If you were a Hollywood casting agent and the squat, garishly decorated Redbox DVD kiosk came in to audition for a role as the newest disruptive force in the entertainment industry, you'd send the poor fellow home. This sorry contraption doesn't run peer-to-peer software; it doesn't do Blu-ray; it won't stream anything straight to your house. It's a vending machine in a supermarket — as old school as you can get without actually involving vacuum tubes.
Yet despite Redbox's antiquarian image, the kiosks are a sensation. Redbox — founded in 2002 as a division of McDonald's and purchased by Coinstar this year — runs 15,000 machines in stores across the country and plans to have about 20,000 in place by the end of the year. Reed Hastings, founder of Netflix, the innovative darling of the movie-rental business, has called Redbox one of his most challenging rivals. "It's really scary," Hastings told The Hollywood Reporter in March.
Redbox is convenient and it's cheap, but the company's fortunes also rest on a more sophisticated calculation about the marketplace. Ask any entertainment bigwig where the movie-rental business is going and you'll hear one thing: digital streaming. Amazon, Apple, Netflix, the cable companies, and many startups are gearing up to send every movie to your home on demand. But Hollywood's byzantine licensing structure precludes that from happening anytime soon. Redbox has positioned itself as the perfect in-between technology — the next best thing to on demand. It's winning by being in more places than Blockbuster and faster than Netflix.
"Two-thirds of all films for rental are selected between 4 and 9 in the evening," says Mitch Lowe, Redbox's president. The other thing people look for during those hours: dinner. Redbox brings these twin impulses together, typically at your supermarket. Its siren song is emblazoned in large type across the front: $1 dvd rentals. Customers pay a buck per movie per night, a price low enough to encourage people to take risks on films they're not sure about, or to keep a movie an extra night. "It expands movie consumption in the same way Netflix's all-you-can-eat program does," Lowe says. "Almost all the time, half of new releases are in consumers' homes." As a result, a new Redbox kiosk becomes cash-flow positive within four to six months.
What's surprising, though, is how much wizardry goes into making Redbox work. Each machine is connected to the Internet via DSL or a 3G cellular modem. This lets customers browse and reserve movies at their local Redbox through the Web, and return movies they rent from one Redbox to any other. Each machine packs a sophisticated inventory-management system that determines how many copies of different new titles to order based on past performance of similar movies at that location. The kiosks send their inventory orders up to the mother ship every week, and Redbox's technicians fan out to each kiosk to stock it with new DVDs. "That's the most interesting part — where technology meets old-fashioned field distribution," Lowe says.
Redbox's success is instructive. In industries where shifts in technology dictate market conditions, why plan for the next big thing when you can make money with the little steps along the way? By the time GM launches its plug-in Volt, Toyota will have been selling the gasoline-based Prius for a decade. Sure, it's unlikely Redbox will survive the transition to streaming; its chief assets — all those kiosks — will suddenly become a liability. Until then, it'll take what it can get.
Farhad Manjoo covers technology for Slate and is the author of True Enough: Learning to Live in a Post-Fact Society.
A version of this article appeared in the July/August 2009 issue of Fast Company magazine.