Verizon, Redbox Alliance Faces Fierce Competition in Streaming Video

Verizon (NYSE:VZ) is teaming with Coinstar’s (NASDAQ:CSTR) Redbox video rental service for a new joint venture to challenge Netflix in the U.S. By the time Redbox and Verizon get their broadband home entertainment business in place, though, their streaming-video competitors may have already moved on to something new.

The truth is that this service has been coming for a long time. Coinstar announced its plans to add a streaming video business to its Redbox DVD kiosk rental business in February 2011. The market was already getting crowded, as if every business in the world was trying to replicate Netflix’s success. Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), Facebook, and even Sears (NASDAQ:SHLD) all announced Web-based video services around that time. Since then, only Amazon has found a following, with its Amazon Prime service. Coinstar’s Redbox, following its announcement, smartly waited to see how others would fail in the market, and it emerged with a promising partner, Verizon, this week.

The Verizon strategy

Verizon also has hinted at streaming video service plans. There were even rumblings in December that Verizon planned to buy the then-injured Netflix. While that deal would have strengthened Verizon’s TV business, adding Netflix’s roughly $800 million in quarterly revenue to the $2 billion Verizon makes from its own TV operations each quarter, this new deal with Coinstar is equally promising.

The joint venture minimizes risk for both companies. For Coinstar, Verizon represents existing infrastructure that will spare the company the cost of building its own network. The millions of Verizon mobile phone users and FiOS Internet service users are also a readymade audience for the service.

Verizon in turn will be spared the burden of building yet another new brand from the ground up. While the joint venture—Verizon will control a 65% stake, while Coinstar will control 35%—doesn’t have an official name, it seems likely that the Redbox name will be used in some way to pull in subscribers. After all, Redbox leads the DVD/Blu-ray rental market, according to research firm NPD. Streaming will also provide Coinstar with much needed growth; As J.P. Morgan said in the fall, the kiosk market is fast becoming saturated.

The partnership looks good on paper and the two companies have the strength in their respective fields to make a new streaming service a success. The thing is, streaming video isn’t the same business in 2012 that it was in 2011. After hinting at its plans for month, Netflix has released its first original content. The company released the entire original series Lillyhammer, a mobster comedy starring Steve van Zandt of Sopranos/E Street Band fame, on Monday. This show precedes other original-content projects, including a continuation of the cult sitcom Arrested Development and David Fincher’s new series House of Cards.

Gorging on programming

Netflix is even taking swipes at the original content of premium subscription TV services like Time Warner‘s (NYSE:TWX) HBO. Unlike HBO, Netflix is offering its original content in bulk because, as the company’s chief content officer, Ted Sarandos, says, Netflix users like to “binge” watch. Netflix has effectively changed the model of both the premium TV and streaming businesses in a single stroke, and it gets to test its strategy on an existing audience of 22 million streaming subscribers.

That’s the first of many challenges facing Coinstar and Verizon’s new baby. Rumor is that Amazon is about to being offering its streaming video service independent of Amazon Prime at a subscription rate below $9 per month. If Verizon/Coinstar wants to compete, it’ll have to wage a price war with Netflix and Amazon in addition to a content war. Verizon and Coinstar are collectively strong, but they have a fierce fight ahead of them in the streaming market.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.


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