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1 Thing That Can Kill Netflix

By Rick Munarriz - Dec 2, 2012 at 5:00PM

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Unlimited streaming is one thing, but keeping it off the clock is another.

Redbox has finally lived up to its digital promise. Does Netflix (NFLX 5.03%) need to worry?

The Coinstar (OUTR) subsidiary is now reportedly two weeks away from officially rolling out the streaming video service that it's launching in cahoots with Verizon (VZ -2.17%).

Follow the Piper
On the news of the imminent arrival of Redbox Instant by Verizon, Piper Jaffray analyst Michael Olson issued a bullish note on Coinstar on Friday. He was able to preview screenshots of the product while it was still in beta testing. Olson, who also put a $64 price target on the shares, sheds some light on the service beyond confirming the $6-a-month price tag that's already making the rounds.

  • EPIX content is available, giving Coinstar a good start in securing well-known celluloid. Netflix had an exclusivity deal with the distributor, giving it access to thousands of somewhat recent studio titles. That ended a couple of months ago, when (AMZN 3.58%) became the second digital service to score an epic EPIX deal for its Amazon Prime service. Well, Redbox Instant apparently makes three. The move assures Redbox of having some magnetic launch titles.
  • Redbox Instant is negotiating deals on a per-subscriber basis. Netflix pays a fixed fee. The move should make it easier for Redbox Instant to acquire content without the kind of 10-figure investment Netflix makes on an annual basis, though it will eventually be limited by the ceiling of its low monthly fee.
  • There's also an $8 plan that includes four nightly DVD credits at nearby Redbox kiosks. Paying $2 more for physical rentals of new releases is far cheaper than Netflix's $8 starting point for DVDs, though the convenience of home delivery, untimed rentals, and the unlimited nature of the rentals will continue to set Netflix apart.
  • Redbox Instant is not offering television shows, a major component of both Netflix and Amazon Prime. Netflix gets knocked as "rerun TV" for its deep catalog of earlier seasons of television shows, but the reality is that they are a major draw. Unlike a movie that can be consumed in two hours, streaming TV shows encourages the binge viewing that improves retention.
  • Just like Amazon, but not Netflix, Redbox Instant will offer digital rentals and purchases.

Impressed? Sure, the features are nice, but what is likely to be a limited catalog at launch and a model that follows Amazon's track, but with a real-world component, may be a hard sell for consumers.

However, there is one thing that can be done to make Redbox Instant a force to be reckoned with.

Data slurping
The one setback to the digital video revolution is that streams suck up a lot of bandwidth. A recent study shows that Netflix accounts for 32.9% of the North American downstream traffic during the peak prime-time period between 9 p.m. and midnight.

What does that tell you? Well, it means digital video is consumed largely at home. There are plenty of smartphone and tablet apps for Netflix, but they're hard to justify if you don't have unlimited Wi-Fi. That's why Verizon Wireless is here. Verizon wants to encourage bandwidth usage, especially on its lucrative shared data plans.

You can probably figure out the one thing that would make Redbox Instant an overnight sensation. If Verizon Wireless would offer unmetered usage of Redbox Instant -- allowing customers to stream all they want off of the data clock -- the service would be more attractive than Netflix or Amazon Prime for Verizon subscibers.

The move might also limit Redbox Instant's appeal to Verizon customers, but that wouldn't be a problem for Verizon. It already has 95.9 million total retail connections, but unmetered streams would be a differentiator that would attract new accounts and help retain many existing customers.

This is the one thing Verizon could do that would make a difference -- but it doesn't seem likely. Still, what would happen if Verizon and Coinstar did it? Do you think AT&T (T 1.84%) would stand idly by? It would probably team up with Netflix for a similar arrangement -- or surprise the market by buying Netflix whole -- and trounce its rival.

In the end, the only thing Verizon could do to make Redbox Instant matter is also the same thing that would trigger an event that would be beneficial to Netflix.

Despite the meandering share price these days, Netflix can't lose.

Stream on
A new premium report on Netflix details the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Click here to check it out now.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$190.85 (5.03%) $9.14
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$50.96 (-2.17%) $-1.13
Coinstar, LLC Stock Quote
Coinstar, LLC
AT&T Inc. Stock Quote
AT&T Inc.
$20.99 (1.84%) $0.38, Inc. Stock Quote, Inc.
$116.46 (3.58%) $4.02

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