Iowa pair's kiosks follow movie-rental shifts in U.S.

Fire up the popcorn, movie lovers, because this probably beats whatever's in the DVD player right now.

It's an action tale, a story that opens with sweeping views of a crowded video rental industry, where once-mighty retail stores are steadily losing ground to Internet downloads, do-it-yourself kiosks and do-it-by-mail home delivery services.

Our stars: Two 25-year-old Iowans, both cell-phone entrepreneurs, who now find themselves with a chance to develop into major players in the Iowa distribution of killer robot and vampire romance films.

The ending: For Justin Sloan and Adam Landis, it's not yet written, but potentially happy.

Sloan and Landis, who launched their first movie rental box eight months ago, say they are nearing the end of an eight-store test phase and have begun a push to place movie vending machines in all 96 Fareways during the next 12 or 18 months. Their Cedar Rapids company preaches customer service, and its stated goal is to make it as easy as possible to grab a movie on the way home, along with that quart of milk.

''We saw the future of movie rentals as not being 6,000-square-foot stores with 12 employees,'' Sloan said. ''The future of movie rentals is whatever you can do to give customers convenience where they already shop at.''

Fareway gets an unspecified sliver of the new kiosk revenues but bears no cost for the machines.

''Right now, we're seeing a value in it,'' said Jeff Sterns, director of sales at Fareway. ''We're not looking to replace Blockbuster Video. ... We have nothing in it.''

Competitors weigh in

Sloan's company, which is called Premier Movie Group but will do business on the Internet at farewaymovies.com, already has at least one fan - the manager of a Des Moines-area video store expected to close next month.

Movie Gallery Inc., which operates more than 2,600 U.S. movie rental stores under the Movie Gallery, Hollywood Video and Game Crazy names, filed for Chapter 11 bankruptcy protection Feb. 2. The company - second-largest in the nation, behind Blockbuster - struggled to compete with Blockbuster, Netflix, Redbox and others while juggling huge debts.

It has announced immediate plans to close 760 stores. The list includes nine of the company's 14 locations in Iowa.

''Fareway has their own brand of machine,'' said the Movie Gallery manager, who declined to give her name out of fear that she might lose her severance pay. ''That's going to be good.

''To tell you the truth, I wish I would have thought of it.''

Jon Fridley, general manager at Video Warehouse in Des Moines, said Redbox and its red vending machines ''really made their presence known'' last summer.

''It took a few months for them to catch on, then we really started to feel it,'' Fridley said.

Fridley said business since has stabilized, with many customers returning to his store either because of its large selection of older movies or because they paid the cost of holding on to Redbox DVDs too long.

''It sounds like a great deal when they say $1 a rental, but there are definitely some drawbacks,'' he said.

Wall Street analysts apparently agree that the movie rental business of the future will belong to mail- and vending-machine-based companies. Even before Movie Gallery's second trip to bankruptcy court in three years, analysts ravaged Blockbuster last month when that company ended a lousy year by reporting lousy December sales.

According to Dow Jones Newspapers, Wedbush Morgan analyst Michael Pachter has estimated that Blockbuster's fourth-quarter rental revenues dropped $160 million from the previous year, while Netflix's grew by $90 million and Redbox revenues increased $85 million.

''Over the long term, it appears that customers are happy with the choice of convenience offered by Netflix and low price offered by Redbox, leaving Blockbuster with the waning customer base that desires broad selection'' not offered by Redbox ''and immediate gratification'' not offered by Netflix ''at full price,'' Pachter said in a note to clients.

Blockbuster tries kiosks

In a bid to cut costs, Blockbuster already plans to close about 1,000 stores by the end of 2011. Blockbuster officials in Iowa declined to comment earlier this year. Blockbuster also has said it hopes to have 12,500 of its own kiosks running in certain parts of the nation by the end of 2010.

So where might a bunch of new Blockbuster movie kiosks go?

Answer: Definitely not in Fareway stores.

''The goal with these kiosks is to be where people already are,'' Premier's Sloan said. ''At some point, the market will be saturated, if it isn't already.''

Landis said: ''You have to have these things in high-traffic areas like a grocery store or a Walgreens for this business to work. ... People try to put them in hospitals and gyms and places like that, and they just don't work.''

According to Redbox.com, that company already has machines at more than 19,000 locations, including many Hy-Vee and Dahl's supermarkets and McDonald's restaurants in central Iowa.

Sloan, the owner of three Premier Wireless stores in eastern Iowa, declined to disclose details of his company's contract with Fareway or to explain how the supermarket chain might benefit by dealing with Sloan and Landis rather than Redbox.

''We're the only people who will ever be in Fareway,'' Sloan said. ''Let's just say there are extreme benefits on both sides for us both being locally owned and locally run.''

For Sloan and Landis, the benefits include time to grow and develop their distribution network and movie library without have to fight for every location - at least for the next several years.

Both owners declined to speculate about further competition with movie retailers.

''If we never went beyond Fareway, I would be happy,'' Sloan said. ''But nobody's ever going to rule out anything.''