Can Redbox and Verizon Kill Netflix?

Soon it won't just be Netflix (Nasdaq: NFLX  ) screaming for your streaming dollar.

Living up to a rumor that began making the rounds late last year, wireless giant Verizon (NYSE: VZ  ) is teaming up with Redbox parent Coinstar (Nasdaq: CSTR  ) to roll out a premium video service during the second half of the year.

Pricing? Content? Flexibility that will include unlimited Redbox disc rentals and streams through Verizon?

You're asking way too many questions, my friend. Details will come later, likely as close to the launch as possible so the new service doesn't tip its hand to the competition.

However, the news was still enough to send Netflix shares slightly lower at the opening. Verizon and Coinstar opened marginally higher.

Suspicious timing
Coinstar has been promising investors a digital strategy for nearly two years. All through 2010 Redbox was hinting at a digital strategy, ultimately telling investors that an announcement would be forthcoming in October of that year.

How much would your Redbox tab be if you were 16 months late on a rental?

Maybe I'm just a cynic, but the timing certainly seems suspect.

Coinstar reports earnings this afternoon after the market close. If the company's Redbox kiosk business is struggling, you'll know why Coinstar wanted to get this news out ahead of the numbers.

After all, this quarter should be a beauty for Redbox. It jacked up its DVD rental prices by 20% in October. Netflix revealed that it shed more 2.76 million DVD plan subscribers during the quarter after its poorly received rate hike. DISH Network (Nasdaq: DISH  ) is in the process of closing more Blockbuster stores and devoting more space in remaining stores to promote its namesake satellite television service.

If the appetite for video on optical discs exists, Coinstar will report monster growth at Redbox. Between bumping overnight rates on DVDs from $1 to $1.20 and folks bailing on other outlets, Redbox should be soaking in an uptick in customers willing to pay more than they used to through the shiny red automatons.

Right?

Well, analysts do see revenue climbing nearly 28% at Coinstar in its holiday quarter, though they actually see profitability slipping.

We're seeing Redbox raise prices and agree to sweeter DVD distribution deals after agreeing to wider distribution windows. Why should earnings be going the wrong way?

Deleted scenes
Coinstar isn't giving up on its disc-flinging business. Redbox announced last month that it was renewing its deal with Wal-Mart, continuing to keep a presence in 3,700 Wal-Mart store locations. This is a relationship that dates back to 2006. If there was weakness in disc rentals, Redbox would probably have been reluctant to renew its placement at the front of stores run by the world's largest retailer.

However, what if it was simply buying time for the digital strategy to kick in? We don't have a lot of details here. Verizon will be the one wearing the pants with a 65% stake in the venture. If it's Verizon securing the digital streaming content, can Redbox be left out in the cold if its kiosks begin to falter in popularity this year?

Even if the service launches as expected, there will be a lot of ground to make up. Netflix closed out 2011 with 21.7 million streaming subscribers. Unlike its fading DVD rentals, this is a business that continues to grow.

We also can't discount Amazon.com (Nasdaq: AMZN  ) . Even Netflix concedes that Amazon will begin offering the streaming service that it offers Amazon Prime subscribers at no additional cost as a stand-alone premium service. Amazon is likely to price its platform considerably cheaper than Netflix's $7.99-a-month service. It's going to be hard for the Verizon-Redbox alliance to match Amazon on price or Netflix on catalog breadth. If the allure of DVD rentals tethered to a streaming service was there, Netflix wouldn't be shedding DVD plan members and Blockbuster wouldn't be a shrinking violet.

So where will this service exactly fit when it's ultimately launched? Verizon's market-leading wireless phone reach is an asset that can't be underestimated, but it's not as if the company has had heaps of success offering premium entertainment as streams in the past.

This partnership sounds relevant right now, but check back at the state of this industry when it actually rolls out. Until we get firm details or a debut date, Netflix is better off worrying at what Amazon is up to.

Motley Fool's top stock for 2012 isn't Netflix, Coinstar, or Blockbuster. If you want to find out what it is, a special report reveals all. It's entirely free, but will only be available for a limited time, so check it out now.

The Motley Fool owns shares of Wal-Mart Stores and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, Wal-Mart Stores, and Coinstar. Motley Fool newsletter services have also recommended creating a diagonal call position in Wal-Mart Stores. 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.


Read/Post Comments (3) | Recommend This Article (10)

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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 February 06, 2012, at 5:45 PM, jumbled wrote:
  • Report this Comment On February 06, 2012, at 9:14 PM, lucasmonger wrote:

    As a Netflix stock owner who jumped in on the year-end slump, I'm smiling right now at their stock price. Sure, Amazon, Apple, Google, Microsoft, Verizon, Dish Network, and Redbox are all lurking on the horizon with potential new delivery mechanisms, but since they're not here yet, there's no basis for comparing anything... just pure speculation.

    I'll sell my stock when I double my money, then wait for it to drop on whatever other crazy news the media or analysts conjure up.

  • Report this Comment On February 08, 2012, at 2:56 PM, H0MBRE wrote:

    In order to take the business from Netflix, a joint venture must combine all its efforts and resources to prove it is worthy competition.

    Simply, companies like Amazon and Verizon cannot afford to spend crucial funds from their established markets for the sake of competing with Netflix. It is a highly unsustainable tactic.

    .

    DVDs are losing favor among consumers. Netflix knows this. But they miscalculated the move to dissolve— I mean, split its DVD delivery service. It was as if trying to begin selling only audio tapes in a 8-track era.

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