Where Redbox Instant went wrong

Samantha Bookman, FierceOnlineVideo

The writing was practically on the wall for Redbox Instant a few weeks ago. Unable to sign up new customers for more than three months after a credit card fraud issue, news outlets pointed out that the company hadn't yet come up with a fix for the problem--indicating that either its parent company Outerwall, or its joint venture partner Verizon (NYSE: VZ), wasn't interested in putting the time or money into a solution.

That supposition bore out this week when Outerwall announced that the hybrid subscription-transactional video on demand (SVOD) service would shut down. While Redbox proper--the nearly ubiquitous video rental service found near the entrance of grocery stores across the U.S.--is still operating, subscribers to its online service may be disappointed to find the app no longer working. Visitors to the redboxinstant.com website today will find only a shutdown notice and a link to a FAQ informing them that refunds would be issued starting Friday, Oct. 10.

How could an SVOD service with such promise--a successful nationwide video rental franchise backed by a $63 million upfront investment from Outerwall along with Verizon's massive network and marketing machine--fail so badly?

Following trends outside its business model

The idea seemed simple and straightforward: Netflix (NASDAQ: NFLX) could do it, so why couldn't Redbox? Since Redbox already had successfully licensed a large amount of titles just for its DVD rental business, it seemed a given that it should be able to do the same for online-only titles.

Redbox Instant launched in March 2013 with about 6,000 titles. Sounds like a lot, until one considers that Netflix routinely has at least 10,000 titles in its streaming library. Likely to make up the difference--or perhaps to just draw in more customers--monthly subscribers received rental credit for four DVDs each month from the Redbox kiosks.

It was a marketing idea that really never caught on--and probably never would. To say that it was "muddled" would be a kindness. "The user experience was too convoluted to actually communicate the value proposition," said James Norman, founder of GroupFlix, in an interview with Benzinga back in February that predicted Redbox Instant's demise.

Streaming customers who wanted to simply pick a movie, sit back and watch it often found that the title wasn't licensed for online streaming. "When you're in the user experience, you're like, 'Whoa, that's a great movie!' And you go to click on it and it's like, 'Go pick it up at the kiosk,'" Norman said.

Late to market and unable to adapt

Redbox Instant was announced not long after Netflix reached what seemed to be the apex of its success arc. In 2011, Netflix's stock had taken a huge tumble after a misstep with its DVD business (the unrealized bad idea that was Qwikster), leading many to think that its growth spurt was over and that competitors would begin to close in.

It looked like a prime moment for Verizon to jump in with its own streaming video offering, and teaming with Outerwall was the fastest path to market. But the actual launch of Redbox Instant didn't happen until the second quarter of 2013--and the service missed its moment to shine.

Under Reed Hastings and with content guru Ted Sarandos guiding key decisions, Netflix by 2013 had amply recovered from its mid-2011 slide. Further, the provider's leap into network-quality original content with series like Lilyhammer and House of Cards--partially a leap of faith, but mostly a data-driven decision--has ultimately reaped benefits and caused a ripple effect across the media and entertainment industry.

The online video market changed too rapidly for Redbox Instant to adapt. As content owners began to realize that OTT was a potential licensing goldmine and began to raise their prices accordingly, established SVOD providers including Hulu, Netflix and Amazon started producing their own content.

Neither of these really factored into Redbox Instant's business plan. Instead, Redbox Instant followed a model closer to the tactic employed by the late, unlamented Blockbuster, which tried, far too late, to transition into subscription-based online streaming after being acquired by Dish Network.

Like Blockbuster's DVD rental customers, Redbox's DVD rental customers also didn't follow the service online in great numbers. DVD rental is a completely different customer engagement and experience than online streaming--and getting established DVD customers to transition to an online model can be time-consuming.

TV increasingly goes OTT

Now the market is transitioning again: toward virtual MVPDs, as pay-TV operators, as well as broadcasters and cable channels, take control of their content distribution online.

Redbox Instant was already competing not just with Netflix and Amazon, but with its own joint venture partner, Verizon's FiOS TV Everywhere service--and now just about every other significant content distributor in the industry.

With a tidal wave of competitors about to hit, a lack of a solid, committed marketing plan, and spiraling cost increases for content licensing and network technology (such as payment security), the decision to pull the plug was probably pretty clear.

In short, Redbox Instant fell victim to an online video market that is, at the moment, too dynamic even for established MVPD giants to fully grasp or wring profit from. While some of its problems were simple missteps, and others, like the credit card signup issue, were unfortunate incidents, Redbox Instant was unable to fully address its issues--and never in a position to adapt to consumer expectations or market changes. It's now simply a chapter in the ever-expanding "lessons learned" OTT manual.--Sam