Verizon and Coinstar Are No Threat to Netflix

Building on the ridiculous Reuters story about Verizon (NYSE: VZ  ) rolling out stand-alone video streaming next year, TechCrunch is now reporting that Verizon's service will roll out in cahoots with Coinstar's (Nasdaq: CSTR  ) Redbox.

The alliance makes sense. Redbox promised investors a digital distribution strategy that failed to materialize last year, and it was always assumed that the cheap DVD rental kiosk operator wouldn't go in alone. Amazon.com (Nasdaq: AMZN  ) was a rumored partner, but it decided on a solo career when it decided to take on Netflix (Nasdaq: NFLX  ) with its limited digital catalog available at no additional cost to Amazon Prime members.

Verizon is a strange partner. It may be the top dog in wireless, but its FiOS broadband television service is a small player with just 5 million accounts.

However, the Redbox brand and Verizon's digital prowess will result in this being less of a failure than it would be if the telco behemoth tried to make it on its own.

I went over three reasons why Verizon would fail in this initiative earlier this week. Let me update my concerns given the possibility that it's moving in with Redbox as a partner.

1. Verizon is limiting its audience
The original Reuters story claimed that Verizon wouldn't be launching this service in markets where it's currently offering FiOS. The logic goes that it doesn't want to cannibalize its broadband television service by arming cord-cutters with an alternative.

This doesn't seem like it can play out that way now. Why would a national player in Redbox let Verizon cherry-pick the markets where this service is offered?

2. Studios aren't interested
One of my biggest concerns was that studios wouldn't want to play along with Verizon. They don't have established relationships. Redbox does, though it's not always amicable. Redbox tried to play along when it agreed to join Netflix in delaying new releases from its rental kiosks for the first 28 days that a new title is on the market last year. Coinstar isn't exactly thrilled with what that has done to its rental business.

However, studios at least have to give more respect to a Redbox-branded streaming service through Verizon. The deal will help.

3. No one can pay as much as Netflix for streaming
It's hard to pay as much for streaming content as a company with more than 20 million paying subscribers, but at least Verizon won't be starting at zero if it's joining forces with Redbox.

Digital content still isn't cheap, but at least there's a better chance now that Verizon and Redbox will be able to scale quickly as it markets its offering to Verizon smartphone owners and frequent Redbox renters.

I still don't see this potential service -- which TechCrunch's source sees launching in six months -- as much of a threat to Netflix, but at least it has a better fighting chance now.

If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.

Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, and Coinstar. 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 Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. 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 December 08, 2011, at 6:47 PM, traderjoe19 wrote:

    I'm not sure any of this really makes sense or proves any kind of point. Mr. Munarriz is trying to make the case that Verizon and Redbox won't challenge Netflix because: 1) Verizon is limiting its audience, 2) Studios aren't interested, and 3) No one can pay as much as Netflix can for streaming.

    1) While it is limiting its audience by not offering to areas that currently have Fios service...the Reuters article still estimates up to 85 million people will be included in the area that has the streaming offered. In the event this streaming became successful in those markets you don't think Verizon couldn't make the snap decision to open it up to everyone? It's not like they're offering it to 5 households. This seems more like they are running it in a test market of 85 million before they alter their Fios service offerings.

    2) I'm pretty sure studios are interested in anyone willing to pay for their content. If Verizon agrees to the same terms that Netflix has agreed to and offers $1 more...the studios will be interested.

    3) I take issue that a $100 billion company couldn't raise enough funding to pay more for contracts than Netflix (currently a sub $4 billion company). While I concede Netflix has a much larger start with 20 million customers, Netflix has a MUCH larger reach if it can tap into its mobile consumers alone (107.7 MILLION subscribers as of 2011).

    I will agree that Verizon and Redbox may not be a Netflix "killer" on its own. However, this announcement paired with Amazon, Google, Apple and everyone else that wants to jump into streaming will likely crush Netflix.

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