Phone company Verizon Communications Inc. will challenge Netflix and start a video streaming service this year with Redbox and its DVD rental kiosks.
Verizon and Coinstar Inc., Redbox's parent company, said last week that the service will be national and available to non-Verizon customers as well. It adds another dimension to Verizon's quest to become a force in home entertainment, and it looks set to compete to some extent with the cable-TV services it already sells.
Unlike competing services from Amazon.com Inc. and Wal-Mart Stores Inc., the new service will combine Internet delivery of movies with DVDs, the way Netflix does. Dish Network Corp. also offers a similar bundle through its Blockbuster subsidiary.
Specific details and pricing of the new plan weren't announced.
Late last year, the companies were shopping around a $6-per-month offering that would give subscribers one DVD rental from Redbox per month as well as unlimited streaming of a certain selection of movies, according to a person briefed on the plan then. The person was not authorized to speak publicly and spoke on condition of anonymity.
It's not known whether the plan has changed since then, though the price is likely to be less than the $16-a-month minimum that Netflix subscribers have to pay for a combined DVD-by-mail and streaming plan.
Although consumers would pay less, Redbox's inventory is limited to what's in its kiosks, compared with Netflix's library of more than 100,000 discs, including more obscure fare. Redbox customers will also have to go in person to pick up a disc, which saves the company mailing costs.
Getting an extensive library of streaming content to rival Netflix's 20,000-plus titles will be expensive. The rising cost for streaming rights is the main reason that Netflix raised its U.S. prices by as much as 60 percent last year in a move that triggered a customer backlash. At the end of 2011, Netflix had video licensing commitments totaling $3.9 billion worldwide over the next several years.
Verizon will handle the streaming negotiations, Coinstar CEO Paul Davis told analysts in a conference call held last week to discuss the company's fourth-quarter earnings. He declined to answer questions seeking more details about how the joint subscription service might work, citing a desire to keep things under wraps for competitive reasons. The streaming service won't be available until the final half of this year.
Redbox, whose DVD rental kiosks are located in more than 29,000 stores, has been looking to expand into online streaming for more than a year. Its business so far has revolved around renting DVDs for as little as $1.20 per day. Along the way, Redbox says it has accumulated about 36 million email addresses from DVD and video-game renters - information that could be used to promote the new streaming service.
Verizon has its own cable-TV service, called FiOS, in some areas. Its Verizon Wireless subsidiary has also signed a deal to sell service from Comcast Corp. and other cable TV companies in its stores. The cable-TV experience has helped Verizon establish business relationships with Hollywood studios and other content producers.
With the Redbox venture, Verizon is breaking ranks with the cable and satellite industry, which makes its own video streaming services available only to people who also subscribe to its traditional TV feeds. They don't want households switching to Internet-only services, which are cheaper. Netflix Inc. charges $8 per month for its streaming-only plan, for instance, while the average monthly cable bill is more than $70.
"We've made a conscious decision to innovate and get involved with this market because it's legitimate and growing, and we think the partnership with Redbox gives us huge upside," said Bob Mudge, president of Verizon's consumer business.
Verizon's own FiOS business is relatively small, with 4.2 million subscribers, making it the seventh-largest provider of TV signals to U.S. homes. Meanwhile, its landline phone business is shrinking, so it needs other avenues for growth. Its wireless arm is growing, but it owns only 55 percent of that venture (Vodafone Group PLC of Britain owns the rest).
Netflix, which is based in Los Gatos, Calif., ended last year with 24.4 million U.S. subscribers. About 8.4 million of those customers pay for Internet streaming and Netflix's DVD-by-mail rental service.
Verizon and Coinstar said the service is intended to give subscribers access to DVD and Blu-ray discs as well as streaming movies starting in the second half of the year. Subscribers might visit the site to find that the movie they want isn't available for streaming, but is available at a Redbox kiosk nearby, Coinstar's Davis said.
To get people to try the service, Verizon and Redbox look set to undercut Netflix's cheapest DVD and streaming plan of $16 per month, which is 60 percent higher than its $10 monthly rate before prices went up in September.
New York-based Verizon Communications will own 65 percent of the unnamed venture, with Bellevue, Wash.,-based Coinstar owning the rest. Redbox is contributing an initial $14 million to the venture, according to a regulatory filing. It did not say how much Verizon would contribute. The filing indicated the two companies may be called upon to contribute a combined $450 million to the venture - another indication that it will have to pay steep licensing fees.
Netflix already has a couple of powerful competitors with video streaming services. Amazon.com provides a library of movies and TV shows to subscribers to its Amazon Prime shipping services. Wal-Mart, the world's biggest retailer, has a streaming service called Vudu. Neither offers DVD rentals.
Netflix, though, isn't devoting much attention to its DVD rental service because it's convinced the discs are destined to become obsolete. Netflix lost 2.8 million DVD subscribers in the final three months of last year alone.
Netflix is hoping to differentiate itself from its rivals with a larger library that is just now starting to include content that hasn't been available anywhere else. The company's streaming library consists largely of older movie shows and TV episodes from past seasons. Netflix's first original TV series, an eight-episode drama called "Lilyhammer," debuted last week. Other original TV series are coming in an attempt to make Netflix more competitive with Time Warner Inc.'s pay-TV channel HBO.
The additional competition in Internet streaming comes as Netflix recovers from the customers losses it absorbed last year following its price increase and a botched plan to spin off its DVD service into a separate website.
Redbox now claims to be the biggest DVD rental service in the country.