Be Afraid, Netflix and Blockbuster

By Rick Aristotle Munarriz | More Articles
February 13, 2009 | Comments (5)

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If Netflix (Nasdaq: NFLX ) and Blockbuster (NYSE: BBI ) weren't worried about the shiny little Redbox kiosks spewing DVD rentals before, they’d better start sweating now.

Coinstar (Nasdaq: CSTR ) will be paying between $155.5 million and $176 million in stock and cash to buy the stakes in Redbox that it didn't previously own. Until now, Redbox was owned by an assortment of companies including Coinstar, a McDonald's (NYSE: MCD ) affiliate, and several other minority stakeholders.

Redbox has 35 million unique customers, renting DVDs for a reasonable ransom of a dollar a day through a fleet of 12,000 automated kiosks. They are primarily located in high-traffic areas of penny-pinching clientele like grocery stores, Wal-Mart (NYSE: WMT ) , Walgreen (NYSE: WAG ) , and McDonald's. The company claims to have 9% of the DVD rental market.

Redbox has already been a thorn in the industry's side with its marked-down new releases, so why should Netflix and Blockbuster be on notice now? Well, now that Coinstar owns 100% of the company, it's likely to put more muscle behind the initiative.

There's nothing wrong with a business venture having too many cooks in the kitchen. Sites like Hulu, CareerBuilder, and MovieTickets.com seem to be doing just fine with the hydra-headed ownership. However, now that Coinstar is completely on the hook for Redbox, it's going to make sure that it grows, because Redbox will now have a bigger impact on its fiscal performance. Coinstar will also have to prove that it made the right decision in going for all of Redbox.

Redbox is also a concept built for recessionary times. Instead of blowing $20 for a pair of tickets at the multiplex -- before we dive into the costly concessions -- a buck can provide a night of in-home entertainment. Netflix and Blockbuster have also been faring well lately, in response to the growing ranks of coach-potato hermits, but it would be a shock to see Coinstar not make a more aggressive push now that it calls all of the Redbox shots.

Netflix and Blockbuster have done an admirable job in tackling the digital delivery challenges of tomorrow. Now they’d better make sure that they don't lose sight of an old-school solution, with dreams of growing larger in the rearview mirror.

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Netflix has beaten Wall Street profit expectations in six of the past seven quarters.
It has kept prices in check, beyond charging a dollar more for Blu-ray access.
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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (14)

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Report this Comment On February 13, 2009, at 5:00 PM, Overallcreation wrote:

I think it's a really stupid idea. I need more selection.
Report this Comment On February 13, 2009, at 6:09 PM, SoYAinvestor wrote:

Not only more selection but at a base price of $4.99 Netflix offers way more value. You also get the streaming media, and NO LATE FEES. They say no late fees but if you don't get it back by 10pm the next day you get dinged another dollar. You have to love marketing euphemisms. It seems clear that this has been successful to some degree by largely appealing to impulse buyers. I would love to know how much money they make off of late fees (oh sorry daily rentals that stretch for days because people forgot to return them) but we already know that model and can prudently speculate it is where all the profit is.
Report this Comment On February 14, 2009, at 10:31 AM, seethruU wrote:

Who woke you up?
We'll see how much of the $1 rental the studios can handle..You know about Universal not selling to Redbox distributors - VPD and Ingram- if they sell to vending...right? You do know the minimum rev share transaction cost is $1.25...right? Kinda leaves Redbox out in the cold with the studios...right?Netflix and Blockbuster online will not rule the world as some idiots posting here believe...The "stores" will still be around for a while at least until downloading and streaming make alot of money for the studios...maybe not as many (remember there's like one super video store per 25,000 population) but they'll still be here. Contrary to what you post, massive numbers of "Netflix" and "Blockbuster Online" customers continue to drop their memberships and come back to the stores because they don't "use" the subscription service after a while.
"SoYainvestore" posted "but we already know that model and can prudently speculate it is where all the profit is." In case everybody here doesn't know...The reason for "late fees" is to get the product back to rent again AND KEEP COSTS DOWN...not to "screw" the customers...the customer blames the store for making him late even though he had 5 days to return it...who the hell started that idea??...did you know the average time the Blockbuster "No Late Fees" customer keeps a new release? 7 days!!!! And more than half keep them almost 2 weeks!!! That's why it's not working for them...it never did work. Sounded good and it was the customers's number 1 complaint but it was really interesting after they started the program that customer started complaining that Blockbsuter didn't have any movies to rent...why? Because the customers weren't returning them!! Inside information has customers keeping the "Redbox" rentals 2.75 days...so they spend $2.75...about the same as a Blockbuster customer on the "Rewards" program...
So don't "prudently speculate" that's where the profit its because YOU don't F'n know!
Report this Comment On February 16, 2009, at 9:50 AM, jimmyxc wrote:

SoYAinvestor
A late fee is when you are charged for 5 extra days after keeping it one day past the due date. A additional day fee is like a dollar a day, MUCH more manageable and customer friendly.
Blockbuster has moved to the daily rates in a lot of stores, new movies cost $1.99 a day and old movies cost .99 cents a day. The feedback has been amazing so far. Not only does blockbuster order almost half the movies they use to for the stores that use them, but the average dvd gets rented a lot more.
Redbox and blockbuster are here for a LONG LONG time.
Report this Comment On February 18, 2009, at 7:18 PM, bunnyblade wrote:

BlockBuster will be here for a long time since people want there movies. People want a good selection... also DO I HAVE TO MENTION THAT THEY WANT THEIR MOVIE NOW?!?!? instead of waiting days just to get it through the online. Please don't tell me "its only 1-2 days" now means now. Also these entertainment center won't lose that much buisness because the movie threader is expensive! You can would have to pay at least $8 PERSON when you can just instead go to BlockBuster and rent 1 movie for the price of $3-5 and ultimate people can view it at once. lol think about it

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