If you're jonesing for a digital movie or two from the Redbox Instant catalog, you'd better hurry. The service is shutting down on very short notice. Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN) just stiff-armed yet another would-be challenger in the digital movie space. Which of course begs the question: are there any credible threats left to this American duopoly?
Existing subscribers got the news delivered by email. The Redbox Instant site's news section is now nothing but a large shutdown notice, with a convenient link to information about service fee refunds.
"The service is shutting down because it was not as successful as we hoped it would be," the refund explanations start. "We apologize for any inconvenience and we thank you for giving us the opportunity to entertain you."
And of course, Outerwall's Redbox kiosks are still open for disc-based business. So it's not the end of Redbox as we know it -- just the end of its online delivery ambitions. Not with a bang but with a whimper.
Surprisingly, the real end may have happened three months ago. That's when Redbox Instant stopped accepting new customer registrations, as the service found criminals using the sign-up process to validate stolen credit card numbers. Redbox Instant never turned its registration process back on, and now the whole service is going away.
Outerwall CEO Scott Di Valero also told investors in July that both Verizon and Outerwall were "not pleased with where the subscribers are to date. ... If we don't hit certain subscriber thresholds, then we have some decisions to make in March."
So the writing was already on the wall, and only accelerated by the credit card debacle.
The writing on the wall
None of this is particularly shocking.
I said as much when Verizon and Outerwall (nee Coinstar) announced the service two years ago: "You know what? I think we've seen this Netflix attack before, and it didn't work out all that well last time. Six years ago, it was called Blockbuster Total Access."
So, what could Redbox Instant have done differently if it really wanted to challenge Amazon Prime and Netflix?
Well, offering a smaller content catalog with an exclusive focus on full-length movies didn't turn out so well, even at a discount to Netflix prices and with a few perks thrown in for good measure. It seems like consumers prefer a fantastic service with a singular focus, even if it does cost a little bit more. Five Guys founder Jerry Murrell would support that conclusion, as it describes how his burger chain built its unstoppable growth momentum.
So the right answer would be to sell a premium-quality digital movie service at whatever price works best. But the Verizon-Outerwall partnership was never right for this winning angle.
Why? Because the partnership would always be too off-kilter.
You need two things to make this business idea fire on every cylinder:
- Plenty of capital to invest in content licenses
- Plenty of Hollywood know-how
Being far richer than Outerwall, Verizon could have brought the capital. Meanwhile, Outerwall could have focused on the "inside baseball" dealings since Verizon lacks this crucial skill set. Running the FiOS TV service is a far cry from negotiating distribution rights with Hollywood studios, after all.
But that would leave Verizon as the far larger partner in this joint venture, while Outerwall could only fume over its minuscule ownership. That's hardly a fair and balanced joint venture. So to keep things in proportion, Verizon kept the capital spigot at a lukewarm trickle, creating a movie service that impressed absolutely no one. That's what had to happen here.
If Verizon really wanted to make Redbox Instant work, it could have bought Outerwall. With an enterprise value below $2 billion and some resale value for the various nonmedia kiosk businesses that Verizon has no interest in, it would have been a reasonably small acquisition for Verizon. Then the unified beast could have launched Redbox Instant with the right capital support and industry clout, creating an attractive content catalog in short order.
Verizon is said to retrench for a new swing at digital media, now that Redbox Instant is off the table. Let's see what Big Red does different this time, and then I'll tell you whether the new service stands a chance.
Is there anybody out there?
The American digital movie market still sports several players, but Netflix and Amazon Prime are getting awful comfortable at the top of the list. They are also the only two services that offer advertisement-free streams for a flat monthly fee, as opposed to pay-per-view or ad-supported business models.
Hulu Plus might be the closest thing to a real rival. Backed by a consortium of occasionally infighting Hollywood giants, this potential contender charges monthly fees and insists on inserting ad spots in your movie streams. Hulu has the catalog and the Hollywood insider track to really get things done, but turns consumers off with the double-dipping revenue approach.
Drop the ad component and watch user satisfaction skyrocket. But that would be a huge risk in the eyes of studio executives who seem to prefer high margins at low volume, rather than the other way around.
So for now, Netflix and Amazon rule the roost virtually unchallenged. And that's how it's going to stay until a well-heeled third option decides to throw caution to the wind with another ad-free, high-quality service.
Redbox Instant tried and failed.
Anders Bylund owns shares of Netflix and a synthetic long options position in Amazon.com. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool also owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days.