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US DVD Kiosk leader wants to challenge Netflix online movies

It’s amazing what you can do to your share price these days, just by saying that you are going to copy a major rival

By PETER WHITE

Published: 11 November, 2010

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It’s amazing what you can do to your share price these days, just by saying that you are going to copy a major rival. That’s why Coinstar in the US, which owns the Redbox, $1 a time, DVD rental kiosk operation, saw its share price jump around 26% the day after its results came out last week – because it says it’s going to do a Netflix and offer films online.

As we remember it, Netflix began researching online movies a full two years before it eventually offered them about two and a half years ago. Now it is reaping the benefit of a business model which makes people think they get online films for free – they pay a monthly subscription to rent DVDs, ordering them online and posted to their home, and the online streaming option is offered for no extra payment.

Redbox has been the only fly in the ointment for Netflix, undermining its online DVD rental program by offering Kiosks in-store among larger retail brands, for $1 a time. Of course the DVDs which Redbox offers can often be B movies which never made the grade, and there is a lot of “straight to DVD” nonsense in their Kiosks, but then again, Netflix has to wait for films to get into the DVD Window and more and more the two are being lumped in together by Studios, as to when they are allowed to have films, and studios hope to extend that delay so that they can earn more money from DVD sales before these two feed the entire US public with movies, for not very much.

But in outlining plans to go online, the weakness of the Kiosk model begins to become apparent. Netflix is able to invest directly in content creation, and leverage more and more DVDs as it lines up content for 17 million US homes. Redbox revenues are based on a whim, an impulse purchase, not a monthly subscription, and it is unlikely ever to be able to plough money into film making ventures because it’s revenues are unpredictable. The better the Netflix online offering does, and we must remember that the company signed up 3 million new subscribers last quarter, the less people are going to go out to the mall and put a dollar in a kiosk, knowing they have to take it back sometime. It costs more money in Gas (petrol).

The chances are that Redbox has only announced its plans to go online because it expects a sudden fall away in business. But it has a long way to go and so far has just said that it is “looking for a partner,” which is likely to lead to the only other game in town, which is Sonic Solutions, whose technology powers at least four of the major online movie services – although not the Netflix one. Sonic has its own service RoxioNow and its technology supports Cinema Now, which is also sold at Best Buy and Sears.

Redbox says that it will have an online service by early 2011, to go with its 28,900 DVD Kiosks throughout the US

Our worry is that even at $1 per online movie, the service will still be perceived as more expensive than the “Free” service of Netflix. In Canada, Netflix has introduced an online only service, with no DVD rental as part of the deal and says it may introduce a similar idea in the US for $7.99 a month. Sure Redbox can undercut that, but for $8.9 a month, US homes using Netflix can currently rent one DVD at a time, and post it back AND get free online movies, and it’s this deal that Redbox has to find an answer to. Which is tough.

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