Redbox Instant: Should Netflix Worry?

The Motley Fool is on the road in Seattle! Recently we visited Coinstar -- now officially renamed Outerwall  (OUTR) -- to speak with CFO-turned-CEO Scott Di Valerio about the 22-year-old company's well-known coin-cashing machines, as well as its more recent acquisition of Redbox, and future initiatives to expand into other aspects of the automated retail market.

In this video segment, Scott argues that there's plenty of room in the streaming video space; Redbox Instant doesn't have to beat out Netflix (NFLX -9.03%) or Amazon.com (AMZN -2.60%) Prime to succeed. The full version of the interview can be watched here.

A full transcript follows the video.

Austin Smith: Now, obviously there's a lot of incumbents in the streaming space. We can't talk about this without saying Netflix and Amazon Prime. Are they your biggest competitors here, or am I misreading it? Do you think about it differently?

Scott Di Valerio: Yeah, I think our competitor is people's time, is what we look at. What are people going to choose to do for their entertainment value? Certainly those folks are in that space across there, plus a whole host of other people as well.

We think we are very well positioned because, for customers who love movies, you've got a service where you get new release content. We're the only service that can bring new release content, and the physical aspect of it, as well as the streaming in there.

What you're really doing is getting real new release content when you want it, how you want it, and then be able to get your stream from around that.

Again, we're doing the business in a different way than some of the competitors on the streaming side. We are paying for content on a per-subscriber basis, which means each subscriber we bring on for Redbox Instant is gross margin positive.

It's different than ... a lot of our competitors are buying content up front and having to build up the subscriber base in order to be able to cover off the costs, so they run negative a much longer time period than we will, from a profitability standpoint.

Because of the way that we're structured and running the business, we can be the number three or number four streaming business, and still be very, very successful, both for us and for Verizon (VZ 1.05%).

Smith: It's because of that margin dynamic.

Di Valerio: The margin dynamic, and the fact that we're combining new release content at the kiosk, on a physical basis, along with the stream, which is something that people are finding very compelling.

Smith: Now, the new release issue has definitely been a user negative, leveled against Netflix and Verizon. What is it about you guys that allows you to bring new releases to users? I think a lot of people aren't really familiar with the dynamic of why some of the streaming people have to wait and why you're able to get the new release content out there earlier, in front of users.

Di Valerio: There's a couple of ways to get new release content from the studios. One is physical, which certainly we do here at the kiosk, and are really focused on that as a company. The other way is through what they call paid video on demand -- not the subscription video on demand -- so to pay $5-$6 to view a movie at home on your TV.

Really, we provide that same content at $1.20 for standard def and $1.50 for Blu-ray. People are continuing to buy Blu-ray players at very high rates. People love to get that physical disc and put it in, because there isn't a better way, from a Blu-ray perspective, to get really high-definition quality picture and sound. The way you get it is through the disc. You can't get that through a stream.

We feel very good about that. We obviously are focused on it, and we think that combination, as you look at Redbox Instant, combined with Redbox on the physical side, is a winning combination.

Smith: Good combo there for users.