I’ll be the first to confess I’ve been unusually enamored by the Netflix (NASDAQ:NFLX) saga over the past year or so — not so much because it’s interesting, but because the writing has been on the wall for so long, and the market has managed to ignore it the whole time.
After the most recent bomb was dropped, though, it’s going to be near impossible to deny how quickly things are unraveling for the online-streaming/DVD-rental company.
Odds are you already know the basics: Coinstar (NASDAQ:CSTR), which owns and operates the Redbox DVD-rental kiosks, is getting into the online-streaming video subscription business. The service’s lowest price-point of $6 per month takes dead aim at Netflix’s most popular steaming-only service. Coinstar has upped the ante on NFLX, however, by adding access to four DVD rentals per month through its kiosks for $8 per month — Netflix’s price-point for its streaming-only service.
Netflix subscribers won’t want to cancel their accounts right away, as the quantity of Redbox-branded videos available online for streaming still pales in comparison to the sizable Netflix library. On the other hand, all big trends start at as small ones; Coinstar almost assuredly will add more content over time.
Is it a Netflix killer? Maybe. But really, Redbox Instant is only one of several key challenges Netflix is facing at this point:
#1: Redbox won’t be the last challenger.
Times are changing, and technology has meant business lines have been blurred, while barriers to entry have been eliminated. In fact, I opined back in March that Cablevision (NYSE:CVC) offering Cinemax and HBO content online through services called HBO Go and MAX Go, as well as Comcast (NASDAQ:CMCSA) developing its own streaming service called Streampix, was evidence that “[a] low barrier to entry, however, isn’t preventing other players from entering the same market.” Bluntly, I’m surprised it took Coinstar this long to unveil the new service.
However, that still doesn’t fully explain why Netflix is in rather big trouble here.
#2: Netflix isn’t applying leverage (while its competition is).
As I added to the Netflix story in early November after Amazon (NASDAQ:AMZN) lowered its price-point on its Prime service (which includes access to some of its streaming digital content): “To investors, the compelling aspect of Amazon Prime is what else it can do with those customers.”
That “what else it can do” is marketing itself as an online retailer of physical goods as well as digital content; the more often a customer goes online to watch streaming content, the more apt those consumers are to purchase a product. It matters because, frankly, Netflix has already proven that margins on streaming content are thin (and seem to be shrinking). If digital content-providing companies are going to make any real money with their subscriber bases, their best bet is to sell something aside from just digital content.
Another example: Through its Redbox machines in certain parts of the country, Coinstar has unveiled — without much fanfare — a service called Redbox Tickets. Certain Redbox kiosks can sell tickets to concerts, car races and pretty much any other event requiring a pre-purchased entry pass. Though Redbox has only been able to sell tickets to unsold (presumably less-than-great) seats to these events, the fact the service has been fairly well-received so far suggests Redbox eventually could become a mainstream ticket vendor — or for that matter, a vendor of all sorts of goods or services… like Amazon.
And let’s not forget that Redbox also sells DVDs outright.
Meanwhile, Netflix still is struggling to just sell streaming content and its DVD rental service, not even thinking of a way to leverage itself or its reach.
#3: Netflix isn’t partnering (while its competition is).
While Coinstar is being lauded here, what the market is overlooking is that Verizon (NYSE:VZ) actually owns 65% of the Redbox Instant venture; this will be a bigger deal for the telecom name than for CSTR. Then again, Verizon brings a name and marketing clout to the table that Redbox could never bring on its own.
Don’t misunderstand. Verizon is neither a studio nor a content distributor. But it does have a wide reach in the telco world, and studios and distributors might be willing to work with the giant. Coinstar on its own might not have been able to accomplish the same when it comes time to convince digital content owners it can reach a big audience.
To its credit, NFLX tried to partner with some cable companies earlier in the year … but the cable operators recognized Netflix had little to offer them.
Yes, the new Redbox venture is a problem for Netflix, though hardly the first one. Just add Redbox to the list of companies that will collectively chip away at the Netflix’s top and bottom line as digital content becomes more and more of a commodity.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.