had enough kiosks and will be a good complement to the store. But, the 'cream of the latest' requires surgical precision in coming up with the list, as you don't have whole lot of space.
Posted: Friday, August 12th, 2005 - 2:05 am EDT
Am I the only one surprised by Scotts skeptical coloration? Granted it is difficult to separate the signals of disruption-potential from the industry hype and noise, but they appear to be fairly obvious in this case"and empirical evidence here in Europe supports the viability of the kiosk DVD-rental model [even without the kiosks serving beverages ;)]. Take another look at the situation through Christensens disruptive innovation lens and I think that youll agree with me that the patterns are recognizable.
One such pattern of disruption-potential can be found by answering Christensens two discovery questions:
Question 1: Do the most demanding customers of the DVD rental market consider the kiosks performance inadequate to solve the problems they face?
Answer: An obvious yes. How could an impersonal, do it yourself kiosk with limited selection fully satisfy the love-group consumers of either brick-and-mortar or internet-only DVD outlets? It cant, so we must assume that key customers in the current DVD rental market will in fact find the kiosk inadequate.
Question 2: Is there a different customer group that would be delighted to use the kiosk"despite its limitations"because it allows them to do something that they couldnt do effectively or affordably in the past?
Answer: Yes, again. Consider some of the behavioral and usage situations of those consumers most likely to use the kiosk concept: Underserved consumers may lack the ability/desire to travel to brick-and-mortar DVD rental stores, or they may lack internet access/knowledge/trust for online providers, or they may not consider the marginal benefit of a new release to be worth the current rental price, or they may even find the current selection processes overwhelming or undesirable. Overserved customers may view currently available selections of both traditional and online outlets to be unnecessarily extensive or raucous--or they may simply decide on movies based on the most recently-viewed advertising--or personalized attention pointless, or memberships annoying.
[An aside: Just how large are the under-and over-served consumer groups here? The US DVD industry is reported to be $5.7B, or 2 DVDs a month per household (assuming 100M US households, 80% DVD player penetration, and $3 rentals). So is the market saturated, and will DVD kiosks compete against consumption? Or is there is an adequate mass of over-/under-served consumers for a true growth opportunity?]
Side notes about market-size aside, however, we have a yes for both of Christensens discovery questions. Is this not an initial requirement of a potential disruption, or at least an indicator? If we carry on with Christensens methodologies then even more patterns emerge.
The second pattern can be discerned by scrutinizing the current DVD kiosk model in light of the value chain integration theory. DVD rental outlets are experiencing decreased revenues as consumers move into the online-realm of DVD rentals. Why are they moving? Supposedly because of the increased convenience, speed and responsiveness. If competitors are winning on the basis of convenience, speed and responsiveness then there must be a performance surplus in the customer utilization trajectory. The market is ready to accept innovation. Netflix certainly seems to know this, as evidenced by their staggering figure of 1 million DVD shipments a day.
A third pattern perceived through the disruptive innovation lens is the unattractiveness of the DVD-kiosk model to the incumbents. Take a look at the resources, processes, and values of the current industry leaders and the unattractiveness is apparent. Can brick-and-mortar stores change their values or resource levels to compete against a $.99 new release price point? Or can franchising models adapt processes for centralized distribution, collection, management and communication? No, and lowering prices would simply force incumbents to engage in a commodity-like price war--and moreover would probably make their currently bleak outlook black. Online companies like Netflix have already established some of the processes necessary to compete directly against kiosks (e.g., centralized distribution), and could even compete on a sustainable basis by raising the level of kiosk convenience with their pre-paid return envelopes (though this would eliminate the value of the dual contact points brick-and-mortar"and kiosk"companies enjoy from requiring the customer to physically come and return the product), but competing in the kiosk arena would require online retailers to increase both fixed costs and inventory levels. Does Netflix have enough value flexibility in their resource allocation mechanisms to do so? Probably not.
A fourth pattern may emerge if McDonalds is successful with their recent launch of the Redbox kiosks. In an arena of performance surplus, they are using the modular and open business architecture"supposedly the correct architecture for the situation"leveraging the modular DVD kiosks with distribution channels and marketing synergies (McDonalds already has ties to the realm of popular entertainment as you can see from the latest movie-themed happy meal), while eschewing a proprietary, interdependent model that might limit Redboxs growth. So how much autonomy does Redbox have? As a subsidiary of McDonalds, is its resource allocation model distinct enough from its parent to truly specialize? Or will McDonalds processes and budgeting systems enforce too much interdependency and limit scalability? If it is truly free to grow, Redbox seems to have the capability of creating substantial network externalities as the kiosk presence saturates foot-trafficked areas"though DVD regioning will present an issue for capitalizing on economies when they scale to an international level.
To these four patterns of disruptive-potential we should add evidence of actual success of the DVD kiosk product in Europe (and in US military bases, too). This concept is not new to markets outside of the U.S. During three previous years spent in Italy I saw the success of the frequently encountered DVD kiosks, and DVD kiosks are now emerging here in Germany to the great delight of my fellow expatriates. I hear that installations in France have proven so successful that they are nearly ubiquitous, and if recent articles and newsgroup posts are any indication of general U.S. opinion, the American market shows waves of approbation.
So to conclude, if Christensens concept of a disruptive innovation with high growth potential is a relatively simple, straightforward solution that offers quick, low-cost, and convenient solutions for under-/over-served customers, then DVD kiosks seem to fit the pattern. They fit it well, in fact. Whats more, they already have evidence of success. Granted, the foot traffic that has driven the flowering of DVD kiosks in Europe is not as prevalent in the states, but if U.S. companies can link their distribution channels into those highly trafficked pedestrian zones that do exist, then what is to stop the wooing of consumers into this market? Netflix? Perhaps for a distinct segment, but without significant expenditure in advertising, an online-only firm lacks the simple but powerful persuasiveness afforded by physical proximity. Will the McDonalds new Redbox bundle prove successful? Lets go get a burger and a DVD and find out.
--Sam
***
Sam Bernards, an MBA student at Brigham Young University, has 7 years experience as an information systems architect and strategic solutions consultant, and is currently assisting the BMW Group in Bavaria.
Posted: Tuesday, August 16th, 2005 - 4:37 am EDT
i noticed in paris that many video stores have kiosks outside the store for getting videos, even off-hours. i have no clue how they work, though. sorry.
i saw people using them, too.
Posted: Monday, August 22nd, 2005 - 11:22 am EDT
I realise that it is difficult for the kiosks to pick up because little choice in titles to rent is the show stopper. But I think I agree with Sam here. But I have my thoughts to add. I believe that there is significant potential for this disruption to go upscale in a relatively short while, if pursued diligently.
What would be required for moving upscale is more investment in the infrastructure to provide the ability to download (i.e. sell) movies from these kiosks. It is worth mentioning that there is a magnitude of difference in convenience to the customer when downloading movies off the net and from a kiosk. Assuming that the effect of data-transfer speed can be offset by virtue of optical fiber lines providing internet connectivity and availablity of HD capacity to the user (thanks to iPOD and the likes), the amount of mobility a kiosk provides to the user is unmatched compared to a computer. It has the potential to define video in the same terms as music on the go.
The supporting and complementary technologies, namely data-transfer speed and portable media player (ex. Zen Vision by Creative), are available. What is needed is a clever integration of the backend technologies, and a bit more time (that will allow for penetration of the portable media players in the existing hard-disk based music player market).
And rest the time will tell.
Posted: Monday, August 22nd, 2005 - 4:50 am EDT
The video vending Kiosk concept has been around since the late 80's so it is not new. The market is different today - it is all about convenience and that is what is driving this concept. This is real bad news for the rental chains - how can they compete against $1.00 rentals. This concept makes rentals and sales cheaper for the consumer and that is what will make it a success.
Posted: Thursday, September 8th, 2005 - 11:46 am EDT
Scott Anthony writes on Innoblog about a new venture launched by McDonald's that provides DVD rental via unmanned kiosks. He wonders why this is significantly better than alternatives (stores, online rental, download). Link: More Disruption in DVD Rental? - Innoblog.
Posted: Wednesday, September 14th, 2005 - 1:59 am EDT
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