Disc rentals, streaming video part of service

If the perfect Netflix killer could be built, Redbox and Verizon certainly have the pieces to assemble quite a competitor.

But with few details set in stone Monday, when the companies announced a joint venture to offer physical disc rentals and streaming video, it’s unknown how compelling a combination is in the works. Redbox parent company Coinstar wouldn’t say much on its earnings call beyond what it had already teed up with Verizon earlier in the day.

What we do know: Verizon will have a 65% share of the joint venture, which expects to launch its offering in the second half of the year. They project to spend $450 million, $14 million of which will be poured in by Redbox right off the bat.

Like Netflix, it will be a national subscription-based venture available to anyone with broadband access, not just those who subscribe to Verizon’s FiOs TV service or its wireless products. Unlike Netflix, the joint announcement makes pointed reference to a download option, which could mean there will be opportunities to own content in addition to rentals.

Together, Verizon and Redbox bring powerful brands with tremendous ability to promote the new service off their existing offerings. And Hollywood has reason to rejoice because the companies’ combined resources yield a new buyer of content that can achieve the kind of scale worth touting on earnings calls.

Both companies bring relationships with the studios to bear, although in the case of Redbox and Warner Bros. there’s strain given their inability to come to a new disc-distribution deal that would see adoption of a 56-day delay in the availability of WB titles. Nevertheless, Redbox CEO Paul Davis played down the impact that might have.

But what exactly Verizon and Redbox are going to launch has many missing details. Price may be the most crucial question, with Netflix seemingly vulnerable after a series of changes late last year that left its base of DVD customers eroding and the number of streaming-only subs only beginning to recover in the fourth quarter.

But Reuters quoted sources suggesting the joint venture could make streaming, together with rental of one DVD, for as low as $6 per month.

How DVD and streaming options will be combined isn’t entirely clear, either, with rumblings of the Verizon-Redbox pairing late last year suggesting some kind of points-based system could be applied that would be different than the unlimited option Netflix brings.

“We think that a points-based subscription model will have limited appeal with the typical Netflix streaming customer, who watched 31 hours per month of content last quarter,” said Michael Pachter, an analyst with Wedbush Securities, in a research note.

Just what content will be part of the mix also has not been spelled out. Redbox’s DVD business isn’t the library-based mix Netflix offers given its concentration on new releases. Verizon will help cover the expensive bill the partners will rack up as they build a streaming library, but whether that lineup will be digital versions of Redbox discs or something entirely different isn’t known.

At the very least, the Verizon-Redbox venture represents a more direct threat to Netflix than the one Dish Network seemed poised to pose with its acquisition of Blockbuster last year. Industry observers spoiling for a fight were disappointed in September when Dish relaunched Blockbuster as a multiplatform value-add to its current subscribers.

Which begs another question: Will this new venture offer any bonus offerings for Verizon’s wireless or multichannel customers? The service could be structured in a way that those subs could get authenticated access at no additional charge, but to what is anybody’s guess.

“We believe there will be TV Everywhere-like benefits to Verizon FiOs customers who utilize this new joint-venture offering,” said analyst Richard Greenfield of BTIG Research.

That Verizon is even interested in getting into the SVOD business is an acknowledgment of the limits to the future growth of its FiOs TV service, designed to compete with cable and satellite operators. FiOs, which bowed in 2005, has an estimated 5 million subscribers to its TV service.

Both Hulu Plus and Amazon Prime have joined Netflix at the SVOD table as buyers willing to buy significant tonnage in catalog content or exclusive locks on particular series or studios. On its own quarterly call last week, Netflix founder Reed Hastings voiced his expectation that Amazon may launch a standalone SVOD service that, unlike Prime, isn’t tied to buying other products from the company.

The venture should also effectively rule out Verizon from the perennial parlor game devoted to guessing which company may attempt to acquire Netflix. The network’s comedown in valuation this year, even amid signs of modest recovery, has done little to erase the notion Netflix is on the market.

There’s also the increasingly unlikely but tantalizing possibility that the new venture will be what’s known as a virtual MSO model, which would involve a low-price tier of linear channels. While Verizon has been among the companies reported to have been exploring such a business, there’s no language in its release that would support that notion.

Then there is the question of brand, with either one of the companies capable of lending its own name or the possible creation of a new one. Though Verizon’s overall footprint across its various products dwarfs Redbox’s still sizable customer base of 30 million, the 28,000 outlets it has already driving disc consumption make some extension of its brand the likeliest scenario.

Stocks for all three companies ended the day slightly up. Shares of Netflix closed up 2.2% at $129.25 while Coinstar rose 1.8% at $50.56 and Verizon inched up 0.8% to $38.14.

Netflix may have also seen some lift from attention for the launch of its first original program, “Lilyhammer,” and rumors that a new Apple-created TV set would include an app for the streaming service.

Coinstar saw a bigger increase in after-hours trading based on strong quarterly results and the announcement of its acquisition of NCR Corp.’s kiosk business.

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