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Netflix Beats Redbox, Again

By Rick Munarriz – Feb 8, 2016 at 9:00AM

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Outerwall stumbles again as its DVD-rental business just can't get it right. Even Netflix's legacy DVD business is holding up better than that.

One of last week's biggest losers was Redbox parent Outerwall (OUTR), which shed 20% of its value after posting another disappointing quarter. It followed that up with uninspiring guidance for the year ahead.

Redbox continues to drag down Outerwall's prospects, and understandably so since it still accounts for a majority of its revenue. Folks continue to rent fewer DVD and Blu-ray discs, and it has only hurt that Redbox has resorted to boosting its rates to account for the shortfall of volume. Redbox revenue clocked in at just $407 million, down 17% since the prior year's holiday quarter. Outerwall's other kiosks -- offering machines that swap pocket change or used consumer electronics gadgetry for money -- are still growing, but Redbox is so important to the company that it still accounts for 77% of the revenue mix.

That's a problem. Folks are relying on streaming television services when they're hungry for video content, and that means fewer physical rentals and less demand for actual movies. The Internet and binge viewing are destroying Redbox's model, and it's fading a lot faster than even many of the naysayers have been forecasting.

Redbox generated 135.8 million rentals during the fourth quarter. That may seem like a lot, but there were 179.5 million rentals a year earlier. Folks may be paying more for their movie and video game rentals -- the 24% plunge in volume is softened to a 17% slide in actual revenue -- but the trend isn't kind. 

It gets worse as we work our way down to the bottom line, where Outerwall's operating profit was shaved in half. 

Contrast this with Netflix (NFLX -4.49%) where the bold gamble to push into streaming nearly a decade ago -- when its DVD rental business was still thriving -- has made all of the difference. Netflix is growing. 

Netflix's worldwide user base has grown by 30% over the past year to 74.8 million streaming accounts. It is probably not fair to compare Netflix's global empire to Outerbox's domestic rental business, especially since most of Netflix's growth these days is coming from its big overseas push. Well, Netflix's subscriber base is still serving 44.7 million accounts in the U.S., 14% ahead of where it was last year. Unlike Redbox, Netflix users haven't flinched at higher rates for new members.  

However, the story that you probably didn't hear last week as Outerwall's outer wall was crumbling is that Netflix's DVD business is also holding up better than that of Redbox. The number of folks still receiving DVDs by mail from Netflix has declined by 16% over the past year -- we're down to just 4.9 million accounts -- but the segment's operating profit has only dipped by 10%. 

Netflix beat Outerwall by being the first to disrupt the DVD model, but it's also doing a better job of maintaining the original stronghold. No matter how you slice it, Netflix is a winner -- and Outerwall is not.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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