Redbox 2007 Annual Report Download - page 8

benefits to our retailers that are superior to or competitive with other providers or systems (including coin-counting
systems which retailers could operate themselves or through a third party) or alternative uses of the floor space that
our machines occupy. If we are unable to provide our retailers with adequate benefits, we may be unable to maintain
or renew our contractual relationships on acceptable terms causing our business, financial condition and results of
operations to suffer.
We do a substantial amount of our business with certain retailers. For example, we have significant
relationships with Wal-Mart Stores, Inc. and the Kroger Company, which account for approximately 25% and
12% of our consolidated revenue, respectively for the year ended December 31, 2007. Our entertainment services
relationship with Wal-Mart is governed by a contract that Wal-Mart may terminate at any time. Cancellation or
adverse renegotiation of these relationships could seriously harm our business and reputation.
We may be unable to identify and define product and service trends or anticipate, gauge and react to chang-
ing consumer demands in a timely manner.
To be competitive, we need to develop new products and services that are accepted by the market and establish
third-party relationships necessary to develop and commercialize such products and services. For example, toy and
other products dispensed in our entertainment services machines must appeal to a broad range of consumers whose
preferences cannot be predicted with certainty and are subject to change. If we misjudge the market for our products
and services, or if a contract with a significant retailer is renegotiated, we may be faced with significant excess
inventories for some products, such as toys and other entertainment products, and missed opportunities for sales of
other products and services. Further, in order to develop and commercialize new non-entertainment products and
services, including our money transfer business, we will need to enhance the capabilities of our coin-counting
machines and e-payment machines and equipment, as well as our related network and systems through appropriate
technological solutions, and establish market acceptance of such products or services. We cannot assure you that
new products or services that we attempt to commercialize will be successful.
Our most extensive business relationship is with Wal-Mart, and changes to this relationship have had and
are expected to continue to have material effects on our operations and results.
A significant amount of our resources are committed to our relationship with Wal-Mart, including investments
in machines and other equipment and management’s time. In late 2007 and early 2008, we and Wal-Mart worked
extensively to revise our business arrangements in connection with Wal-Mart’s efforts to reset and optimize its store
entrances. As part of these arrangements and in light of the successful completion of our coin and DVD tests in
hundreds of Wal-Mart locations, we amended written agreements covering, among other things, the installation and
service of coin-counting machines and DVD kiosks. Although these arrangements do not provide for a minimum
number of installations, based on our discussions with Wal-Mart, we expect to install up to 2,700 additional DVD
kiosks and up to 2,000 additional coin-counting machines in Wal-Mart stores in the next 12 to 18 months. As a
result, between early 2008 and mid-2009, we are making significant investments, such as machine and kiosk
manufacturing, in line with these expectations. In addition, as part of this arrangement, we will remove or relocate a
substantial number of its entertainment machines in Wal-Mart stores.
Although we have had and expect to continue to have a successful relationship with Wal-Mart, changes to this
relationship will continue to occur both in the long and short-term, some of which could adversely affect our
business. Further, because our formal arrangements with Wal-Mart are generally for relatively short periods and do
not provide for minimum installation obligations by Wal-Mart, much of our benefit in this relationship will depend
on the execution of Wal-Mart’s plan and the installation of significant numbers of our coin-coin-counting machines
and DVD kiosks.
The entertainment services market has brought with it risks that could adversely affect our business, operat-
ing results and financial condition.
In July 2004, we entered the entertainment services business. This business now represents a significant source
of our revenue and is associated with various financial and operational risks. However, we may be unable to
leverage the comparatively lower margin entertainment services business with our other lines of business to produce
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