Netflix Blew It This Time

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Netflix (NAS: NFLX) has made it clear that it sees optical discs as a dying medium, but it may have made a mistake in letting Redbox parent Coinstar (NAS: CSTR) run away with the kiosk market.

Coinstar revealed last week that it's paying $100 million to acquire NCR's (NYS: NCR) entertainment business.

NCR -- a company far better known for its ATMs than its fledgling fleet of licensed Blockbuster Express machines -- will hand over to Redbox its kiosks, DVD inventory, and certain retailer contracts.

It could've been Netflix. It should've been Netflix.

To DVD or not to DVD?
The DVD may have put Netflix on the map, but Reed Hastings wants little to do with optical discs these days.

It was supposed to be subscribers to its disc-based plans -- and not members of its growing streaming business -- that would have had to hike over to a new website under the short-lived Qwikster fiasco. Netflix's marketing efforts these days emphasize digital delivery, and couch potatoes have responded. Netflix closed out 2011 by losing 2.76 million DVD plan subscribers in the final three months of the year.

Hastings has made it clear that mailing out discs is a dying business.

"We expect DVD subscribers to decline steadily, every quarter, forever," Hastings told an analyst during last month's conference call.

Netflix isn't the only one. If DISH Network is closing up Blockbuster video stores and NCR sees a brighter future in spitting out deposit receipts instead of copies of Paranormal Activity 3, why would Netflix have made a run at NCR's Blockbuster Express kiosk business?

Well, maybe the disc isn't exactly dead.

In Redbox's defense
Coinstar's Redbox business surged 40% in its latest quarter. It was apparently able to pull off the price hike -- a 20% increase in late October -- that Netflix struggled to push through last summer.

The future won't be as spectacular. Coinstar is targeting revenue to climb by just 17% this year, on a margin-mincing 12% improvement on the bottom line. This may not seem all that exciting, but keep in mind that Wall Street is bracing for an actual deficit out of Netflix this year on a mere 14% top-line advance.

The DVD isn't dead. Redbox and its ability to spit out other disc-based media including Blu-rays and video games will give these automated machines a longer shelf life than cynics probably think.

After raising money in November that it didn't need at an embarrassingly low price, Netflix owes it to investors to do something more meaningful with the $400 million it raised than simply to buy back stock at insultingly higher price points now. Challenging Coinstar's $100 million purchase would've been a good start.

Let's go over a few reasons that Netflix kiosks would make sense:

  • As large as Netflix's digital library grows, it will never carry the new releases that mainstream audiences covet. There will always be holdout studios that don't make their older catalog available digitally, either.
  • The USPS has boosted postage rates a few times in Netflix's tenure, and now it's threatening to end Saturday deliveries. The mail-based delivery of Netflix's red mailers and subsequent returns will slow.
  • Kiosks -- which aren't subject to postal hikes or the whims of delivery schedules -- are always stocked with fresh DVDs.

Plan now for the future
You hate my Netflix kiosk idea. I felt you boiling on this end of your computer screen. However, you do realize that Redbox is already teaming up with Verizon (NYS: VZ) to introduce a streaming video service during the second half of this year? Are streams paired with kiosk access better than Netflix streaming paired with mail-delivered rentals? The answer may very well depend on how deep the Redbox/Verizon digital catalog is, but should Netflix be taking this kind of chance?

You won't see Netflix defend its DVD turf by playing the kiosk card. This will never happen, even though DVDs are currently generating far more in contributing profit than Netflix's streaming business. Maybe it'll have a change of heart when it sees how competitive streaming is about to become as Amazon.com (NAS: AMZN) beefs up its cheaper digital library and Redbox woos mobile phone customers from the country's largest wireless carrier.

Netflix denied itself an opportunity to paddle a new revenue stream last week. In the process, it made a competitor that much stronger.

Fade to black
The movie industry has embraced digital delivery, but there will be an even bigger winner in this trillion-dollar revolution. Find out the surprising star of the mobile revolution in a free special report.

At the time this article was published The Motley Fool owns shares of Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Netflix and Amazon.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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