Redbox vs. Netflix: Streaming Game On

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RedboxThe ubiquitous Redbox video kiosk is about to take the plunge into digital movie streaming and Wall Street is all cheers. Coinstar (CSTR) executives announced during the company's earnings call Thursday that the spare change kiosk company's Redbox subsidiary planned to introduce a streaming video service in the near future as a complement to its physical location business. Red-hot Redbox has blanketed America with popular and handy $1 video rental kiosks that are particularly amenable to impulse rentals.

In the wake of the announcement and stellar earnings numbers, Redbox shares soared by nearly 25% in a single day - the biggest jump in five years. The market, however, did not seem terribly worried about the fate of Netflix, which saw its shares go down by a few percentage points.

A Sea of Competitors


So what's going on here? To date, the video streaming market has been a winner-take-all affair with Netflix doing most of the taking. A rash of other entrants, including Amazon (AMZN), Apple (AAPL), and Hulu.com, have active plays in the streaming video content segment but all lag behind Netflix (NFLX), which offers customers unlimited streams of content for as little as $9 per month. But the days of winner-take-all markets in segments where the primary up front cost is technology and not physical gear, could be on the wane. Hollywood, for its part, could be eager for another outlet that would allow it to try to seek better prices due to competition for its historical catalogs and more current movies.

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Further, the actual switching costs of leaving Netflix are rather low. The service has won tens of millions of loyal fans but it also has no clear lock-in on its customers other than the superior interface. True, Netflix has invested heavily in sophisticated recommendation engines and logistics, but Redbox has also clearly shown logistical competencies and its not a stretch to assume it could successfully build out a streaming engine.

The market could well be flooded with streaming video engineering talent due to the prolonged death of Blockbuster, which also fully staffed up a streaming offering that failed to gain traction. Unlike Blockbuster, however, Redbox has no strong allegiances to legacy business models and culturally is more suited to embrace a lower-margin but higher volume streaming business.

What could ensue between Redbox and Netflix is a price war for streaming viewers and a full onslaught to push subscriptions to its video service via physical kiosks. Netflix, no marketing slouch, will certainly push back hard. The upshot? Get ready for a serious rumble between two innovative video rental companies that don't mind breaking eggs.

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