Redbox and Verizon Face Key Decisions for DVD-and-Streaming Service

Haven't Ruled Out Ad Support Yet, Allude to Scheduled TV

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Credit: Tony Pettinato
Redbox and Verizon's hybrid streaming and DVD service, which will compete directly with Netflix, remains in the planning stage, but so far its backers are still considering some elements that Netflix rules out or de-emphasizes.

The partners are in the process of determining, for example, whether or not the service's streaming video will be ad-supported. "We are looking at what consumers want," said Galen Smith, senior VP for finance at Redbox. "They are used to ads not being there, but we are weighing all of the options."

Advertising may be a long shot, but it would help Redbox and Verizon compete in a key area: price. "We have observed a void in the video-rental market for a subscription service that offers new release DVDs as well as unlimited web-based streaming for a low monthly fee," Piper Jaffray analyst Michael Olson wrote in a note today. "It appears that Redbox and Verizon will attempt to fill that void."

Redbox parent Coinstar also said in a Securities and Exchange Commission filing Monday that its planned service would give consumers access to video "including linear content," industry jargon for programming that runs at a particular time -- such as traditional TV. It's hard to imagine a TV network giving a streaming service access to its live signal, but there are already nibbles around the edges of that challenge.

Redbox is considering all of its options, with the possibility out there to include some live TV, Mr. Smith confirmed.

And in its most certain departure from the Netflix approach, Redbox and Verizon are investing in the physical-DVD business.

Convinced that the DVD still has a long life ahead, Redbox just agreed to purchase about 10,000 Blockbuster Express kiosks for about $100 million.

This is all part of Redbox and Verizon's plan to give consumers an all-encompassing video experience, an area left relatively vacant following Netflix's decision to break up its DVD-by -mail and unlimited streaming service into separate plans.

"Consumers will be able to get new releases at our kiosks and library content through a subscription basis," Coinstar Chief Financial Officer Scott Di Valerio told AdAge.

Netflix has said that customers for its DVD service will decline every quarter from here on out, and has no plans to even market it this year.

"Physical has a long tail for us and we will be rolling out more ways to utilize the kiosks and provide more services," Mr. Di Valerio said. "There's still an opportunity to grow and no one is really delivering the convenience at this price point."

After Netflix's price hike for people who want streaming and physical DVDs, Netflix lost perhaps 9 million DVD customers last year and stands to lose another 1 million to 1.5 million in the first quarter of this year, according to Wedbush analyst Michael Pachter. "Coinstar's Redbox unit is the clear beneficiary," Mr. Pachter wrote in a note.

Demand for DVDs for Redbox remains strong, however, even after the company raised its per-night rental fee 20% in October.

A strong slate of DVD releases in the fourth quarter helped Redbox maintain rentals, but that wasn't the only boost it received. "We believe another factor that drove demand was the lack of a true substitute to Redbox, as Netflix has implemented very unpopular price increases and does not offer a pay-as-you-go rental option," Mr. Pachter said, "while Blockbuster Express has a more expensive pricing structure."

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