Redbox Instant has a target on its back. The combination DVD and streaming video service, jointly run by Outerwall (NASDAQ: OUTR) and Verizon (NYSE: VZ), might not even survive to celebrate its first anniversary of taking on paying subscribers.
We learned from financial filings this week that an activist investor scooped up 13% of Outerwall. That investor plans to push Outerwall's management toward "selling or discontinuing certain businesses." That includes the offloading or shutting down of the Redbox Instant service, according to Bloomberg.
We hardly knew you
Redbox Instant is a young business, having just launched last spring. But even from the beginning it was clear this wasn't going to be the Netflix (NASDAQ: NFLX) killer that some investors were hoping for.
Sure, the service pairs easy access to new-release DVDs with a catalog of older movies available via streaming. That's a nice draw, especially since a popular complaint has been that Netflix fails to deliver all the newest material in its streaming library. But Redbox Instant focused on movies, and ignored the episodic content that has helped Netflix become a nightly destination for so many members.
Redbox's service also wouldn't, or couldn't, go down the pricy path toward original content. That's understandable considering that Redbox doesn't have the 30-million-member subscriber base that Netflix can use to fund its bets on shows like House of Cards. Outerwall also lacks the deep pockets of an Amazon.com (NASDAQ: AMZN), which generates enough cash from its retail business that it can spend a billion (or two) on streaming content and expensive original shows. Amazon has its first crop of originals, including a John Goodman comedy called Alpha House, slated for release later this year and into 2014.
Outerwall may have taken a different path with Redbox Instant, but it responded to the activist investor's financial filing by saying that it "welcomes the opinion of its shareholders" and is "open to constructive input." It's too early to say whether that means the company will seriously consider dumping Redbox Instant anytime soon.
Still, if profitability doesn't rebound in its DVD rental business in the coming quarters, as management forecast in September, then Outerwall might need to consider making some big strategic changes. High on that list should be ending the Redbox Instant experiment before it becomes a distraction from Outerwall's bread-and-butter business of automated retailing.
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