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Netflix and Redbox: The New Low-Price Leaders

10 Feb, 2010 By: Stephanie Prange

I recently heard a report that, while liquor sales are doing well during this recession (as they always do), consumers are increasingly opting for the lower-priced booze. Instead of Grey Goose vodka, they are buying Popov. Instead of Gentleman Jack, they are opting for Black Velvet whiskey.

The same thing seems to be happening in the video industry. Wal-Mart used to be the low-price leader on packaged home media, offering the best value with DVDs priced close to the $4 it would take to rent it at the local Blockbuster. But as the recession has cut into consumers’ budgets, increasingly kiosks such as Redbox, with its $1 rentals, and Netflix, with its unlimited streaming plus disc rentals for $9 a month, are looking good by comparison.

Cable VOD, with prices around $4, also is struggling. Both Time Warner Cable and Comcast, the top cable operators in the country, each reported quarterly declines of about 200,000 subscribers for premium channels, including VOD.

“I have to imagine that the continued proliferation of Redbox kiosks and Netflix offerings is drawing consumers looking for cheaper alternatives that are just about as convenient as VOD,” Eric Wold, director of equity research with Merriman Curhan Ford in New York, told Home Media Magazine. He commented on a survey from research firm Light Reading that said 30% of respondents had switched providers due to video service price issues.

While analysts may wax poetic about Netflix’s technological advantage, I contend one of the primary drivers behind its growth during this recession is price for the amount of service. I know people who have dropped cable altogether in favor of Netflix. Subscribers have access to a slew of TV shows and older movies, as well as the traditional by-mail rental of the latest hits for a price that is much less than the typical cable bill.

As for Redbox and other kiosks, no retailer I know of can beat a $1 rental. That’s likely one of the reasons Wal-Mart is refusing to sell a buyer more than five copies of new releases (a move obviously aimed at Redbox, which has kiosks in its store) and has kicked out rent-sell-buy kiosk company e-Play. The low-price leader doesn’t like the lower-priced competition. I wouldn’t be surprised if the retail goliath gets into the kiosk business itself. That would make them a low-priced leader in the rental business as well.

Redbox and Netflix may have innovative business models, but it’s really price that is growing their businesses. To quote a political maxim, it’s the economy, stupid.

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