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

Redbox Automated Retail LLC aims to transform its $2-a-night DVD rental business into a billion-dollar-a-year digital media enterprise, and it is relying on a combination of its loyal consumer base and Wall Street to get it there.

Redbox projects that it will double its revenue in the next two years, largely by converting many of its 40 million customers from disc rentals to streaming, according to documents detailing its planned signing a reverse-merger with blank-check firm Seaport Global Acquisition Corp.

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This is one of a two-part series on the evolution of Redbox. The second part, a Q&A with Redbox CEO Galen Smith, can be found here.

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

Additionally, the company plans to grow revenue from streaming partnerships with Netflix Inc. and Hulu LLC, as well as from a third-party kiosk maintenance business that services Amazon.com Inc.'s locker-based pick-up locations, Redbox CEO Galen Smith said in an interview with S&P Global Market Intelligence.

Streaming analysts questioned the feasibility of Redbox's revenue goals, saying the company would be hard-pressed to achieve such growth through its digital business alone. But they acknowledged the value of Redbox's ready-made customer base.

Redbox said its loyalty program has 39 million members. The program offers incentives for customers to keep coming back to Redbox's DVD rentals and digital services, which include video-on-demand and free ad-supported TV. While that tally is well below the 207 million global subscribers Netflix reported at the end of the first quarter or the 100 million subscribers The Walt Disney Co.'s Disney+ touted in March, it is in line with the 36 million global streaming subscribers ViacomCBS Inc. recently reported and the 44.2 million HBO network and HBO Max streaming customers Warner Media reported in the U.S.

Revenue projections

Redbox, with its affordable, no-contract kiosk model, was one of the last innovators in the DVD trade as the burgeoning world of streaming video began swallowing video stores. Founded in 2002, Redbox during its heydays enjoyed a majority share of the disc rental market. In 2015, it reported revenue of $1.76 billion.

But Redbox ultimately found itself on the wrong side of video history as consumers moved away from physical media. The company reported $546 million in revenue for 2020, down 34% year over year, a decline that the company attributed in part to the much slower pace of new film releases during the COVID-19 pandemic.

Looking ahead, the company projects revenue will grow to $1.11 billion by 2023 as its business model evolves. The SPAC transaction affords a company seeking public capital more legal protection on forward-looking statements than a traditional IPO. However, Smith stressed that Redbox's decision to go public via SPAC was about moving forward more quickly and not any concerns about its financial projections.

"We are at a really interesting time in our space, and we know we can take better advantage of it the quicker we move. So a SPAC becomes a more efficient way to go to market," Smith said in an interview. The Redbox CEO was formerly CFO of Outerwall, Redbox's parent prior to its 2016 acquisition by private equity firm Apollo Global Management Inc. "I wish there was an opportunity to not include projections, but that's just how the model works," Smith said.

M&A in Focus: Join our SPAC webinar and hear thought leaders discuss first-half deal volumes, key trends among specific sectors and the outlook for the rest of 2021.

University of Florida finance professor Jay Ritter said the SPAC model makes sense for a company like Redbox that is in the midst of evolving its business model.

"Here's a company where its business has been collapsing, but it's got a story to tell about how it's been turning around with online growth," Ritter said in an interview. "The advantage of the SPAC merger is they're able to make this presentation."

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Evolving strategies

Some media analysts questioned how effectively Redbox could convert technological late adopters, which account for 70% of its current customers, to the digital realm.

"Late adopters are not the people using streaming services," said Dan Rayburn, streaming media consultant and principal analyst for Frost & Sullivan. To succeed in streaming in today's market, a platform needs billions to invest in original content, a sound core business rooted in streaming and a digital native customer demographic, he said.

Kagan analyst Seth Shafer also noted competition in streaming is growing, particularly as deep-pocketed studios like Amazon, Disney and Netflix expand their offerings. But Shafer believes Redbox's loyal customer base could help it gain a foothold.

"They have a pretty good existing database, so it's not like a company like Quibi that was launching from scratch," Shafer said, referring to a short-form video platform with Hollywood investors that launched in 2019 and folded in 2020 after failing to catch on with the public.

Redbox's CEO argued that the company's late-adopting customer base presents an opportunity, rather than a hurdle. Given the high cost of pay TV subscriptions and the growing market around streaming, Smith said he expects Redbox's value-conscious viewers will increasingly drop their satellite and cable pay TV packages and shift to digital video — especially ad-supported free video — in the coming years. The average U.S. multichannel TV subscription in the U.S. was $102 per month in 2020, according to data from Kagan. Meanwhile, broadband-only service to the average home was just $57.

Kagan projects broadband-only homes will exceed traditional multichannel homes by 2022.

New revenue streams

While assembling a bundle among various subscription video services like Netflix and Hulu can exceed the cost of a pay TV subscription, many companies are now offering free streaming video platforms supported by advertising revenues.

That includes Redbox. In 2020, it launched the advertising-based streaming platform Redbox Free Live TV. Such ad-supported platforms have been growing in the U.S., offering free streaming options for linear-like viewing. While Redbox is well behind other well-funded competitors like Pluto TV and Tubi, Smith believes the free offering will provide an easy entry point for many of Redbox's existing customers that have yet to try ad-based streaming.

Redbox also has a transactional on-demand streaming platform it launched in 2017, which allows consumers to access new release films online, and it provides sign-ups to other streaming apps, like Netflix, Showtime or Hulu, for which it gets a portion of the subscription fee.

Redbox is further betting on growth in its kiosk services business and Redbox Entertainment studio. The company employees a team of maintenance professionals that service its 40,000 kiosks nationwide, and in recent years, it has begun to contract to service third-party kiosks, including Amazon Lockers. This rapidly growing business accounts for an outsized share of the company' legacy DVD-based segment's growth projections, Smith said.

Meanwhile, Redbox Entertainment, the company's studio, is focused on licensing and distributing original content across its own platforms and to third parties. As of the merger announcement, Redbox Entertainment had released 16 films, and it is targeting 36 per year. While this number is small compared to the vast original pipeline at Netflix, Smith noted it is still a revenue opportunity. Redbox Entertainment splits production costs with filmmakers, and it releases films in a windowing model. For example, Redbox last year distributed the film "The Lost Husband" as a premium video on demand option, then for rental on its kiosk and on transactional video on demand, and then added additional licensing revenue when Netflix picked up streaming rights on its subscription platform.

The company's production studio is also looking at slate deals. It recently signed an agreement with Basil Iwanyk's Thunder Road Films, the studios behind the John Wick franchise, to make 10 to 12 action films over the next two years in the $10 million to $15 million budget range.