Gregg Kaplan: Evading the Death of Redbox

Entrepreneurship is not a glossy, frilly, easy way of life; Gregg Kaplan’s incredible, at times humorous, speech evidences to the aspiring Investment Club members that becoming a successful businessman means enduring obstacles, fighting for survival, and sometimes just doing what’s necessary to see tomorrow.

Kaplan first described his educational background, which served as a foundation for his future success. He was a Philosophy major at the University of Michigan, and after college he did what all good philosophy majors do: he went to Wall Street to be an investment banker. The perception of an investment banker of being a sophisticated, globe-traveling, finance-midas was quickly debunked by Kaplan, who described his experience being the low-man on the totem pole, working 100 hours a/week and earning “luxurious” trips to the sparkling destination of Newark, New Jersey. Despite the hardships, Kaplan began to get interested in entrepreneurship. He enrolled in Harvard Business School, graduated, then worked at a grocery delivery service and an internet incubator before finally arriving at McDonald’s.

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At the golden arches, Kaplan was part of a team that was looking for different concepts for McDonalds. One of these concepts was vending: in the industry, his team saw potential for improvement, especially as the age of credit cards and touch screens loomed large on the horizon. To illustrate their perception of vending, Kaplan give the ATM analogy: ATM’s were introduced to save the bank money on tellers, and initially they weren’t popular. However, over time, once people starting using the ATM’s, they never went back to the tellers. Thus, Kaplan looked for a similar model in automated retail. He and his team scoured the market for ideas; maybe a french fry vending machine, or an automated convenience store (although refrigerated toilet paper was not a big hit). Eventually, they found a VHS rental machine, asked to retrofit it for DVDs, and all of a sudden Redbox, in its most primitive state, was born.

The idea had hatched; next, Kaplan and his team developed the business model. They tried charging $3 or $4 for a little while; it wasn’t right. His team tinkered with the capacity of DVDs: 1000 titles was too much, 20 was too few. Finally the group launched the price of $1 a day, which was supposed to be a three month promotion; it lasted eight years. At that time, with RedBox still so young, Kaplan encountered Near Death Experience #1: a new McDonald’s CEO, Jim Cantalupo, ascended to power, and didn’t care so much for a DVD machine, threatening to cut Redbox. Kaplan quickly responded, without knowing the full scope of what his rebuttal would mean, that Redbox could help McDonald’s sell more burgers and fries. Cantalupo’s interest piqued, he gave the operation $10 million and ordered for a rollout of Redboxes in Denver.

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Denver represented Near Death Experience #2: at the beginning, although it seemed that the Redboxes were helping with food sales (which Kaplan said could’ve been attributed to the nature of change: people like change), there were problems with the mechanisms. The Silicon Valley company they had hired couldn’t come through with larger machines. As a result, Kaplan and the Redbox employees were forced to babysit the machines; he remarked that hiring midgets to man the machines probably would’ve worked better. In the end, despite the malfunctions, the Redboxes kicked butt in Denver, while also driving up McDonald’s sales. Management’s orders: expand across the country.

A Redbox Kiosk

An expansion seemed like the spark that would bring Redbox to ultimate DVD rental power, as the machines were installed in six major markets, with millions of dollars in advertising behind them. Yet, another blip registered on the Redbox radar, casting Kaplan and his group into Near Death Experience #3. The company needed better machines, plain and simple. In Minneapolis, the Redboxes weren’t working. People became incensed, as the machine wouldn’t give them the DVD; another problem was the machine failing to take DVDs back, turning day-rentals into week-charges. Again, Kaplan and the Redbox employees babysat the machines, and again business began to boom.

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From the brink of death, Redbox soon began to charge forward with a full head of steam. Machines were being churned out, installed, and money flowed like a river. At one point the company installed a new machine every hour of every day for an entire year. The number totalled 44,000, as Redbox went from $0 to $1 billion in revenue in just seven years.

As Redbox approached its peak, the stage was set for the largest near death experience of them all, a studio showdown. One day, as Kaplan was expecting representatives from Universal Studios to show up and negotiate a direct deal, instead he was met with lawyers from the company arriving to threaten to put Redbox out of business. Two other major studios-Warner Bros. and Fox-followed suit, and said that distributors could no longer sell DVDs to Redbox. Redbox relies on the DVDs from these studios; without them, disaster lay in waiting.

What did Kaplan do in response? Redbox sued the larger studios for antitrust violations, saying these entertainment behemoths were preying on a smaller company. In the meantime, while the lawsuit was being fought for, Kaplan had to do whatever he could to help Redbox survive: they turned to Walmart. Each time a new release from the behemoth-studios arrived in stores, the employees at Redbox flocked to the stores, buying up the DVDs and putting them in the machines. The studios were outraged; they went to Walmart and complained. Walmart, stuck between two revenue sources, compromised: Redbox employees could still buy the DVDs, but there was a five DVD limit in the stores. Kaplan said that for each employee to fill the demand for the DVDs in the Redboxes, they would need to buy close to 500, sometimes more Kaplan and his 1500 employees would spend hours in the early mornings after a big release venturing hundreds of times back-and-forth into Walmart, keeping Redbox afloat 5 DVDs at a time. Eventually the judge in the antitrust case told Kaplan they’d have a good case, and the studios reopened negotiations.

To end the presentation, Kaplan spoke a little bit about other issues the company faced: freezing machines in Minnesota, as well as scaldingly hot screens in Phoenix. He also let the Investment Club members know what happens to DVDs after their time in the machine is up: they are all shredded as part of the deal with the studios. Finally, Kaplan shared some advice for the future entrepreneurs, ranging from simple to more psychological. Firstly, do well in school. Secondly, align yourself with good people. Finally, with an allusion to the famed Marshmallow study, Kaplan warned against caving into instant gratification, preaching patience, for patience is a virtue when you find yourself scurrying in and out of Walmart hundreds of times just so that your business will live to see another day. Today, Redbox has $2 billion in revenue and 42,000 kiosks in operation. Over 68% of the US population lives within five minutes of a Redbox kiosk.

Gregg Kaplan answers a question
Gregg Kaplan answers a question

This post was written by Ben Osterlund. Photos and videos by Ben Silverman. Edits by Noah Silverman.

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