Redbox Instant Is Netflix, With a Twist

It's been over a year since Coinstar (NASDAQ: OUTR  ) and Verizon (NYSE: VZ  ) first announced plans to join forces to take on industry-leading Netflix (NASDAQ: NFLX  ) . At least, that's what most industry insiders seemed to think, and why not? Coinstar, owner and operator of all the Redbox kiosks, and $138 billion telecom giant Verizon make a formidable team. In typical fashion, Netflix CEO Reed Hastings pooh-poohed the notion that this dynamic duo would pose a threat. Well, we're about to find out.

Redbox Instant is up and running
Redbox has officially launched its new video streaming and DVD rental service in the U.S., after completing a successful beta testing phase that began in December. For $8 a month, users can stream movies using their Android or iOS mobile devices, an Xbox or Blu-ray player, and some Samsung TVs. Redbox Instant customers will also receive "4 fabulous DVD credits at the kiosk" as part of their $8 monthly fee.

Customers of Redbox Instant also have the option to forgo the DVDs and stream an unlimited number of movie titles for $6 a month, $2 less than a similar Netflix subscription. That would appear to directly compete with Netflix, so why did Strickland go out of his way to emphasize that Redbox Instant isn't playing in Netflix's field?

At least for now, the differences between the two services somewhat support Strickland's assertion that Redbox Instant doesn't want to be Netflix. Unlike Netflix and direct competitor Amazon Prime, Redbox Instant is all about movies. There's no original content with the new Redbox service, something both Netflix and Amazon are diving headlong into.

In addition, the number of streaming titles is limited to about 4,600, or 10% of the entire Redbox library. Current rules surrounding which movies can be streamed and when will put a crimp in the Redbox Instant content library for the foreseeable future. The movies offered for streaming come from an agreement Redbox has with Epix, similar to the arrangement Amazon recently signed to supplement its Prime service content.

So it's not another Netflix, right?
As former Verizon executive and current Redbox Instant CEO Shawn Strickland tells it, the new service was never supposed to compete directly with Netflix. But there are similarities between the two services that Netflix investors shouldn't discount.

For one thing, the new Redbox Instant service is targeting high-margin DVD rentals. Unlike Netflix and its negative outlook toward the DVD market, which Hastings has overtly stated he wants little or nothing to do with, sending electronic DVD credits to customers for use with existing Redbox kiosks does away with the time and expense of mailing selections.

When Hastings was quoted last year saying, "We expect DVD subscribers to decline every quarter, forever," he left little doubt what side of the fence he fell on. But why? Here we are a year later, and the number of Netflix DVD customers has dwindled to 8 million in its most recent quarter, compared to about 30 million paid, domestic, and international streaming customers. Yet even with its relatively small percentage of total customers, the DVD business still contributes more to Netflix's bottom line than streaming does, largely because of its 50% contribution margins.

Now, let's consider Redbox Instant's take on DVD's. The kiosks are already there, stocked with a wide selection of movies and games. With little to no additional expense, outstanding margins, and its only real competitor (Netflix) opting to get out of the DVD game, Redbox Instant's commitment to those old-fashioned discs could prove very profitable. As Strickland said, "It's the core equity brand of Redbox."

For now, Strickland and Hastings are right: Redbox Instant isn't a direct threat to Netflix. But as streaming becomes less regulated, and Redbox Instant gets some experience under its belt, it won't take much for Coinstar and Verizon to expand Redbox Instant services if they decide to. Hastings may not be concerned, but then he's rarely concerned about competitors it seems, including Amazon Prime. But if you're a Netflix shareholder, don't discount Redbox Instant. The Coinstar/Verizon partnership may not be on the same field as Netflix yet, but it's definitely in the ballpark.


 

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. 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 The Motley Fool 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. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

(NYSE: VZ  )


Read/Post Comments (5) | Recommend This Article (7)

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  • Report this Comment On March 16, 2013, at 12:23 AM, swinney20 wrote:

    I tried the Redbox Instant service from Verizon as a beta tester. I cancelled because the service is terrible. Verizon is obviously running the website and customer service because it's typical terrible Verizon Customer Service. The website wouldn't work, I had problems, I sent them messages to correct things, and they never responded. And then they would send me emails asking me to join the service when i was already a member. They were clueless. I love Redbox renting the DVD's at the kiosk but I think Redbox made a poor choice hooking up with Verizon. Don't your time or money. Stick with Netflix, Amazon Prime and/or Hulu Plus for streaming and when you want a DVD go to a Redbox kiosk.

  • Report this Comment On March 16, 2013, at 12:39 AM, 83fong wrote:

    It sound a lot like netflix when they first started. Limited online library of movies with set date that can be view. Dvd in the mail vs. red box kiosk. Trouble with online streaming while they first started out.

  • Report this Comment On March 16, 2013, at 2:15 AM, bagbyblue wrote:

    I had the service. It was horrible. Not worth the 4 credits the give you. Stick with Netflix and wait them out for a year. They would have to get as good as Netflix and then offer the 4 credits of movies at their boxes to justify another switch. How profitable can they really be at that point.

    Bad service they should just stick with the boxes.

  • Report this Comment On March 16, 2013, at 12:29 PM, vireoman wrote:

    Nice article, Tim. You've crystallized why I'm a CSTR shareholder. Thanks.

  • Report this Comment On March 18, 2013, at 5:14 PM, Franky46 wrote:

    If all they have is Epix titles why would anyone pay for the services. If you own a Roku, or probably many other streaming devices, you can get the Epix channel for free.

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