BRINGING INNOVATION TO MARKET

Lessons from a Dying Business

Redbox has built a successful DVD kiosk business, but its days are numbered. Here's why that's not such a bad thing.
Redbox is an excellent example of how to create growth from a business that will ultimately die.
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You’re probably familiar with Redbox, owner of those DVD-rental kiosks that you see parked outside of just about every neighborhood grocery store or pharmacy. Redbox is an excellent example of how to create growth from a business that will ultimately die. All growing companies can benefit from thinking more like Redbox.

Redbox has grown over the past decade by offering the convenience of DVD rentals via self-service kiosks. Owned by Coinstar (CSTR), RedBox revenues grew at a 73 percent compound annual growth rate (CAGR) between 2008 and 2010; in 2011, revenues are expected to grow 28 percent, topping $1.4B.

Strong operational management–supported by rigorous data analytics that tailored DVDs for specific neighborhoods–has enabled RedBox to grow operating income at a staggering 96 percent CAGR over that same fiscal period.

Redbox’s days, however, are numbered. In its current form, Redbox’s DVD business will eventually go the way of Blockbuster’s retail business, and be eclipsed by other ways for consumers to watch their favorite movies.

But here’s the twist: A business in decline can make money, and sometimes even grow profits in the process. Similar to Earthlink and AOL in the dial-up Internet space, Redbox has found a way to make money, lots of money, by “riding the tail” and providing a profitable product to customers until the window closes.

Redbox knows that for a period of time, maybe 10 years or more, a segment of consumers will want to pop in a DVD that they can order cheaply, on the fly, and without a subscription. Redbox appeals to convenience conscious consumers who want to pick up a movie on the way out of the grocery store and return it the next day, no strings attached.

Coinstar understands the end game; it’s already developing new kiosk concepts that will eventually replace the DVD rental business. Coinstar employs both internal and external innovation networks to incubate and commercialize the next generation of self-service kiosk solutions.

Its annual “Next Big Idea Contest” is the most visible of these external innovation efforts; over the last few years, this contest has produced new ideas such as pay-as-you-go product sales, as well as tax, money transfer, and coffee kiosks.

Here’s what you can learn from Redbox’s model:

No. 1:  Identify the likely “shelf-life” of your current product or market

No. 2: Explore strategic alternatives for maximizing the value during the shelf-life and quantify each

No. 3: Build an innovation plan and engine around your strategic assets; invest in new business models to replace lost revenues and profits as your existing market wanes

Ten years from now, when the DVD rental business goes the way of the dinosaur, Coinstar will have developed new growth businesses and in the process, generated significant cash for its shareholders.

Last updated: Dec 13, 2011

KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale

Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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