UPDATE 8-Verizon, Redbox plan Netflix challenge

Mon Feb 6, 2012 7:12pm EST

* Verizon to own 65 pct, Redbox 35 pct

* Redbox to contribute $14 mln, implying $26 mln from Verizon

* Venture to undercut Netflix with cheaper DVD rental, streaming

* Netflix shares recoup losses

* Coinstar jumps 13 pct after deal for rival kiosks, earnings

By Sinead Carew and Yinka Adegoke

Feb 6 (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.

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 Amazon.com 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.

For its part, Coinstar moved to cement its hold on its business of renting DVDs from automated kiosks, announcing on Monday 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.

The deal is "a testament that we believe in the physical space," Coinstar's Paul Davis told analysts on a conference call. The purchase of NCR assets, which is subject to regulatory approval, will help the company fill in areas where it currently does not operate, he said.

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.

THE CONTENT GAME

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 Dec. 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. Verizon edged up 0.8 percent to $38.14 on the New York Stock Exchange.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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