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Redbox CEO talks future of video entertainment as company's business evolves

Redbox expects cord-cutting will accelerate among its 40 million value-conscious consumers as the cost of pay TV subscriptions rises.

➤ Redbox Entertainment, the company's production studio, is aiming to ramp up to making 36 low-budget films per year.

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This is one of a two-part series on the evolution of Redbox. The second part, a look at Redbox's prospects, can be found here.

Redbox's SPAC-funded evolution from DVD rentals to digital media

➤ The company is experimenting with distributing content through various windows, including premium video-on-demand, lower-priced transaction video-on-demand or pay-per-view, and ad-supported platforms.

Redbox Automated Retail LLC, which is in the process of going public via a reverse merger with special purpose acquisition company Seaport Global Acquisition Corp., is aiming to evolve its business beyond its legacy DVD rental kiosks to include more revenue from streaming partnerships, ad-supported content and other business. The company, which specializes in distributing low-budget films, is attempting to coax the company's 39 million value-conscious loyalty program customers, many of whom are technology late adopters, to give digital media a try.

S&P Global Market Intelligence recently spoke with Redbox CEO Galen Smith about the future of Redbox and video entertainment in general. What follows is an edited version of that conversation.

S&P Global Market Intelligence: Considering the decline in the physical media trade and the crowded digital video space, how do you see Redbox competing today?

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Redbox CEO Galen Smith
Source: Redbox

Galen Smith: If you think about the natural trends that are happening, there is more and more cord-cutting. Consumers are looking for alternatives to what they normally watch, and we're giving them a linear option as well. [Linear media follows a programming schedule, rather than being accessed on-demand.] Our customers are very value-conscious. They're looking for a great deal, and because of that, free content serves them well and they're happy watching ads to monetize that.

So you're hoping to shepherd this value-conscious customer base into the digital space?

Yes. We believe there will always be a subset of the population that will love the physical side of the business, but the digital world and over-the-top services opened up whole new opportunities for content. We want to have this ecosystem that has more choice than anyone available when that consumer is ready to make that shift.

One of the things we found really interesting, we over-index relative to the general population among our consumer base for cable TV subscriptions, which to me is very surprising. [Cable TV subscriptions are] not a great value. As more and more consumers continue to cut the cord, we want to offer solutions like Redbox Free Live TV and our integrated channels platform.

You recently launched Redbox Entertainment to produce your own content. Can you offer some financial detail on that?

We look at it on a project-by-project basis. We tend to take up North American distribution rights, and these are not the movies for which we're competing with an Amazon or a Hulu in paying $50 million, $100 million, $150 million per movie. We're picking these up for a couple million dollars in terms of our minimum guarantee. The budgets we're looking at typically are $5 million to $15 million. And we're interested in entering into slate deals.

If you think about what's happening in the space, one of the downsides to the growth of all the subscription services and their buying out content is that it does limit who sees those movies, because you have to be a subscriber. They're buying out all rights. For us, we want to work with talent, because they care a lot about their art. They want to make sure as many people see it as possible.

For example "Shadow of the Cloud" has been one of our best performing films. It was released on Jan. 1 at a $20 [premium video on demand] price point. Now that's not the most interesting price point to our consumer base, but it absolutely worked as released through Amazon and iTunes. Then we released it at a lower-priced [transactional video on demand or pay-per-view], and then also in the kiosk. Then in May, we sold streaming rights to Hulu. So we're looking to monetize all those different windows and we're building this content moat for our ad-supported service.

Given the streaming shift and the challenges facing theatrical films, what do you think a mature industry looks like years from now?

I think you'll see a little bit of a hybrid structure in terms of theatrical and how it gets to the home. But the reality is windowing is a structure that maximizes the value generated from each piece of intellectual property. So having things that start at high value and move to low value is really in the interest of content creators. Starting with [premium video on demand], transactional video on demand and getting to subscription video on demand really maximizes that value, and I think that's going to continue.

To combat that I think you'll see streamers wade into more and more original content, and they'll make their own movies. There's going to be some shrinking of windows, but there's going to be continued pressure on direct-to-consumer subscription plays to show subscriber growth, show reduction in churn. That’s where someone like Redbox can drive retention through having additional benefits.

Do you think the big leap in streaming consumption during the pandemic was a high water mark that will recede in the near term?

[The pandemic] created a new level of the streaming market that will continue to grow, but with those [services] that are more established and more successful, I think you're seeing this challenge around "what's new." "What do you have for me lately?" Because of production delays across the board, it's going to be hard to get those shows out as quickly as you need to in order to retain those subscribers. That will change, but you're going to see a lot more [consumers] moving in and out of services, and so you're going to see a lot more pressure on subscriptions as people return to normal life.