Redbox New Year's Success Highlights Blockbuster Distress

The announcement that automated DVD rental operator Redbox set a record for movie rentals on New Year's Eve, at two million, is bad news for Blockbuster (BBI).

The success of Coinstar (CSTR)-owned Redbox, which operates self-service DVD rental kiosks out of retail and foodservice locations, signals how hard it will be for Blockbuster to meet the competitive challenges facing it. To deal with Redbox, Blockbuster has developed an alliance with kiosk maker NCR Corp. (NCR) for DVD rental machines that carry the retailer's brand.

NCR sees a value in the Blockbuster name, which is familiar to consumers and might make the uninitiated more inclined to rent from a machine. NCR has been aggressive in expanding its position in the DVD rental business. In early December, it acquired kiosk operator DVDPlay and announced plans to convert the 1,300 kiosks in that company's network to the Blockbuster Express brand name. The deal will boost the NCR/Blockbuster operation to 3,800 kiosks, but that's less than a fifth of the 20,000 kiosks Redbox operates in the United States. And Blockbuster's involvement is in the realm of a licensing deal. The advantage is that Blockbuster has little risk, but the disadvantage is that the retailer is working on a percentage and, so, can't reap the full rewards of any success achieved. On top of that, popularizing kiosk rental of DVDs actually makes Blockbuster's stores less valuable. The more places to rent DVDs, the smaller the percentage of consumer spending available to each.

Playing catch up with Redbox, which surpassed 350 million rentals nationwide in 2009, will be tough enough. Redbox already places kiosks in some prime locations including a lot of McDonald's restaurants as well as grocery and convenience store chains, not to mention a number of Walmart and Walgreen locations. And Redbox also has added services including online DVD reservations at redbox.com or via an iPhone app. Customers can make reservations and pick up their selections at the whichever of the operator's kiosks they choose.

Blockbuster recently announced a strategy to become a multi-platform entertainment retailer, but it looks to be hemmed in on all sides. The Redbox New Year's Eve success is a signal of the competitive pressure it faces from that quarter, and automated kiosks are only one vehicle being used to challenge Blockbuster for the home movie business. With competition from cable, satellite, phone lines, Wi-Fi, movies, even the public library, the flix biz is up for grabs.

The mail order business Blockbuster has been developing challenges the better known and well regarded NetFlix operation â€" which is consistently ranked as a top service web site â€" and its expansion into consumer electronics runs headlong into a battle occurring between Walmart (WMT), Amazon (AMZN), Best Buy (BBY), Costco (COST) and others. That struggle is driving down prices and prompting the addition of new services, developments that Blockbuster will be pained to match.

Blockbuster is facing a severe struggle in 2010.