As far as I can tell, Redbox targets a different consumer base from Netflix's. The majority of Redbox machines are placed outside of Safeways, Walgreens, Walmarts, 7-Elevens, and so forth. The sort of customer who rents DVDs from these machines is likely to be of lower socioeconomic status than your typical Netflix subscriber. He or she may not have a cable subscription, may not have high-speed internet access [1], and may deem Netflix's monthly fee to be too expensive. He or she could be a working-class parent, a college student on a tight budget, or maybe a reasonably affluent professional who, for one reason or another, doesn't consume enough entertainment to find Netflix worthwhile. On top of this base, you have a small proportion of ad hoc Redbox usage from people who happen to stop by, see a movie they can't get on Netflix, and check it out. And you have a very small proportion of film buffs who prefer the AV quality of physical media, like Blu-Ray.

Time will tell how long this strategy will work for Redbox. In their favor: their 36,000 kiosks are placed directly in the footpath of hundreds of millions of shoppers every week. (Walmart alone sees over 100M shoppers per week in the US, and 3,700 Walmart stores have Redbox kiosks). Working against them: broadband penetration, Netflix, Amazon, and the steady transition away from physical media.

[1] About a quarter of US households do not have high-speed broadband. That number will shrink over time, obviously, but perhaps not as quickly as we like to think it will.