Redbox taking on Netflix

Coinstar Inc, Redbox's parent company, and Verizon Communications Inc are ready to set up a video-streaming service later this year to challenge Netflix after signing up a joint venture. Redbox began in 2002 as an idea sponsored by McDonald with kiosks selling grocery products and DVD rentals. Today, Redbox is the biggest DVD rental service in the US with the market share of 37%. Redbox has expanded its DVD rental service to 28,000 locations including the bigger chains like Wal-Mart, Walgreens and Safeway. Redbox's business model targets customers visiting supermarkets, grocery, convenience and drug stores. Its CVP is to provide a convenient (Redbox kiosks is present in every state) and easy (rent and return anywhere policy) buying experience by charging an affordable price ranging from low-medium. Redbox revenue increased 35% last year to $1.6 billion. If the revenue growth is so strong, then why is Redbox horizontally integrating into the video-streaming service?

This is because of the following reasons:

• DVD rental business is a dying business model. This does not mean that in the coming years customers will stop renting from Redbox's kiosks. This means that given the surge in number of internet users, more customers will shift from renting the DVD physically to streaming it online. Redbox in order to sustain its brand name and business cannot only rely on DVD rentals and therefore has made the right choice of entering the video-streaming market. Netflix also started on the same path, first renting and selling DVD's and then moving beyond the DVD market to video-streaming.
• It is also important to understand the timing of this deal. A few months ago Netflix tried to change the fee structure by separating its DVD rental and video-streaming service. Subscribers were upset about the price and some of them also cancelled their accounts. Most of the customers have continued with Netflix because there are no other companies that provide both DVD rentals and a video-streaming service. Given the negative image that Netflix has created for itself in the market, Redbox has appropriately grabbed this opportunity by signing a joint venture with Verizon to create its own video-streaming service that will be introduced later this year.

There are two questions that Netflix needs to answer and to which Redbox needs a reply.

• Is Netflix replaceable? This means can Redbox replace Netflix when Netflix is not in the market?
• Is it easy to replicate Netflix? This means while Netflix is in the market, is it easy for Redbox to replicate Netflix’s business model?

Netflix is replaceable for the following reasons:

• Redbox over the years have accumulated 36 million email addresses which will help them promote their video-streaming service.
• When Netflix is not present in the market, the licensing dealers like the big studios (Times Warner) will shift to Redbox in order to sell their licenses.
• If Netflix shuts down now, then Redbox is the only company among its competitors like Wal-Mart’s Vudu and Amazon streaming service to provide both DVD rentals and video-streaming.

Though these three points indicate that Netflix can be replaced when shut down, there is a challenge that Redbox faces. According to Charlie Wolf, an analyst at Needham & Co., comment in a Wall Street Journal article that Verizon and Coinstar could not gain traction in licensing content. He said that "Unless Verizon and Coinstar are prepared to spend an amount that's in the ballpark with Netflix and/or possibly Amazon; the service is unlikely to capture a material number of households."

Netflix cannot be replicated by Redbox for the following reasons:

• Given that Netflix is in the video-streaming market, it will be a tough job for Verizon to negotiate licensing deals with the big studios who would have already sold their licenses to Netflix.
• On the contrary, Redbox's inventory is limited to what is in the kiosks, compared to Netflix's library of 100,000 discs.
• Redbox and Verizon aim to charge lower prices to consumers in order to attract them to the service. However, given the rising cost of streaming rights, it will be tough for the joint venture to sustain profits which will ultimately force them increase the price of their product.

Also, Netflix is making it hard for its competitors to replicate its business model by expanding with content that has not been introduced anywhere else. For example, Netflix's first original TV series, an eight-episode drama called "Lilyhammer," debuted Monday.

These are my viewpoints on whether Redbox can replace or replicate Netflix. What are yours?