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Redbox Instant Shuttering Oct. 7

4 Oct, 2014 By: Erik Gruenwedel

Kiosk vendor’s late entry into the digital space never gained traction with consumers or Wall Street

Redbox Instant, the digital sales and rental joint venture between Verizon Communications and Redbox, will cease operations Oct. 7, according to an announcement on its website.

“Thank you for being a part of Redbox Instant by Verizon. Please be aware that the service will be shut down on Tuesday, Oct. 7, 2014, at 11:59 p.m. PT. Information on applicable refunds will be emailed to current customers and posted here on Oct. 10. We apologize for any inconvenience and we thank you for the opportunity to entertain you.”

First unveiled in 2011, but only launched last year, Redbox Instant attempted to take on Netflix and other SVOD services by melding Redbox’s successful disc rental business with a digital component that included transactional VOD, electronic sellthrough and subscription streaming.

Despite being backed by Verizon’s investment and digital prowess, the service never caught on with Redbox’s disc subscribers or consumers already inundated with third-party transactional VOD and digital sales options.

With parent Outerwall and Verizon apparently unwilling to invest in original programing — a trend mandated by competitors Netflix, Amazon Prime Instant Video and Hulu Plus — or pay escalating content license fees, Redbox Instant’s streaming content never evolved beyond fare offered by Dish Network’s failed SVOD platform Blockbuster @Home.

With the joint venture hemorrhaging money (about $15 million quarterly) and Outerwall never disclosing subscriber figures, the writing was on the wall.

Outerwall hinted in its most recent fiscal report it could shutter Redbox Instant if conditions didn’t improve. Indeed, analysts such as Michael Pachter with Wedbush Securities and B. Riley & Co.’s Eric Wold have called upon management to pull the plug.

Late last month, Redbox announced it was not accepting new Instant subscribers because criminals allegedly were using the process to validate/test stolen credit card information acquired elsewhere. This misuse did not involve a compromise of Redbox Instant customer information, according to a Redbox spokesperson.

Wold said the shutdown is a double-edged sword for Outerwall. Since Outerwall had not classified Redbox Instant as part of the company’s core offerings, the losses generated by its 35% interest in the joint venture are not reflected within Outerwall's pre-tax earnings or earnings per share.

Yet, Redbox has been recognizing an undisclosed amount of rental revenue per each Instant subscriber. Eliminating this contribution could have a negative impact on company revenue and pre-tax earnings outlook, although Wold assumes it would be a relatively small impact given the service has been unsuccessful in signing up subscribers.

Meanwhile, the analyst says Outerwall's three-year investment of $74 million into Redbox Instant will now be written down to zero and actually save shareholders from any further money-losing capital contributions.

"I also believe that the payment to Warner Bros. for its digital content (to be used in the streaming service) was a carrot that brought the studio back to 28-day delay terms with Redbox. With this venture underperforming and now being shut down, that could impact the renewal decision later this year for that studio," Wold wrote in an email.

Wedbush's Pachter said the loss of Redbox Instant is not necessarily a blow to the Redbox brand. He said the digital offering was too limited to appeal to consumers, while continuing to be fiscal drain on company resources.

"It was a money pit [for Redbox]," Pachter said.

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