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The candy machine just sold me an iPod

Popping up in military bases, airports, fast-food restaurants, and hospitals is a new kind of vending machine that offers everything from a DVD rental to a digital camera.

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The industry has a lot of room for growth, if Japan is any indication. The United States currently has 400,000 self-service kiosks, according to the Self-Service & Kiosk Association, based in Louisville, Ky. That works out to about 1 machine for every 750 Americans. In Japan, there is 1 vending machine for every 23 people, according to the Japan Vending Machine Manufacturers Association.

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"They use vending machines for everything," says David Drain, executive director of the Self-Service & Kiosk Association. "They can buy a train ticket or a Coke with a mobile phone and all of it is a 24-hour service."

In the US, the most visible transition from conventional to automated retailing is in the video-rental market. Redbox, a Chicago area company specializing in $1 DVD rentals, launched its self-service kiosks in 2004. Five years and 19,000 units later, it was renting 350 million DVDs.

That poses a big threat to the traditional video-rental market. From 2008 to 2009, market share for bricks-and-mortar video-rental stores dropped from 63 percent to 47 percent, according to NPD Group, a market-research firm based in Port Washington, N.Y. In that same period, vending machines' share of the market grew from 9 percent to 20 percent.

Blockbuster joins the move

Not to be outdone, Blockbuster is also entering the self-service market. Through a partnership with NCR Entertainment, it launched Blockbuster Express, a series of automated kiosks renting videos for $1, in 2009. The company has already deployed 4,000 kiosks and expects to reach 10,000 by the end of this year.

NCR plans to go further into the entertainment field by launching kiosks that burn DVDs to "Secure Digital" memory cards, which allow the movie to play for only a short period of time, although the cards themselves can be reused..

One of the industry's biggest remaining hurdles is cost. Machines can run to $40,000 apiece. "If you're selling razor blades you have to sell a lot of product to recoup your cost," says Mr. Drain.

However, automated retail may help retailers manage costs, says Rory Gardner, an analyst with VDC Research Group, a Natick, Mass., company that studies the self-service industry. "Not only can self-service help you change the way you interact with current or potential customers, it can also help you change your retail landscape a little bit – not taking the place of employees, but allowing retailers to redistribute employees to more appropriate tasks."

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