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Can Redbox Chase Netflix Higher?

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If Netflix (Nasdaq: NFLX  ) is raising prices for those on its dual plans, why can't Redbox parent Coinstar (Nasdaq: CSTR  ) play along?

The market's been buzzing over a Merriman Capital report this week. Analyst Eric Wold discovered that Redbox kiosks in Austin were testing out a DVD rental rate of $1.20 a day. Blu-ray discs and video games are sticking to their $1.50 and $2 price points, respectively. Is Coinstar working on a 20% hike for DVD rentals across the country?

Let's not read too much into this move. What happens in Austin as a test lab stays in Austin as a test lab.

This isn't some fresh knee-jerk reaction in light of Netflix's rates going up. Coinstar has been testing different price points for some time. Last summer it bumped its nightly DVD rental prices from $1 to between $1.15 and $1.50 in select markets. The unofficial Inside Redbox blog reported that Portland, Ore., was testing a $1.15 price point two months ago.

Head out to the website and it's hard to see that $1 price point being bandied about. In other words, Coinstar is reserving its right to be flexible.

Churn will inevitably inch higher at Netflix, and it's only natural for rival flick feeders to see whether they, too, have that kind of pricing elasticity. It doesn't mean that it's the smart move.

After all, Redbox isn't the only company spitting out cheap discs. NCR's (NYSE: NCR  ) Blockbuster Express kiosks would stand to make a killing if Redbox jacked up its prices. Dish Network's (Nasdaq: DISH  ) Blockbuster has tweaked its prices to make them friendlier for overnight rentals.

Quite frankly, raising its prices now would be the dumbest thing that Redbox could do. There are going to be plenty of Netflix subscribers next month who drop the disc-based plan in favor of streaming. They will need an outlet for cheap new releases, and Redbox has choice seats to catch most of those couch potatoes. Moving its prices higher would send the worst message possible to DVD watchers: If Netflix moves higher, we move higher.

Coinstar is smarter than that. If there is room for a price hike, it is unlikely to happen for several more months at least. Give Netflix refugees a taste of what it can do before springing that particular trap.

Isn't that really the only way to pull this off while still making the most of the heavy Netflix churn that is expected in the coming months?

Should Redbox raise its prices now? Share your thoughts in the comment box below.

Motley Fool newsletter services have recommended buying shares of Netflix. Motley Fool newsletter services have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a subscriber and shareholder in Netflix since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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  • Report this Comment On August 18, 2011, at 9:55 PM, mracz425 wrote:

    They are testing the $1.20 a day DVD's in Pittsburgh, PA as well. $1.28 w/tax now.

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