July 29, 2021
Good morning, and welcome to Protocol Next Up. This week: Redbox is going public this year and Facebook's has expensive plans for the metaverse.
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The Big Story
How Redbox plans to spend its SPAC money
DVD kiosk rental company Redbox is scheduled to go public via a SPAC reverse merger later this year, and I caught up with Redbox CEO Galen Smith recently to learn how he wants to spend all the money the deal is expected to bring in. You can read more about Redbox and its unique take on the streaming wars in my Q&A with Smith, but it's worth looking a bit more closely at some of its post-SPAC investment plans:
- Redbox wants to launch a channel store next year. Smith told me that a key reason for the SPAC deal was to get additional capital to build out the company's digital initiatives, including a storefront for third-party subscription services similar to those run by Amazon and Roku. "It will allow us to have customers sign up and subscribe and then have all their content in one place," he said.
- Redbox wants to buy more content. "We're going to license more content for the ad-supported side," Smith told me. Redbox currently operates an ad-supported, on-demand service as well as over 100 free, ad-supported channels. You'll find most of those channels and movies elsewhere, but the company does have its own Redbox Entertainment production arm as well.
- It also wants to promote itself and others. The company is still primarily known for its DVD kiosks, which don't necessarily appeal to streamers. Now, it plans to use those very kiosks to tell the world about its streaming services, all while making a little ad money on the side. "We're doing a number of digital screen installs on the top of the kiosks," Smith told me. "About two-thirds of what we do on those kiosks will be for advertising the business. The other part will be ads right in the store, at the point of purchase."
Is all that enough to turn Redbox into a successful player in the streaming world? Honestly, I'm not sure. A recent investor presentation shows that the company only made $40 million with digital video last year, yet hopes to grow digital revenue to a whopping $384 million by 2023. At the same time, Redbox estimates that its kiosk revenue will recover from a pandemic low of $506 million last year to $728 million by 2023.
And Redbox isn't acting in a vacuum: Its digital initiatives compete with streaming services from media companies and device makers, including ad-supported services like the Roku Channel, Amazon's IMDb TV and Samsung's TV Plus. However, the company has a few things going for its digital push:
- Redbox's audience has some catching up to do. "70% of our customers identify as late adopters of technology," Smith said. "They haven't necessarily made the switch to digital." Redbox's customers also over-index for having lower income, so they may be more willing to watch free, ad-supported video.
- Redbox has a massive loyalty program, and cheap incentives. Around 39 million people have signed for Redbox Perks, which the company has started to push its own streaming services. Once it resells other services, those perks members will be first in line for a promotional push. "If I'm able to offer to someone a promotion, maybe a free night at the kiosk, simply for signing up and trying a streaming service, that becomes a great value to everyone," Smith said.
Redbox wouldn't be the first company to kickstart streaming with DVDs. Netflix essentially financed its entire streaming business through DVD rental profits (and still sends out red envelopes to a few million members every month). It will be interesting to see whether Redbox can follow in Netflix's footsteps.
"Tech companies are going to start calling everything a 'metaverse' soon aren't they." —CNBC tech editor Steve Kovach, probably actually predicting the future.
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Zuckerberg to investors: This metaverse thing will be expensive
Mark Zuckerberg told investors Wednesday that the metaverse will require "very significant investment" for years to come.
Zuckerberg has been on a one-man tour to sing the virtues of the metaverse, which continued with his appearance on the company's Q2 earnings call Wednesday. Outlining the company's key priorities for the next few years to come, he told investors and analysts that "the metaverse is going to be the next chapter for us as a company."
- Writing that chapter will take a lot of ink. "It is going to require very significant investment over many years," Zuckerberg warned.
- Some of these expenses will be due to new hires. Earlier this week, Facebook announced the formation of a new metaverse product group headed by Vishal Shah, Instagram's current VP of product. That new group will hire hundreds of additional staffers in the coming months.
- And then there's the hardware. Facebook has invested billions into AR and VR, and the team behind those efforts is reportedly already close to 10,000-people strong.
- But don't expect any hard numbers anytime soon. "We're investing billions of dollars annually" into AR/VR, said CFO David Wehner. Analysts wanted to hear some more specifics, but Wehner demurred.
- Those investments will ultimately be worth it, according to Zuckerberg. "This is going to create a lot of value for a lot of companies up and down the stack."
- However, the business model for the metaverse is still a bit fuzzy. "Ads [...] will probably be a meaningful part of the metaverse," Zuckerberg said, while also musing that people may spend money on avatars and other digital goods. "Over the long term, I think that there's going to be a very big digital economy," he said.
- Don't expect hardware profits to be a big part of it, though. "Our mission is around serving as many people as possible," Zuckerberg said. "We want to make everything we do as affordable as possible."
Analysts on the call seemed to be a little unhappy about the lack of details, and investors sent Facebook's share price down 4% in after-hours trading. However, this hasn't been the first time that Zuckerberg outlined a massive initiative seemingly on a whim, only to be proven right later.
In 2016, he predicted that "the vast majority of the content that people consume online will be video" in a few years. On Wednesday, Zuckerberg delivered a bit of an update on that prediction: "Video now accounts for almost half of all time spent on Facebook."
This story first appeared on Protocol.com.
- Samsung's giant Wall TV is being used for virtual productions. You and I can't afford it, but Korea's film industry is now embracing The Wall.
- Facebook has turned its VR headset into an AR developer device. Developers can now enable mixed reality pass-through mode on the Oculus Quest.
- Ten Warner Bros. films are going straight to HBO Max next year. WarnerMedia's Jason Kilar told investors that the release windows of the past are not coming back.
- Spotify missed its Q2 user target. On the plus side, the music streamer saw its ad revenue more than double year-over-year.
- Facebook may tie Oculus workouts to Apple's health ecosystem. The Oculus iOS app includes code snippets that suggest your VR workouts may soon count in Apple Health.
VR motion sickness is a real thing, and the industry has been working hard to make sure people don't puke their guts out after wearing a headset. Personally, I don't experience it all that often, but I nonetheless do appreciate those comfort-level warnings on the Oculus Store. In fact, I wish that they would be available in the real world as well, including during a mini vacation I took last week. Sitting at the pool? Very enjoyable. Climbing up a 100-foot sand dune? Not that comfortable at all. Rolling down said sand dune? Apparently not something someone in their 40s should ever attempt.
Thanks for reading! See you next week.