There's Finally a Threat to Netflix

Market darling Netflix (Nasdaq: NFLX  ) may not have the low-priced streaming smorgasbord to itself for much longer.

Coinstar's (Nasdaq: CSTR  ) Redbox is apparently ready to dive in, once it finds its swim trunks. The company behind cheap flick rentals from its signature red kiosks is surveying customers about a streaming subscription package, according to DVD enthusiast website High-Def Digest. Film buffs are being asked if they would be interested in paying $3.95 a month for a plan that includes unlimited streaming along with four nightly rentals.

It's a pretty compelling deal on the surface, since the value of the four DVD rentals alone is $4. The cheapest unlimited streaming model through Netflix sets subscribers back $8.99 a month with a single DVD out at any given time.

Now, before Netflix shareholders begin curling up in fetal positions and barking out sell orders, let's ask the two questions that truly matter at this point.

  • Is this really going to happen or is it just survey vaporware?
  • How quickly can Redbox build a streaming catalog that as of right now is at zero?

The second question is just as important as the first one, because a buffet is only as good as the quality of the spread. If Redbox's streaming selection is limited to Gigli, Ishtar, and the Police Academy series, it may as well rename itself Deadbox.

Keeping your frenemies close
How is Redbox going to strike the digital licensing deals anyway? This is a company that has butted heads with studios in the past. Hollywood hates having its hottest releases marked down to $1-a-night rentals through Redbox machines, fearing that the cheap deals are eating into DVD sales.

It has taken Netflix three years to build its digital library to roughly 17,000 titles. How quickly can Redbox get up to speed? It is chummy with Viacom's (NYSE: VIA  ) Paramount, but the studio is unlikely to license any of its reasonably marketable films cheaply.

The one thing that is making sense in light of this development is the deal that Coinstar entered with Warner Home Video two months ago. Coinstar and Netflix have agreed to hold back from renting Time Warner's (NYSE: TWX  ) freshest releases for the first four weeks. The studio estimates that it sells 75% of any title during the first 28 days on the market, and it should sell more if Redbox isn't spitting out buck rentals and Netflix isn't devaluing the flicks with its unlimited DVD plans.

Time Warner agreed to give both companies price breaks for their patience. It also agreed to open up more of its older library to Netflix for streaming purposes.

"This is going to be a real problem, for Coinstar in particular," I wrote at the time. "At least Netflix can point to its data-crunching recommendations engine or its growing streaming service. Coinstar simply will not have the Time Warner flicks -- until a large group of movie fans have already bought a copy."

Well, if Coinstar struck this deal under the assumption that it would eventually have the same streaming access to certain Warner Home Video as Netflix, then it wasn't the one that got punked in this deal.

Twin peaks?
Netflix hit a new all-time high yesterday, fueled by its popular debut over the weekend on Apple's (Nasdaq: AAPL  ) iPad. With 12.3 million subscribers -- and growing -- the service has overcome concerns that its fortunes will live and die by the optical disc.

A lot of that sizzle comes from the fact that its unlimited streaming watering hole is presently uncontested in the industry. Time Warner's HBO Go and Comcast (Nasdaq: CMCSA  ) are making their programming available online to active subscribers at no additional cost, but those services are part of already costly monthly cable bills. Netflix -- for now -- is the only deal in town where unlimited streams of studio content are available for less than $10 a month, with home-delivered DVDs as a bonus.

If Coinstar manages to round up a reasonable digital library -- and that's a big if -- at less than half of Netflix's price, it can really be a game changer. With every passing quarter, more and more Netflix subscribers are embracing the streams.

Just 48% of its subscribers may have streamed at least 15 minutes of video during last year's fourth quarter, but Netflix sees two-thirds of its base streaming by the end of this year.

Redbox may have timed this perfectly. Let Netflix educate the market. Let Blockbuster (NYSE: BBI  ) buckle. Dive in when the coast is clear with a value offering.

The wrench in Redbox's plan is more of a toolbox, though. Where is the digital library? Where is the arsenal of video game consoles, Blu-ray players, DVRs, and connected set-top devices to stream Redbox flicks through television sets? Where are the peace pipes to hand out to the studios it was suing a year ago?

Redbox may be introducing a heck of a plot twist to Netflix's story, but this is a character that lacks the development to pull this off.

Can Redbox seriously threaten Netflix's model? Share your thoughts in the comment box at the bottom of this queue.

Apple and Netflix are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services, free for 30 days.

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 (10) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2010, at 4:14 PM, CrankyTexan wrote:

    Blockbuster and Redbox both require you to go to the store twice. Once to pick up a DVD. And then again to return it. Netflix only requires you to get your mail. Redbox is just another version of Blockbuster with a failed business model.

  • Report this Comment On April 07, 2010, at 4:22 PM, eric2800 wrote:

    Hi Rick,

    I still believe Coinstar made a mistake by taking the same deal as NFLX, even with the same catalog. The best part about NFLX's subscriber numbers is that the "other" companies have to "call and raise" NFLX. Any service on par with NFLX I think is a loser. Coinstar, I believe had more pricing power than NFLX and should have bought DVDs at best wholesale price and raised prices at the vending box. This would have kept them more hip and young than NFLX's older titles. This could have been an advantage.

  • Report this Comment On April 07, 2010, at 4:51 PM, tooFoolToBeTrue wrote:

    If it pulls through streaming and competes at that level great! and i believe it still got time to ramp that up. What can not be over-looked already is a convenience of picking-up your movie for $1.0 while buying groceries at Kroger, shopping at wal-mart or picking-up a happy-meal for your kids at McDonalds. Given currently it has only about 19000 boxes there is a great deal of growth potential in the box business alone.

  • Report this Comment On April 07, 2010, at 5:18 PM, 8martini8 wrote:

    There is an enormous, gaping hole in this threat assessment: the very large degree to which Netflix subscribers still rely on and value the vast catalogue of titles availble through the mail. If Coinstar wants to compete dredibly with Netflix, they must not only match them in streaming offerings, but expand the size of their cute little kiosks to the size of, oh, say a Home Depot store. Until 90% of netflix's titles are available fore streaming (and Coinstar matches *that*) I'm not real concerned.

  • Report this Comment On April 07, 2010, at 5:18 PM, 8martini8 wrote:

    There is an enormous, gaping hole in this threat assessment: the very large degree to which Netflix subscribers still rely on and value the vast catalogue of titles availble through the mail. If Coinstar wants to compete dredibly with Netflix, they must not only match them in streaming offerings, but expand the size of their cute little kiosks to the size of, oh, say a Home Depot store. Until 90% of netflix's titles are available fore streaming (and Coinstar matches *that*) I'm not real concerned.

  • Report this Comment On April 07, 2010, at 5:31 PM, PositiveMojo wrote:

    You ignore one fact. Netflix is way ahead on the technology curve. They are at least 1-2 years ahead of anyone else and have leveraged some very powerful partnerships.

    In order for someone to catch up they would have to remain dead in the water for at least a year and ignore the new relationships and innovations like the Apple iPad. Given the outstanding management at Netflix that ain't gonna happen.

    Netflix will remain the industry leader in the near future. All other competitors are just tempests in a teapot. They have an awfully huge mountain to climb. And while I'm at it let's talk about price. There is a cost associated with staying on top of cutting edge technology. If a competitor comes on line that is worthy of attention, they will have to offset the cost of the technology - which means their bottom line will likely look pretty whimpy for at least 3 years. Plenty of time for Netflix to launch a counter-attack with their established operation and great cash flow.

  • Report this Comment On April 07, 2010, at 5:31 PM, PositiveMojo wrote:

    You ignore one fact. Netflix is way ahead on the technology curve. They are at least 1-2 years ahead of anyone else and have leveraged some very powerful partnerships.

    In order for someone to catch up they would have to remain dead in the water for at least a year and ignore the new relationships and innovations like the Apple iPad. Given the outstanding management at Netflix that ain't gonna happen.

    Netflix will remain the industry leader in the near future. All other competitors are just tempests in a teapot. They have an awfully huge mountain to climb. And while I'm at it let's talk about price. There is a cost associated with staying on top of cutting edge technology. If a competitor comes on line that is worthy of attention, they will have to offset the cost of the technology - which means their bottom line will likely look pretty whimpy for at least 3 years. Plenty of time for Netflix to launch a counter-attack with their established operation and great cash flow.

  • Report this Comment On April 07, 2010, at 6:34 PM, XMFConnor wrote:

    I'm actually starting a service to compete with both of them... 100% of DVD's are offered through streaming... for only ten cents/month.

    O wait, there is no possible way I could ever pull that off... and I don't see how Coinstar can either. It is very far behind in this game, and it hopes to come in at half the price? Even then, could it really be profitable at that level?

    This was an awesome article.

    I'm a skeptic of their success, but going long the term "Deadbox"

    TMFConnor

  • Report this Comment On April 07, 2010, at 9:50 PM, feldmail wrote:

    Dear Rick,

    I am very surprised at this article because all of your NFLX coverage that I have read in the past has been good. But, really!! How could CSTR possibly compete in streaming? Don't you listen to the conference calls in which Reed Hastings talks about how the size of the streaming library is solely dependant upon how big a check they write? CSTR cannont possibly compete with NFLX unless they're willing to upfront the big checks and wait years for their subscribers to sign up! It would be a disaster for their cash flow which is pretty nonexistant to begin with.

    You mention CSTR possibly having the same streaming access to certain Warner Home Video as Netflix but you fail to mention that this does not come for free!

    Additionally, all of the reasons mentioned by other responders are all good points. The ONLY reason that CSTR talks about digital at all is to try to convince the market that they are relevant. They are not relevant. The only reference in your article that made any sense is referring them to "Deadbox". This kiosk biz is a fad and it won't be long before it dies.

  • Report this Comment On April 08, 2010, at 2:04 PM, emptygestures wrote:

    Coinstar doesn't need to bother with streaming technology. The vast majority of consumers are not ready for the streaming switch especially those hit hard by the recession. CSTR does not follow blockbuster's model because the DVDs can be returned at any location and since they are already everywhere, returning a movie isn't like having to go out of the way.... You go to work and there is a redbox on the way. You go to your 7-11 or grocery store and there is one. It is very convenient..

    If most people can avoid a contract of some sort they will and that is why Redbox will succeed. They will hit new 52 week highs by June. Mark my words.

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