Netflix (Nasdaq: NFLX) has long reigned as the unofficial king of streaming video rentals. But now, Coinstar's (Nasdaq: CSTR) upstart Redbox service may be ready to launch a challenge to the throne.

Bloomberg reports that Redbox President Mitch Lowe dropped hints about expanding the company's kiosk-based movie rental service with an online component. According to the article, Redbox will reveal its digital plans in October.

Watch Instantly streaming has become a huge hit for Netflix. A survey last February from The Diffusion Group revealed that more than half of the service's customers stream Netflix to their TVs, computers, and other mobile devices. As digital streams begin to replace optical discs, rivals such as Redbox will need to challenge Netflix on this turf, or risk falling by the wayside.

Adding online streams could also help broaden Redbox's selection of titles. Netflix offers hundreds of thousands of new and old movies on disc, plus tens of thousands of TV shows and movies available at no extra cost online. In contrast, each of Redbox's kiosks can stock only a few hundred movies at most -- and while some of them are recent big-name releases, others are the kind of low-budget hokum you'd expect to find at 2 a.m. on the SyFy channel. (MegaShark vs. Giant Octopus, anyone?)

To succeed in online streaming, however, Redbox will have to tread carefully. It hasn't revealed any details about what form its online service would take, but if it's smart, the kiosk renter will take a cue from its similarly rosy rival. Netflix does offer a handful of relatively new releases online through its deal with Starz Play, but for the most part, its service focuses on classic and indie movies, popular TV shows, and more obscure and arty fare from high-end outlets such as The Criterion Collection and the BBC.

Avoiding huge new releases and their gargantuan studio licensing fees helps Netflix offer its streaming video as an inexpensive, all-you-can-watch subscription service, rather than asking users to pay per rental. It also allows Netflix to avoid scrapping with Apple's (Nasdaq: AAPL) iTunes, cable companies such as Comcast and Time Warner Cable, satellite providers such as DirecTV and DISH Network, and the increasing throng of other services all competing to get users to shell out for limited-time digital rentals of the latest blockbuster titles. If Redbox wants to pose any threat to Netflix's huge and growing competitive advantage, it'll have to favor cheap, old, and convenient over new, expensive, and restrictive.

Whatever form Redbox's digital strategy takes, Netflix isn't standing still. It recently announced that it'll roll out its Watch Instantly service in Canada this fall. This move won't just be Netflix's first non-U.S. expansion, but also the first time it's offered a disc-free, streaming-only subscription option. More and more, it seems the future of movie rentals doesn't lie on a series of shiny discs.

Can Redbox pose a real threat to Netflix online? What's the best strategy to rule on the streaming rental market? Share your thoughts (or your jokes about Slap Shot, NHL highlight reels, or season sets of The Kids in the Hall) in the comments box below.

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Fool online editor Nathan Alderman is grateful for Canada's many fine cultural offerings, including Slings & Arrows, Scott Pilgrim, and Rachel McAdams. He's a longtime Netflix subscriber, but holds no financial position in any company mentioned above. The Fool's disclosure policy believes Giant Octopus could take MegaShark any day of the week.