Analysis: Redbox Instant vs. Netflix Hybrid

18 Dec, 2012 By: Erik Gruenwedel

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When it launches in the second quarter of next year, Redbox Instant by Verizon promises to be the first real contender to Netflix’s lucrative hybrid streaming-disc-rental option — a reality that could push the subscription VOD pioneer off its lofty perch, observers say.

Netflix continues to pay lip service to disc rental, as its 8.5 million physical renters (as of the third quarter) generate much of the company’s operating income ($131 million) and margin (48%) — notably due to the 5.9 million who opt for the $15.98 monthly hybrid plan, which represents a veritable cash cow.

Redbox Instant aims to cut off the Netflix hybrid plan at the knees on price. At $8 monthly, Redbox Instant would offer unlimited streaming of movies, including movies from pay-TV service Epix, Paramount, Lionsgate, MGM, Sony Pictures and Warner Bros., with four one-night credits per month for new releases on DVD at Redbox kiosks. For $1 more ($9 monthly), customers can opt to redeem their four credits for rentals on Blu-ray Disc at the kiosk. A streaming-only plan is available for $6 monthly.

Given the significant embedded customer bases already using both Redbox (43.8 million email addresses) and Verizon (90+ million wireless connections), the attractively-priced SVOD plan driven by variable content costs and the ability to get DVDs the same-day at 40,000+ kiosk locations is a game changer, according to Eric Wold, analyst with B. Riley & Co. in Los Angeles.

“I believe that Redbox Instant will not only immediately become a viable competitor within the space, but it has the potential to turn profitable much sooner than most expect (within 12 to 18 months),” Wold said. “I do not believe that Redbox Instant has to completely displace either Netflix or Amazon Prime in order to be deemed successful.”

Yet, with its willingness to spend big on licensing coveted digital content rights, Netflix’s streaming offering will not only be significantly larger than Redbox Instant at launch, it will offer highly coveted TV shows, in addition to movies.

Indeed, Wedbush Securities analyst Michael Pachter cautions that Redbox Instant has not revealed its streaming content lineup — a portfolio he said undoubtedly does not include TV programs. Pachter also believes the addressable market of hybrid subscribers is small.

“The question is whether there are people who are getting tired of Netflix, and who perceive value if they take less streaming content and add movies,” Pachter said.

At the same time, the analyst doesn’t see Netflix cutting its hybrid price for any reason to compete. And given the margins hybrid plans generate, Netflix cannot afford to cut DVD pricing. Pachter said that for every $1 in reduced pricing for the DVD plan, Netflix loses more than $8 million per month, or around $100 million per year. 

“After tax, that comes out to just about exactly $1 per share in lower earnings,” he said. “They simply can’t afford to compete on price.”

Meanwhile, Morgan Stanley, in a recent report on Netflix, said the fact that Redbox Instant will charge subscribers additional fees ($1.20 per day) for rental discs not returned in 24 hours (unlike Netflix) could mute its popularity among unsuspecting users. More importantly, the research firm said Verizon’s willingness to enter the rental business underscores the popularity of the SVOD market.

“We do think that Redbox Instant does help Netflix, and in a crucial way: it validates the company's business model,” Morgan Stanley wrote.

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