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Redbox poised to split home video market with Netflix

|Includes:BBL, Netflix, Inc. (NFLX), OUTR

The rise of Redbox as the first legitimate challenger to Netflix suggests that the two companies are poised to split the home video rental market along the "frequent user" and "casual user" continuum.

How is it that brick-and-mortar Blockbuster can be bankrupt by the Internet, while barely five years later brick-and-mortar Redbox finds phenomenal success?

Home video rental, like all media, can be segmented into two camps: casual users and frequent users, or movie fans.  In the 1980s,  independently-run video rental shops <em>like the one in Kevin Smith's film Clerks (1994) served the movie fans.  Casual users were had to wait until a movie was shown on broadcast TV, sometimes a year after the theatrical release.  Blockbusters opened the floodgates for all the casual market's pent-up demand casual via real-estate expansion and an ingenious revenue-share model with the studios.  Blockbuster then used its size to muscle out independent video stores by offering the movie fan better selection at cheaper prices.  The 1990s were halcyon days for Blockbuster.  It owned both the casual user and the movie fan.  Steady cash flow allowed the company to leveraged itself to maximize ROI for its shareholders.

In 1997, Netflix was founded, thus sounding the death knell for Blockbuster.  Although Blockbuster's selection of titles far outstripped anything the 1980s indie rental shop had to offer, it was nothing compared to what was possible via Internet distribution.  By 2000, Netflix had stolen all the movie fans from Blockbuster.  By headcount, movie fans make up a small portion of the market.  But by rental dollars, these fans are disproportionately larger due to frequent and repeat use.

For a highly leveraged company such as Blockbuster, the loss of such an important segment to Netflix was too much.  Based on current cost and price structures, Blockbuster's model was obsolete.

But as Blockbuster shuts down stores, the casual user became under-served.  Because while the movie fan had ditched Blockbuster a while ago, casual users continued, albeit in reduced numbers, to patronize Blockbuster.  Netflix was never an adequate substitute, because the casual user today isn't (a) a frequent enough user to want to pay a subscription, neither is he (b) interested enough to spend time managing his queue of movie titles online.

Enter Redbox.  With just a kiosk, the company avoids costly overhead.  With locations at the local supermarket, it increases convenience.  With a clever pricing scheme of $1/day (which is about the same as Blockbuster, which charged $2.50 for 2 days), the company created the perception that they were cheaper than Blockbuster.

Redbox is a phenomenal success because it serves the casual market that was once so well-served by Blockbuster.  Like digital satellite radio versus over-the-air radio, cable TV versus free TV, and hardcover versus softcover books, Redbox and Netflix are poised to split the home video rental market along the frequent user and casual user continuum.

Disclosure: No positions