Maybe it was just a head fake, but reports that Redbox would be delaying until January the launch of its streaming video service are proving false. Instead, Coinstar (NASDAQ: CSTR ) is taking the instant-viewing game to the home court of Netflix (NASDAQ: NFLX ) and starting a limited beta test of the instant-viewing challenge over the next few weeks.
Toppling the throne
While the service itself has been under development for some time, specific details of pricing have been kept under wraps, and in a joint statement with its partner Verizon (NYSE: VZ ) , Coinstar shows that it plans on aggressively attacking Netflix's dominant position.
A basic streaming service will cost just $6 per month, cheaper than its rival's $8 per month Watch Instantly streaming service. But where it really gets compelling is in the hybrid streaming-DVD packages Redbox is offering: For $8, viewers can also get four DVD rentals, or for a dollar more, you can make them Blu-ray disks. Netflix charges another $8 to get an unlimited number of disks, but you can only take them out one at a time.
Considering turnaround times for mailing back and receiving a new disk, you're talking about twice the cost for pretty much the same number of disks -- that is, if you're fastidious in returning them. I know my disks would often sit for a day or so before I would send them back, and I wouldn't necessarily watch them the minute they came in, either. So with the Redbox package, you're getting movies only when you want to watch them -- though I've also been known to be delinquent in returning a disk to a kiosk, too, which adds an upcharge to the rental.
It's deja vu all over again
My Foolish colleague Anders Bylund is less than impressed with Redbox's foray into streaming, believing we've seen all this before in bankrupt Blockbuster's Total Access package. There are key differences between the two, as Anders acknowledges, such as that Blockbuster was sending actual DVDs to viewers whereas Redbox is sending bits and bytes, but I think there are equally important differences that make the potential for Redbox's success -- even win -- more probable.
Blockbuster had to support a vast bricks-and-mortar network, so that with every DVD it shipped out, it left less inventory for its stores, and they cost a lot of money to maintain. Redbox, on the other hand, has a minimalist footprint in its kiosk network: locations that aren't expensive and whose presence can be expanded almost at whim. I have a dozen kiosks within a mile of my home that I can choose from; I'm sure others in more densely populated areas have more. And adding DVD viewers to its streaming service doesn't harm existing customers; it can just add more kiosks if necessary.
At the end of the third quarter, Coinstar reported having 42,400 kiosks as well as a host of others it acquired from NCR after Blockbuster's demise. Revenues grew 19% last quarter to $460 million on the strength of its pace of opening new kiosks, as well as greater comps from those already existing and the price hike it initiated last year. Redbox is dealing from a position of strength and is using it to expand into other areas like ticket sales.
A deep bench
Many Netflix bulls contend that the real value in the company is its vast library of movies. At last count it exceeded 100,000 titles and had some 60,000 titles available for instant viewing. In comparison, Redbox has some 200 movie DVDs in its kiosks and its streaming plan will offer 5,500 titles from Time Warner's (NYSE: TWX ) Warner Bros. studio as well as the cable channel Epix, which is a joint effort of Viacom's (NASDAQ: VIAB ) Paramount Pictures, MGM, and Lions Gate Entertainment (NYSE: LGF ) .
It seems a pretty anemic comparison until you consider just how many of Netflix's movies are unwatched or unwatchable. There's a lot of chaff mixed in with the few kernels of wheat, and sussing them out for a night of viewing is an undertaking all in itself, even using its queue feature. With Redbox, the DVDs are typically the top titles that are out, and through Epix it will have top features like The Hunger Games.
The right mix
The future of movie viewing is streaming. There are lots of options out there and coming out soon that will continue to challenge Netflix's preeminent position. There's Amazon.com's streaming service, as well as Hulu, Vudu, and even YouTube. Cable operators like Comcast are developing competing services, and I've said it won't take much for Cablevision's mobile app to adapt to a streaming option.
Redbox, however, is the first to combine the right mix of streaming and DVDs at the right price that can't be ignored. I've often held that Coinstar's kiosk network was never a replacement for Netflix, but rather a supplement to it. Now with Verizon backing its entrance into streaming, there's the real chance Redbox will replace its rival as the preferred streaming service.
The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.