Is Verizon's Redbox deal a challenge to Netflix, or to its cable competitors?


Remember way back in the olden days? You know, when people wanted somewhat-current hit movies, they'd run down to the video store and rent VHS copies of them. Then, (lightbulb here) Netflix (Nasdaq: NFLX) launched a DVD-by-mail program, through which customers could get some of those same discs through the good old U.S. Mail. It was good, and late fees became a thing of the past.

But, something strange happened... people discovered the Internet, and so did Netflix. And that was good, too. Movies streamed, instead of arriving in the mail. Waiting for the mail-and your latest movie-became passé.

Is a Verizon (NYSE: VZ) deal to team up with Coinstar's (Nasdaq: CSTR) Redbox really a threat--or an alternative--to Netflix?

Verizon newly announced Entente Cordiale with Coinstar, which operates the king of dollar movie rental kiosks, Redbox, goes deeper.

In a press release, Verizon said the deal will "create a new choice for quality- and value-conscious consumers seeking a simple and affordable way to access the video entertainment they crave." The telco said the venture will combine the DVD rentals with "a new content-rich video on-demand streaming and download service from Verizon," set to launch in the second half of 2012.

To its credit, Verizon isn't limiting the offering to its subscribers, but will make it available across the U.S. as a subscription service "and more," available on multiple screens and devices.

"When you consider the core elements the parties bring to this venture-- our powerful brands; our national rental kiosk footprint; our anytime, anywhere network presence; and our mutual commitment to customer-focused innovation-- it's clear that Verizon and Redbox are a powerful entertainment team," said Bob Mudge, president of Verizon consumer and mass business markets, in the release.

During a surprisingly brief conference call, more notable for its lack on information than for the amount it revealed, Mudge pointed out that Redbox is the U.S. market share leader in disc rentals "through its footprint of 35,000 kiosks nationwide," a dubious achievement since its biggest competitor, Netflix, has been doing its best to dump that side of its business for months.

He went on to describe Verizon as "an insurgent provider in the interactive video space" that's "embracing streaming, a platform many view as a disruptive force in our industry as a great opportunity for innovation."

The deal, he said, was a "great opportunity for innovation and leadership."

Coinstar CEO Paul Davis said the company had been "looking for a partner to launch a digital strategy." The deal with Verizon, which will have a 65 percent stake in the JV, allows Coinstar to add a streaming component and to "invest prudently" while it is better positioned to "take advantage of the changing media landscape."

At last year's NAB, Verizon conducted briefings about its Verizon Digital Media Services, which would allow it to easily step outside of its service footprint to deliver OTT content. At the time, visions of streaming movies and TV services over the top were dancing in everyone's head.

It's pretty obvious that more is at stake here than a simple Verizon vs. Netflix battle.

A Coinstar 8K filing with the Securities and Exchange Commission cast the deal in a little clearer light:

The JV is being formed "for the primary purpose of developing, launching, marketing and operating nationwide ‘over-the-top' video distribution services providing consumers with access to video programming content, including linear content, delivered via broadband networks to video-enabled viewing devices and offering rental of physical DVDs and Blu-ray Discs from DVD rental kiosks (together with all activities, services and assets directly and reasonably related thereto...)."

Can you say virtual MSO? I knew you could.--Jim