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.
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