Redbox 2005 Annual Report Download - page 8

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maximum efficiency and perform maintenance on a cost-effective basis. These proprietary features allowed us to
achieve availability rates on our coin-counting machines of approximately 95% in 2005, which underscores our
reputation for providing reliable service. Our vouchers are encrypted using our proprietary technology to
minimize the potential for losses associated with voucher fraud. We believe that the combination of our
proprietary technology and reliable machine performance results in a preference for our services compared to our
competitors.
Barriers to entry. We believe that our proprietary network of coin-counting machines combined with our
wide geographic reach and existing relationships with our coin and entertainment services retail partners, would
require a substantial investment of time and resources for other companies to enter the market and compete
effectively against us in the self-service coin-counting and entertainment services markets. In the last 12 years,
we have invested more than $340 million in capital equipment and research and development to build our coin-
counting network, and believe that this investment represents a significant competitive barrier to entry. The scale
and size of our entertainment services operations allows us to achieve better economies of scale and provide
higher quality merchandise in our machines, which we believe increases usage, resulting in higher revenues for
us and our retail partners. We believe that any potential competitors in the skill-crane and bulk vending markets
would need to invest significant capital and secure relationships with large scale retailers in order to challenge
our leadership in those markets. In addition, we believe that our existing relationships with retail partners and a
broad range of product offerings in our e-payment business gives us a competitive edge in the e-payment services
space.
Consistent and diversified revenue streams and stable operating cash flow. Our revenues and operating
cash flows have increased each year for the last seven years. Our diversified revenue streams are mainly driven
by the service fees we charge our customers and the size and number of customer transactions. For example, in
our coin services business, the average transaction value over the last five years has remained stable at
approximately $36, while the annual number of transactions has grown from 35 million in 2000 to 62 million in
2005. A large proportion of our costs are variable, which allows us to maintain stable operating cash flows while
responding to changes in the business.
Growth Strategy
Key elements of our growth strategy include:
Leadership of the 4th Wall space. There is an area between the cash registers and the front door of retail
locations that we call the 4th Wall space, where many convenient and profitable consumer services are located.
We are a leader in providing consumer products and services in this space and our leadership in this area
positions us to continue to drive growth through the front of the store as well as differentiates us from other
suppliers. Our 4th Wall strategy has been the focus of our business development and acquisition strategy over the
past two years and will continue to drive our growth as we move forward.
Product and service expansion. In less than two years, we have transitioned from a one-product company
offering coin-counting services to a business with a variety of products and services for the 4th Wall. We now
offer self-service coin counting, e-payment services and entertainment services. In addition, through our strategic
investments in DVDXpress and Redbox, we now offer DVD rentals through self-service kiosks. Additionally,
our Coin to Card™ program, where customers receive gift cards instead of cash vouchers from our coin
machines, is an example of how we are beginning to leverage our coin-counting network driving incremental
transactions. We expect to continue to add products and services to our existing kiosk businesses through our
acquisitions, strategic alliances and product line extensions, as well as explore other services designed to drive
traffic to the front end of retail locations, the 4th Wall.
Place more units. We expect continued growth through new distribution; both new channels and cross-
selling activity among the products and services we offer. At December 31, 2005, we had more than 65,000 retail
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