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Using Game Theory to Optimize the Pace of New Technology Adoption
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Is Redbox Unbeatable?

Will Redbox Cause the Value of the Home Movie Market to Plunge?

 

A recent article in the NYT, “Movie Studios See a Threat in Growth of Redbox” by Brooks Barnes, discusses Redbox, the latest phenomenon in the home movie market. Redbox “rents movies for $1 a day via kiosks” located “in spots like supermarkets, Wal-Mart Stores and fast-food restaurants… The kiosks hold about 500 DVDs and focus on new mainstream releases. The Illinois-based company started with 12 kiosks in 2004, and by December, there will be 22,000 Rebox machines. The kiosks currently “process about 80 transactions a second on Friday nights.”

Redbox and its vending rivals now have 19 percent of the rental market, compared with 36 percent for rent-by-mail services (Netflix) and 45 percent for traditional stores, according to the NPD Group, a market research company. NPD estimates that vending will grow to a 30 percent share by the end of next year, at the expense of traditional stores…

Furious about a potential cannibalization of DVD sales and a broader price devaluation of their product, three studios (20th Century Fox, Warner Brothers and Universal) are refusing to sell DVDs to Redbox until at least 28 days after they arrive in stores. Redbox is suing them on antitrust grounds…

The $1 price is not the main issue for the studios, although they do not like that, either; it is the timing. New DVDs sell for about $25. Video-on-demand services price them at about $5. Multiday rentals of new titles cost $4.99 at Blockbuster. Now there is a $1 option at the same time. That could put downward pressure on the industry’s price structure…

Mr. Lowe [Redbox’s Founder and President] dismissed worries about the cannibalization of sales. He cited internal research indicating that 20 percent of Redbox’s volume is additive — people who did not previously buy or rent DVDs — and that partners like Wal-Mart have had only a 1 percent decline in sales after Redbox machines have been installed at their entrances... “If you make renting affordable and fun, people are going to watch a whole lot more movies than they did before,” Mr. Lowe said.

 

 

So is the value of the home movie market at risk?

To decide whether or not the value of the home movie market is at risk, we need to first decide whether or not the Redbox deal is unbeatable. If it’s not, that is, if the other home movie alternatives can still compete with Redbox, then Redbox cannot be blamed for killing the value of the home movie market. If Redbox, is in fact unbeatable, and it ends up dominating the other alternatives, then we still need to decide if Redbox’s $1 rentals will put a dent in the value of the home movie market.

Is Redbox Unbeatable?

At a dollar a pop, the Redbox rentals sound pretty unbeatable. But are they really? Let’s consider each of the various alternatives for buying or renting a movie as a bundle of characteristics, together with the price you must pay for that bundle. Then we can decide whether or not the Redbox bundle will dominate the future home movie market.

The major factors viewers probably consider when deciding how to go about getting a movie to watch are

Price: What’s the price of the movie?

Period: How long do I get to keep the movie for?

Frequency of Viewing: How many times can I watch the movie while it’s in my possession?

Requisition: How do I get the movie into my hot little hands?

Variety: What variety of movies do I have to choose from?

Info Available: What type of information do I have at my disposal to consider when choosing from the movies available to me?

For each of these six factors I provided a simple 3-tiered ranking of L, M, or H:

L: Bad / Low / Limited / Inconvenient

M: Medium

H: Good / High / Unlimited / Convenient

for each of the purchase/rental options available:

Buy a DVD – I assumed from a store, but you can also buy them online

Rent a movie from a store (e.g., Blockbuster)

Purchase Video-on-Demand through your cable or satellite service

Rent a movie from Netflix

Rent a movie from Redbox

Below I provide a table that displays in color-coded form the rankings for each of the major factors for of each of the purchase/rental options.  In an attempt to provide a visual summary of the information in the table that’s easier to digest, I also use a bar graph to display the same information, where the number of features are represented as colored bars and correspond to the labeling on the left axis, and the price is represented as big black dots and correspond to the right axis. 

 

So what does my “analysis” tell me?

If I assume that you buy the movie online, then you have the added benefits of not having to go down to the store and of being able to get more information on the movie than you’ve ever wanted through IMDB.

Renting a movie through Netflix is similar to buying a movie online, but if you want to keep the movie forever you have to pay $9 a month. So if you want to keep the movie for more than three months (and not be able to get any others from Netflix), then you would be better off buying the movie. Alternatively, if you rent two or more movies a month, then the individual movie price for renting from Netflix drops to under the price of renting movies from a store or on-Demand.

Video-on-Demand costs the same price as renting through a store, but you get the added convenience of not having to leave your home to get the movie. Of course you “pay” for this convenience, by sacrificing the ability (1) to see the movie more than once, or, more importantly, (2) to select from a wide variety of movie offerings.

The graph makes it a bit easier to see that while the price of Redbox movie rentals is lower than that of the alternatives, Redbox also provides fewer features than the other options do, namely, the Redbox option lacks both information and variety of selection. On the other hand, if you know what you want, and what you want is a “new mainstream release”, then Redbox provides a good deal for you.

To summarize, my analysis tells me that while Redbox does offer a lower price than the alternatives, it also offers fewer features that viewers may, in fact, be willing to pay the added costs for. In particular,

Viewers who like to watch the same movie over and over again whenever they want will get the most value from buying the movie.

Viewers who like to watch a lot of movies, and/or select from a wide variety of offerings and/or who like a lot of information on their choices will get the most value from renting from Netflix.

Viewers who watch less than two movies a month will do best by:

Renting on Demand if they’re happy with the limited offerings and/or if they really don’t want to leave the house.

Renting at a video store if they like a wider selection of movies or they like to browse through the selection, and they don’t mind going out to get them.

Renting at a Redbox if they know they want a “new mainstream release” or they plan o sleep through the movie (or do something else other than watch the movie).

If viewers don’t sufficiently value the features the other alternatives have to offer, but instead, they see price as the driving feature, then Redbox could indeed force other alternatives out of the market.

The closest substitute for Redbox is the traditional video rental store. The article indicates that the market research company NPD Group expects Redbox and other vending machines to take significant market share from traditional stores over the next year. This makes sense, considering that many people who rent from traditional stores are happy with a selection limited to new, mainstream releases, and would therefore choose the lower price at Redbox over the higher price charged by their local video rental store.

Video-on-demand also provides a good substitute for Redbox. There are surely plenty of viewers with access to on-demand who would rather spend the extra money in exchange for not having to leave their homes to go out in search of a video rental store or kiosk. However there are probably also enough viewers with access to video-on-demand who would be happy to run out and pick up a movie at a kiosk (or pick up a movie while they’re at the supermarket) to save a few bucks. So I can also see Redbox taking market share away from on-demand, in addition to the gains from traditional movie rental stores.

 

Will Redbox Cause the Value of the Home Movie Market to Plunge?

Consider both (1) the pool of viewers who are considering buying X-Men Origins: Wolverines, which has recently been released on DVD, and (2) the features associated with renting or buying that DVD, as presented in the table above, “Features of Alternative Video Purchase/Rental Options”. That pool is comprised of viewers who have differing values for each of the features in the table. In particular, some viewers are less sensitive to price and care more about being able to watch the movie over and over again. In contrast, other viewers are more sensitive to price and care less about being able to watch the movie many times. Let’s now line up all the viewers who are considering buying X-Men Origins, putting the people with the highest willingness to pay (i.e., those who are least sensitive to price) at the top and the people with the lowest willingness to pay (i.e., those who are most sensitive to price) at the bottom.

Say there was an option available where viewers could purchase a DVD for half the full price, where the DVD would self-destruct after a month. There is a portion of viewers at the bottom segment of the X-Men Origins line who would rather buy the self-destructing copy for half the price than pay the full price for a regular, permanent (until the next technology comes out and makes DVDs obsolete) copy of the DVD. And if you go all the way to the bottom of the line, there is a small portion of viewers who would rather pay $1 to rent the movie for a night, instead of paying $25 to buy the movie.

With the $1 a day kiosk rental from Redbox available to viewers, it is that small portion of viewers at the very bottom of the heap that will forego purchase of X-Men Origins in favor of a Redbox rental when the option is available to them.

Let’s line up potential renters of X-Men Origins the same way, making separate lines or piles for rent-by-mail viewers and traditional store rental viewers. When the Redbox kiosks are (become) available, it the viewers at the bottom of each pile, the one’s who are most sensitive to price, who will stop renting from Netflix or Blockbuster in favor of renting from Redbox.

The same description applies to both potential renters of DVD by mail and potential renter of DVD from traditional stores.

The movie studios are worried that the kiosks will steal away large portions of the potential buyers and renters and reduce them from $25 or $5 transactions to $1 transactions. That is, the movie studios would portray Redbox’s encroachment of the home market for DVD sales and rentals as follows:

 

However, research cited by Redbox’s President suggests that a more accurate portrayal of Redbox’s impact would look something like this:

These two illustrations portray the quantity side of the market. Now let’s consider the price side. Prices for DVD sales and rentals are determined based on the compositions of the pools of potential buyers and renters. As I discussed above, these pools are comprised of heterogeneous viewers, who assign different weights to each of the various features associated with the purchase or rental of a DVD.

Before the kiosks came along, there was portion of viewers (at the bottom of each segment’s heap) who cared most about having low prices for sales and rentals, relative to the amount of value they assigned to other features, such as variety of offerings or information available. As Redbox’s entry into the market has expanded, it is stealing away from the established market segments these portions of viewers who care primarily about price. This means that what is left in each of the established segments (buy, rent by mail, and store rental) are those viewers who value features other than having a low price. As such, by emphasizing the other features, say, buy having the other segments expand more into niche film markets, providing a larger variety of information and recommendations, providing different options for duration of rental, these established segments might be able to increase their purchase or rental prices to their remaining pools of viewers.

I would thus conclude that Redbox’s entry into the home movie market should not necessarily cause the value of the industry to plummet. Yes, Rebox is cutting into the revenues that would have been generating by established segments. However, Redbox is also expanding the market for rentals, and its presence is enabling sellers and renters of movies to cater to their viewers who value features other than being able to see a movie for a buck. 

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