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Is Netflix Embracing Disc Rental as Redbox/Verizon JV Looms?

9 Jul, 2012 By: Erik Gruenwedel, Chris Tribbey

Netflix’s staunch indifference toward physical rental could be changing.

The Los Gatos, Calif.-based by-mail disc rental pioneer has infamously turned a cold shoulder to DVD and Blu-ray Disc for years — opting instead to focus resources and management’s attention exclusively on streaming and the burgeoning subscription video-on-demand market.

But with Redbox and Verizon Communications set in the coming months to bow a joint venture that combines the former’s kiosk-based physical rental business model with the latter’s digital prowess, Netflix appears to be brushing up on its disc rental roots.

Last week, Netflix began an email campaign that entices existing streaming customers to upgrade their subscriptions to include unlimited disc rentals for an additional $7.99 a month ($15.98 total). The offer included unlimited disc exchanges (one out at a time) shipped to the home in about 24 hours.

Notable to the email was the statement, “No lines, no hassles,” in reference to an oft-cited challenge (by Coinstar management) about renting at a Redbox kiosk. This challenge has prompted Redbox to aggressively double the number of kiosks in heavily trafficked retail locations.

BTIG Research analyst Richard Greenfield, who first noticed the email campaign and kiosk reference, said the fact Netflix is citing physical rentals in a marketing push when there is no mention of DVD or Blu-ray rentals on its homepage underscores growing concern regarding the Redbox/Verizon venture.

“Makes us wonder if Netflix feels threatened by the coming ‘Redbox Instant’ service?” Greenfield wrote in a July 9 blog.

The analyst believes the joint venture will be called “Redbox Instant” based on a June 27 logo trademark application filed by the Coinstar-owned kiosk vendor with the U.S. Patent & Trademark Office as reported July 5 by Fiercecable.com. 

The disc/streaming venture could launch shortly after Sept. 1 — the date Netflix’s exclusive two-year license agreement with the pay-TV platform Epix ends — thereby allowing Redbox/Verizon the opportunity to forge an agreement.

Epix is co-owned by Paramount Pictures, Lionsgate and MGM.

“An Epix deal would give the joint venture streaming access to movies 13 to 14 months after their theatrical release,” Greenfield wrote.

He believes Redbox Instant will be priced between $7.99 and $15.98, and that subscribers would have unlimited streaming (similar to Netflix) access to largely movies while receiving credits for kiosk rentals and related content such as transactional VOD for new releases.

Separately, Eric Wold, analyst with B. Riley & Co. in Los Angeles, in a July 9 note suggested Redbox ramp up efforts to “re-skin” recently acquired Blockbuster Express kiosks for redeployment in Europe.

Coinstar CFO Scott Di Valerio earlier this year in an investor presentation said Redbox would likely deploy shuttered Express kiosks into untapped foreign markets as the kiosk vendor looks to expand internationally beyond Canada.

“Not only would this significantly reduce future cap-ex needs for that market, but it would accelerate revenue growth in the Redbox segment as well as offset the depreciation expense that has already began on those unused [Express] kiosks,” Wold wrote.



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