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Verizon CFO: Redbox Instant Profitability Not Likely Until 2014

22 Jan, 2013 By: Erik Gruenwedel, Chris Tribbey

Characterizing Verizon’s subscription video-on-demand joint venture with Redbox as a start-up with significant capital investment, CFO Fran Shammo Jan. 22 told analysts in a fourth-quarter (ended Dec. 31) fiscal call he believes Redbox Instant by Verizon won’t positively impact the telecommunications company’s bottom line until next year.

Redbox Instant, which enables subscribers to stream, rent discs and purchase digital movies, is slated to launch in the first quarter of this year.

As a majoirty partner with Redbox parent Coinstar in the joint venture, Verizon nonetheless has contributed significant resources getting the SVOD platform off the ground, Shammo said. At the same time, Verizon is investing in separate business ventures, including purchasing Hughes Telmatics and establishing Verizon Digital Media Services.

The latter includes Verizon Content Services — a turnkey platform designed to give content owners an easier means of distributing programming to digital consumers on mobile devices, including smartphones, tablets, laptops and PCs. It is also expected to include transactional video-on-demand and subscription VOD targeting Netflix, Hulu Plus and Amazon Prime Instant Video, among others.

“So when you look at Redbox, Hughes and VDMS, these will all start to contribute to top-line revenue in [FiOS] wireline for 2013, but again, probably not much in the profit area,” Shammo said. “Because they are all startups and I would think that in 2014, these will really start to contribute to the overall profit.”

Eric Wold, analyst with B. Riley Caris in Los Angeles, reiterated that strategic advantages Redbox Instant has over other SVOD services include a variable content cost structure negotiated with the studios as well as the incremental offerings of both VOD and electronic selltrough.

"Even with an initially smaller streaming content library than Netflix, we continue to believe that a significant number of consumers will be attracted to an $8 per month movie service that offers both unlimited streaming as well as same-day DVD access to new movies (something Netflix cannot offer)," Wold wrote in a Jan. 23 note. "While we could see some of those subscribers defect from Netflix (given the significant customer overlap between Netflix subscribers and Redbox DVD renters currently), this does not have to be the case in all situations as each SVOD service will be attractive to different consumers for different reasons (i.e. free shipping, greater content levels, cable bundling, etc.)."

Meanwhile, Verizon said its FiOS TV service added 134,000 net subscribers in the quarter, bringing its total to 4.7 million. Shammo called the FiOS sub additions “very good,” saying they were greater than the second and third quarters.

“This was in spite of the significant disruption caused by the Hurricane Sandy restoral efforts,” he said.

Indeed, Sandy had a dramatic effect, particularly on the FiOS wireline business due to the heavy concentration of damage in the New York metropolitan area, according to Shammo.

“We also made a strategic decision to use storm restoration as an opportunity to accelerate fiber migrations in both the enterprise and FiOS markets,” he said.

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