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Analysts: Redbox Likely to Benefit from Netflix Price Changes

13 Jul, 2011 By: Chris Tribbey

Analysts seem certain of one thing regarding Netflix’s decision to charge $7.99 each for its streaming-only and DVD-only services: Redbox stands to benefit.

“With most new releases not available for streaming, Netflix subscribers choosing the streaming-only option will have to turn to other sources for these newer releases,” John Kraft and Douglas Greiner, analysts with D.A. Davidson & Co., wrote in a research note. “In our opinion, this will create incremental demand for alternative low-cost DVD rental services such as Redbox.”

They count 17.6 million Netflix DVD subscribers that will have to decide on what to do, and estimated 12 million of those will choose the streaming-only plan. Those consumers could then turn to Redbox for DVD.

“With Blockbuster brick-and-mortar locations few and far between, we contend most will choose Redbox,” they wrote. “[Redbox parent] Coinstar is in an envious position, as the Redbox business has been growing explosively with competition quickly evaporating. Given the plan and price changes at Netflix, Coinstar is well-positioned to gain market share.”

Eric Wold, research director with Merriman Capital in San Francisco, noted the “quick and vocal” negative backlash from Netflix consumers regarding the price hike, pointing to the more than 22,300 comments on Netflix’s Facebook post the night of the July 12 announcement. He said 98% of those were negative.

“While it’s a known fact that consumers are more likely to comment negatively than positively, we believe this level of complaints is worth noting,” he wrote in a note to investors. “Netflix defection would benefit Redbox traffic. For those Netflix subscribers who still utilize DVDs, we would expect this price increase to force them to re-evaluate their subscriptions — with a potentially meaningful percentage of them canceling their subscriptions altogether.”

With brick-and-mortar rentailers far and few between, Redbox is the likely beneficiary, he wrote.

“With limited choices now for DVD rentals (especially with Blockbuster and other chains closing), we believe Redbox would experience a significant share of any defecting DVD-rental demand,” Wold concluded.

However, Ralph Schackart, analyst with William Blair & Co. in Chicago, struck a wait-and-see tone on whether Netflix will lose a significant amount of subscribers due to the change.

“Netflix has done a tremendous job navigating a by-mail DVD business to a streaming service,” he wrote in a note to investors. “While the streaming service offers unlimited selection of its catalog of older movies and DVDs offer a nice complement of new releases, it will be interesting to see what the customer reaction will be to the price increase.”

Redbox officials would not comment on the Netflix pricing changes.

About the Author: Chris Tribbey

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