Analyst: Netflix’s Sub Drain Equals $160M Redbox Gain

18 Nov, 2011 By: Erik Gruenwedel

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With Netflix expected to lose 2.6 million to 3.6 million subscribers in the current fourth quarter, Redbox could realize incremental revenue of about $160 million as a result, an analyst said.

When Netflix implemented a 60% rate hike in September to its combined disc and streaming rental program, subscribers reacted negatively — with 300,000 more abandoning the service than Netflix’s projected third-quarter (ended Sept. 30) loss of 800,000 subs.

Eric Wold, analyst with B. Riley & Co. in Santa Monica, Calif., believes Netflix’s defections could reach 4.7 million, which he said represent upwards of $445 million in disc rental revenue up for grabs. 

In a Nov. 16 note, Wold surmised that the majority of the aforementioned defectors would downsize their monthly rental activity since a-la-carte rentals carry a higher perceived cost than a monthly subscription.

Indeed, the Netflix exodus occurred in large part due to the perception among subscribers that the value of its $9.99 combined disc and unlimited streaming rental program could not be replicated by Netflix’s separate $7.99 monthly disc and streaming program.

“Once that subscription plan was eliminated (or essentially priced up 60% to $15.98), we believe the attractiveness of a $7.99/month DVD-only plan for the casual renter was dramatically diminished given the growing availability of Redbox rentals for $1 a day,” Wold wrote.

With Redbox parent Coinstar acknowledging that 20% of Netflix subscribers also use Redbox, Wold said a large percentage of the remaining disenchanted Netflix subscribers would likely downsize their rental activity to about one to two discs per month at Redbox kiosks generating $50 million to $80 million in incremental annual pre-tax earnings.

“In our opinion, this potential upside is not fully reflected in either our or consensus 2012 expectations at this point,” Wold wrote.
 

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