Verizon, Redbox plan Netflix challenge

Mon Feb 6, 2012 5:57pm EST

Customers rent DVD movies from a redbox video kiosk in Burbank, California,  May 8, 2011.  REUTERS/Fred Prouser

Customers rent DVD movies from a redbox video kiosk in Burbank, California, May 8, 2011.

Credit: Reuters/Fred Prouser

(Reuters) - Verizon Communications Inc and Coinstar's Redbox unit have formed a joint venture to sell video services aimed at competing against video rental giant Netflix Inc.

The venture will combine the Redbox DVD rental kiosk business with an Internet video offering from Verizon, including mobile offerings, in the second half of the year.

On Monday, Redbox-operator Coinstar Inc moved to cement its hold on its business of renting DVDs from automated kiosks, announcing it will buy rival NCR Corp's machines and video inventory for up to $100 million. That, and better-than-expected quarterly results, pushed the stock 13 percent higher after hours.

However, investors in Verizon and Coinstar were unimpressed as the pair offered little detail about the service. Netflix shares ended up 2.2 percent, reversing a decline that came directly after the news.

The new service's price will start from around $6 a month for movie streaming and one DVD rental at a time from the Redbox kiosks, according to a person familiar with the plan.

Netflix's pricing currently starts at $7.99 for either streaming only or a single DVD by mail. To get both the streaming and DVD rental package prices start at $15.98.

Verizon and Redbox declined to comment on the pricing.

The alliance will mark Verizon's first foray into video streaming outside its network operating region as the telephone company so far only offers Web video services to subscribers using its FiOS TV service which competes with cable providers like Comcast Corp and Time Warner Cable.

However, Verizon/Redbox's success in competing with Netflix and other online rivals like and Hulu Plus, will depend hugely on the price of the service and the depth of content it has available, according to analysts.

"We're in negotiations right now (and) finalizing," Bob Mudge, Verizon's head of FiOS, told Reuters. "I feel very confident we'll have a wide set of digital distribution content."

The executive promised a subscription service and "other options" with the "right pricing" to compete but declined to give details of the service or to comment on how much it would cost Verizon, which has already spend about $23 billion upgrading its copper network for its FiOS TV and Web service.

Verizon and Coinstar will need to invest heavily to convince Hollywood studios to participate to create a service comparable to Netflix, said Hudson Square Research analyst Daniel Ernst.

"The question is, how much are they investing to get a large library of programming? Netflix is spending up to $1 billion a year on content," said Ernst. "For me, it's doubtful that these two companies will invest to that level."

According to regulatory filings Redbox will make an initial capital contribution of $14 million in cash, implying that Verizon would contribute around $26 million.

As Netflix has shifted its emphasis to instant-view streaming from its mailed DVD rental service, it has had to write ever-heftier checks to content.

Coinstar earnings got a lift from the negotiation of better credit-card rates. A strong movie slate also helped it post fourth-quarter revenue of $520.5 million, surpassing the $498 million Wall Street had expected.


Verizon did not disclose how many of its FiOS TV programming partners, if any, had agreed to make video content available for the streaming service. The partnership follows a December 6 Reuters report that Verizon was planning a streaming video service.

To help market the online service inside and outside the FiOS region, Mudge said he is hoping to tap into the loyalty of Coinstar's 30 million customers who rent an average of about 1.9 million movies a day at Coinstar's 35,000 kiosks in places like supermarkets and gas stations.

Netflix had 24.4 million U.S. subscribers at the end of December, while Verizon ended the year with 4.2 million FiOS TV customers. Coinstar rents out DVDs at $1.20 a day and Blu-Ray discs for $1.50 a day.

Coinstar sees an online offering as an important expansion beyond the roughly 200 recent-release movies the company offers at any given time, CEO Paul Davis said.

"What our consumers would like is access to a much broader array of options," Davis told Reuters, adding that most CoinStar customers have Internet connections. "We're focused on new releases. ... Once it's in the box a few months we pull it out."

The venture -- to be 65 percent owned by Verizon and 35 percent by Redbox -- will offer its first products in the second half of 2012, the companies said. It will be managed by a board consisting of three Verizon appointed managers and two appointed by Redbox.

Pacific Crest analyst Steve Clement said it was too soon to judge whether the venture will be a success.

"We don't know what kind of content they'll have available, what they'll pay for that content and what they'll charge for it," said Clement. "There's way more questions than answers at this point."

He noted that a big part of Netflix's success was due to its easy user interface and recommendation of TV shows and movies based on its subscribers viewing history.

Shares of Netflix closed up 2.2 percent at $129.25 on Nasdaq. Coinstar ended up 1.8 percent at $50.56 after pulling back from an earlier increase of about 7 percent. Verizon edged up 0.8 percent to $38.14 on the New York Stock Exchange.

(Reporting by Sinead Carew; Editing by Lisa Von Ahn, Mark Porter, Gunna Dickson and Bernard Orr)

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Comments (3)
r1ghtm1nd wrote:
Does redbox/verizon really have to go deep? Most of Netflix’s recent depth is stuff from the 60′s and 70′s that very few people are going to watch. They lost most of the good content from Starz, making it alot less attractive.

If redbox/verizon can get something like what Starz used to give netflix, instead of what they have now, it would probably win.

The thing I want to know, is why isn’t HBOgo a subscription service? Or Starz direct marketing downloads?

Feb 06, 2012 12:45pm EST  --  Report as abuse
aligatorhardt wrote:
When one considers that Verizon could offer streaming for the price of Netflix, and of course the present low cost of Netflix, it is really obvious how much Verizon and other cable companies have been ripping us off for years. Charging 600% more for less programing than Netflix, cable offers constant repeats with no convenience of watching on your schedule. Sports is the only category of shows that cable has exclusive.
For new Netflix customers, I recommend the Roku box. I bought one for my mom a year ago, and another for the bedroom TV. I started getting Netflix via an Xbox 360 console, but I will not renew Xbox live again, as the service is getting worse all the time. They do not allow the same control as Roku, and seem to be crimping bandwidth. No longer can you get the full descriptions of shows, or year of release, no longer can you stop and rejoin a show later on xbox. They have delays on looking over selections, and do not support 1080 resolution. The menu on xbox is slow and lacking in features compared to the Roku. There is a pitiful online help website with very few options and no persons available, there is not even a number listed to call for support problems. There is not e-mail for support questions either with xbox live.

Feb 06, 2012 6:11pm EST  --  Report as abuse
Gall0wz wrote:
Heh smooth move. Curb unlimited internet then introduce streaming service.

Feb 07, 2012 3:43am EST  --  Report as abuse
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