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The Honolulu Advertiser
Posted on: Sunday, April 30, 2006

McDonald's ventures into DVD rentals

By JOSHUA FREED
Associated Press

Chris Kliner and his daughters, ages 4 and 5, select a rental DVD from a Redbox machine at a suburban Minneapolis McDonald's, where they had stopped to eat.

JANET HOSTETTER | Associated Press

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MINNEAPOLIS The big red vending machine at the McDonald's whirs and hums and spits out rental DVDs of "Chicken Little" and "King Kong" and maybe, if McDonald's is lucky, profits.

Machines run by McDonald's Corp. subsidiary Redbox Automated Retail have popped up in Golden Arches restaurants in several cities in an experiment to see whether they drive more customers into the stores. Rental chain Movie Gallery is experimenting with DVD rental machines, too, saying the machines will make rental transactions easier for customers and make its stores more efficient.

The spread of DVD rental machines comes as rental stores are struggling under a business model that hasn't changed much from the mom-and-pop video stores of 20 years ago. The rental business has suffered from the sale of cheap DVDs, rent-by-mail services like Netflix Inc., and expanding video-on-demand from cable companies.

"We think it's a tremendous opportunity," said Greg Waring, Redbox's vice president of marketing. "We think we're providing a new model for the industry that is going to be difficult for the traditional retailers to compete against."

About the size of a soda machine, each Redbox machine holds 500 discs and has a touch screen so customers can pick a movie, and a credit-card reader for the $1-a-night fee. The machines don't take cash. Customers return the movies to the machine.

Signs near the machines promote the movies kids' titles down low, movies for grown-ups on top. Redbox staffers load newly released DVDs each Tuesday. Redbox workers at the headquarters in Oakbrook Terrace, Ill., can monitor which titles are renting the most in each machine and adjust their selection accordingly. Generally there are 50 to 60 individual titles.

McDonald's came up with the idea in 2003 as it looked for ways to draw more people into its restaurants. It began experimenting with the machines in Denver in 2004 and now has 750 machines in restaurants in cities such as Minneapolis and St. Paul. Its Redbox subsidiary isn't waiting to see how the McDonald's experiment turns out. It has placed the machines in 75 grocery stores, and has signed agreements for 400 more grocery locations.

This summer, the company plans to let customers go online to check title availability in a particular location and rent a movie on the spot for pickup at that machine later.

Waring said the Redbox market share of all DVD rentals in Denver is in the low- to mid-teens, and that includes Netflix customers. Redboxes there average about 1,200 visits a week, including both the rental and return visit, Waring said.

"We have some very aggressive projections in terms of our growth, led by McDonald's locations," Waring said. "There's over 13,000 McDonald's restaurants in the U.S. We foresee a day when we're in the vast majority of those."

In Apple Valley, a suburb of the Twin Cities, Chris and Teresa Kliner stopped at a McDonald's for both a meal and a copy of "Chicken Little" for their daughters to watch. The Kliners used the machine to avoid signing up at Blockbuster to rent a single movie.

"With kids, it's easier this way, because they're not running all over the store," Teresa Kliner said as daughters Olivia and Analiese played on the slides at the restaurant's indoor playground.

While sales are growing quickly, Redbox doesn't appear to be profitable yet, judging by comments made by minority investor Coinstar Inc., a vending company based in Bellevue, Wash.

Coinstar spent $20 million in December to buy a little less than half of Redbox, while McDonald's retained a majority stake. Coinstar also loaned $4.5 million to another DVD vending operator, DVDXpress, and sales at those two businesses combined grew more than 85 percent between the third and fourth quarters of last year, Coinstar CEO David Cole told analysts in February.

But Coinstar also predicted Redbox will lose money this year $4 million to $5 million for Coinstar's share of the company. That works out to $8.5 million to $10.5 million overall. Waring declined to comment on Redbox's losses, other than to say the machines themselves are profitable.

The Movie Gallery rental chain is also experimenting with rental machines. Chief financial officer Tim Price told analysts on Nov. 10 that its machines will hold at least 1,000 DVDs, and some as many as 5,000, and can be used 24 hours a day.

"We're very early in the results, but still very, very encouraged," Price said.

Wedbush Morgan Securities analyst Michael Pachter said he believes Movie Gallery is aiming to cut store hours, leaving the machine to rent movies even when the store is closed.