Last week, Verizon (VZ 1.44%) and Outerwall (OUTR +0.00%) announced they would be shuttering their joint venture: Once heralded as a potential Netflix (NFLX 0.16%) killer, Redbox Instant is no more.
When it was first unveiled in 2012, Redbox Instant appeared to be a legitimate threat to Netflix's business model. With a combination of DVDs-by-vending-machine and a catalog of older movies available for streaming, Redbox Instant promised something Netflix couldn't match -- at least in theory. But as is often the case, reality proved quite different.
Why did Redbox Instant fail? Although it's hard to say definitively, three factors in particular stand out.
Lack of original and exclusive programming
Netflix's aggressive push into original programming has at times drawn the ire of investors: Its lavish spending on original shows like House of Cards and Orange Is the New Black have been questioned; its expensive deals for exclusive content have been criticized. But despite its steep price tag, Netflix's content has emerged as a key differentiator and advantage, one that has it allowed it to remain stalwart in the face of new challenges.
Shortly after the launch of Redbox Instant, there was widespread speculation that Verizon and Outerwall would follow Netflix's lead, perhaps investing in original programming of their own. While the executives involved hinted at the possibility, it never came to fruition: Although it offered thousands of movies, Redbox Instant was never able to offer its subscribers anything they couldn't get elsewhere.
Limited distribution
At the same time, Outerwall and Verizon's service was hampered by a lack of availability. A website and apps ensured that anyone with a laptop, PC, or mobile device could instantly access the service, but set-top boxes were something else entirely.
Netflix has an app for virtually every smart TV, blu ray player, and streaming device in existence (even a few cable boxes). Netflix management frequently updates its investors on its progress in this area, often using a portion of its quarterly investor to letter discuss changes in the consumer electronics market.
To be fair, Redbox Instant did launch on most major game consoles -- in the U.S., the most popular streaming media devices -- but it never made it to the Apple TV (with 20 million users, its importance cannot be understated) or most smart TV platforms.
A bad business model
But ultimately, the failure of Redbox Instant may have simply been the byproduct of a faulty value proposition: a bad bet that consumers wanted what its CEO once termed "disc plus."
When it was announced in early 2012, Redbox Instant appeared almost intentionally designed to take advantage of Netflix's then-recent blunder: the controversial splintering of its online streaming and DVDs-by-mail subscription plans. By separating disc rentals from streaming video (and charging a separate, minimum $8 fee for both) Netflix had indirectly raised prices on its customers by 60%, sparking a fair amount of backlash and some subscriber loss. The concern was real enough to devastate Netflix's stock -- in just four months, shares shed more than 75% of their value.
Around that time, Outerwall and Verizon came along, trumpeting their new service with a plan that would offer something approaching the Netflix of old: For $8 per month, customers could rent four DVDs from one of Outerwall's many Redbox kiosks, and stream unlimited video from the Redbox Instant app.
In hindsight, Netflix's management was the more forward-thinking, correctly betting that online streaming was the future. In the years since, Netflix has added tens of millions of new streaming subscribers, and while the number of customers receiving DVDs by mail still numbers in the millions, it has experienced steady declines nearly every quarter.
Life after Redbox Instant
For Verizon, the closure of Redbox Instant doesn't mean much -- the telecom giant's core business still remains entirely centered around wireless and wireline services. Adding a subsidiary the size of Netflix would've helped, but its failure is not material.
Outerwall's future is far less certain. The company has been a persistent target of short-sellers, largely due to its reliance on Redbox. Last quarter, for example, its DVD rental kiosks generated more than 80% of its revenue, a precarious situation to be in, considering the persistent improvements in online infrastructure and Internet-connected TVs. Had it succeeded, Redbox Instant may have driven more business to Outerwall, and kept its DVD rentals somewhat relevant.
With Verizon and Outerwall out of the market, Netflix should benefit from having one less competitor to worry about. Redbox Instant never posed much of a threat to begin with, but its official shuttering stands as one less obstacle in Netflix's path.
