Redbox’s secret streaming wars weapon: DVD rentals

The DVD kiosk company, which is scheduled to go public this year, plans to use its existing rental business to kickstart the launch of new digital services.

Redbox CEO Galen Smith

"We believe that our best opportunity is to be able to provide one platform for consumers to access the content of others," said Redbox CEO Galen Smith.

Photo: Redbox

Redbox CEO Galen Smith isn't ready to give up on DVDs. His company is preparing to go public via a SPAC merger later this year, and its ubiquitous red DVD rental kiosks are a key part to the pitch to investors.

That's in part because Redbox caters to an audience that is more affected by the digital divide than your typical Apple TV+ subscriber. But in a recent conversation with Protocol, Smith also described how the kiosks are part billboard, part promotional opportunity to get people hooked on streaming — including on streaming services run by other companies, which Redbox plans to resell to its customers starting next year.

In our conversation, Smith also talked about the company's ad-supported streaming efforts, and why Redbox has no plans to ever launch its own subscription service again.

This interview has been edited and condensed for clarity.

Redbox is still primarily known for its DVD kiosks. Why should investors care about DVD rentals in 2021?

Redbox is an entertainment company. We not only serve customers through the kiosk, but we're also a player in the streaming space, and we're producing movies. We launched [a digital transactional service] in 2017, and started a Redbox free live TV service in 2017, which has now grown to more than 100 channels.

We think that there is further opportunity for us to lean into the growth on the ad-supported side to really transition customers from your typical cable subscription to a free service supported by ads. What this [SPAC] transaction provides is incremental growth capital to lean into building a channels platform, which will allow us to have customers sign up and subscribe [to premium video services] and then have all their content in one place.

What kind of traction have you seen in the streaming space, and how do you want to use that for subscriptions going forward?

We've seen significant growth across all the different platforms. As COVID hit last year, we saw rapid expansion of our digital transactional service. We added over 3 million unique customers to date, and we've seen 74% compound annual growth [for paid downloads] over the last two years. We've seen rapid growth on the ad-supported side as well, with over 9 million unique devices in the last 12 months.

One of our key differentiators is that we've got 39 million members of our loyalty program that earn points for things that they do, including watching free live TV. [This allows us to] incentivize trials for consumers, and then we are able to acquire them at a very low cost. Our acquisition costs for our customer is approximately $3. 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.

You recently tested that with Showtime, right?

We did, and we drove over 60,000 subscriber sign-ups in a five- to six-week period. So we saw some really great success. And since it was a test and not an integrated experience, it was definitely more clunky for the consumer to sign up and subscribe. As it becomes integrated into the app, we see an opportunity to drive even higher numbers of subscribers.

Redbox launched its own subscription streaming service back in 2012, but gave up on those efforts soon after. Would you ever try this again?

One of the things that we've seen over the past 18 months is this growth in direct-to-consumer services from all of the different content owners. And we think, honestly, that becomes a significant source of frustration for consumers. We believe that our best opportunity is to be able to provide one platform for consumers to access the content of others. We think that's a much more successful path than us going into direct competition with the streaming services.

How do your content production efforts fit into all of this?

We created Redbox Entertainment in 2019, and we have released 21 titles to date as either Redbox Entertainment or Redbox exclusives. We're acquiring either North American or U.S. rights to distribute [movies] across the board. And since we don't have a direct-to-consumer subscription streaming service ourselves, we license that content to [other streaming services]. It's another way for us to partner with them.

We had a movie we released earlier this year with a partner, Vertical Entertainment, called "Shadow in the Cloud." It was released at a $19.99 price point on premium video-on-demand. That obviously is a little bit harder for our consumer base, but it worked tremendously well across other digital retailers like Amazon Prime or iTunes. Then we sold the subscription rights to Hulu, so you can watch it on Hulu today. Down the road, when it gets to that window, [we will stream it on] our ad-supported, on-demand services.

At the same time, Redbox is still operating its kiosks. How long will that part of the business be around?

The Redbox kiosks are one of the most powerful assets that we have. Think about them as 40,000 billboards at retail. One of the things that we've added over the last couple of years is the ability to advertise on the kiosks. We have digital ads on our screens. We're able to drive incremental activity [for things like] our ad-supported service and our digital transactional service. None of the competitors in the space have this retail presence that we do. It gives us a really distinct advantage, and the kiosk becomes an incredible asset to the digital transformation going forward.

The other piece that is important to note is: Clearly, we have a broadband problem in the U.S. So we think that we'll be able to continue to serve consumers. And because of our very efficient structure, we think that we'll have a very big footprint for many, many years to come.

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