By Kevin Kelleher, contributor
Last summer, the Netflix (NFLX) CEO tried to introduce a new fee structure that most subscribers viewed as a price increase. A few months later, Redbox raised its DVD rental fees by 20%. But Redbox customers gave it a pass. The level of grumbling was nothing close to the hostile revolt Netflix endured.
But here's the thing. Netflix's fee change reflected the costs of running both a DVD-by-mail business and a growing library of streaming titles. Under the new subscription fees, the monthly fee for a DVD-only subscription went down to $7.99 a month from $9.99. Redbox, which has no streaming service, raised its rental fees from $1 a night to $1.20. But if anything, it seems angry Netflix customers are flocking to Redbox.
This week, Redbox parent Coinstar (CSTR) reported its earnings for the first quarter of its higher fees. The results far surpassed investor expectations: $1 a share in earnings, against analysts' estimate of 65 cents. Coinstar's stock, which surged 14% the next day alone, is now 36% above where it was a year ago. And Netflix? It's down 43%.
Redbox began a decade ago as a McDonald's-sponsored (MCD) experiment with kiosks selling milk, eggs, pantyhose and DVDs. In time, the kiosks sold only movies and by 2009, when Coinstar bought out McDonald's remaining stake, revenue was above $400 million. Even then, Coinstar was seen more as a place to dump pocket change than as a rival to Netflix.
For much of the past year, however, Redbox has succeeded by being the anti-Netflix. While Netflix has strived to move beyond the DVD-rental business, Redbox, which controls 37% of that market, is moving more deeply into it. Its kiosks, fixtures in the front of Wal-Mart (WMT) and Walgreens (WAG) stores, is expanding to new chains like Safeway (SWY). This week, the company said it will buy the DVD-kiosk operations of NCR Corp. (NCR) for $100 million, boosting market share to 42%.
That counter-intuitive bet is working so far. Redbox -- which makes up 85% of Coinstar's revenue -- saw its revenue grow 35% last year to $1.6 billion, slightly less than half of Netflix's 2011 figure. Redbox's operating profit grow an even healthier 48%; Netflix's grew 36%.
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Redbox raised its DVD rental fees without spurring a Netflix-like backlash by pitching it as a necessary move in the face of new government regulations on debit-fee transactions. In trying to reform debit-transaction fees, the Dodd-Frank Act ended up raising fees on low-cost transactions like $1 DVD rentals. And in contrast to the furor over Netflix fees, the increase seemed modest.
But Redbox raised fees much higher than it needed to account for higher debit-transaction costs. An analyst at D.A. Davison said Dodd-Frank would increase rental costs by 5 cents. The other 15 cents Redbox made went to the company itself.
The next few years are likely to be tougher ones for Redbox. If Redbox is looking more like Netflix, it is the Netflix of several years ago -- a company dependent on rentals of DVDs, a dying business model, and in need of streaming-video licensing deals that could eat into its profits.
To address that, Coinstar signed a joint venture with Verizon (VZ) offer a subscription service combining Redbox's DVDs with digital offerings. Details on the joint venture are sparse so far, but it's expected to launch later this year. Redbox will own 35% of the venture, and contribute an initial $14 million, and perhaps much more over time.
The deal will give Redbox exposure to the streaming-video business that is the heart of Netflix's business today. But it will require Redbox to, like Netflix, negotiate with the big studios -- some of them the same ones that the company has exchanged lawsuits with over DVD licenses. Redbox and Warner Brothers recently declined to renew a DVD agreement. (Warner Brothers is owned by Fortune's parent company.)
Charlie Wolf, an analyst at Needham & Co., doubted that Verizon and Coinstar could gain traction in licensing content. "Unless Verizon and Coinstar are prepared to spend an amount that's in the ballpark with Netflix and/or possibly Amazon (AMZN), the service is unlikely to capture a material number of households" Wolf wrote in a report. For now, Rebox's momentum is helping it setup a confrontation with the bigger Netflix. But there's no doubt that that momentum is the product of a good 2011 built mostly on a business of the past.
Apple looks like a pretty big fish in the video on demand business -- if you ignore Netflix
If all you saw was the pie chart at right, produced from data issued Monday by iSuppli, you might think that Apple (AAPL) had succeeded in doing to digital video what it did to digital music.
According to iSuppli, now a unit of IHS (IHS), iTunes' share of U.S. consumer spending for movie MOREPhilip Elmer-DeWitt - Aug 23, 2011 1:43 PM ET
Netflix fees are still insanely low and the prices it pays for rights to movies and TV shows are about to soar. Investors better get used to this new reality.
FORTUNE -- Netflix (NFLX) on Monday reported a 57% increase in profits. Its stock on Tuesday plummeted by more than 10% during trading before recovering to a level 5% below the previous day's close. The plunge, at least according to reports, came MOREDan Mitchell, contributor - Jul 27, 2011 5:00 AM ET
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* Netflix announced changes to the low end of its pricing scheme. The "all-you-can-eat" DVD and streaming plan for $9.99 was split into two separate plans: $7.99 for unlimited streaming (no DVDs) and $7.99 for unlimited DVDs, one disc at a time (no streaming). That means if you MOREJP Mangalindan, Writer - Jul 13, 2011 3:30 AM ET
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Several high-profile Facebook employees have recently left the company, including Jim Midgal, director of business development, Jonathan Heiliger, VP of technical architecture, and Marcel Laverdet, one of three employees who got their jobs by once hacking the social network to resemble MySpace.
AOL's latest quarterly earnings are in, MORE
A recent Supreme Court decision, confusing Copyright Office rules and Amazon's Kindle policies all indicate that the only way consumers will ever get to resell "used" ebooks may be to sell their hard drives, too.
By Seth Greenstein, contributor
The holiday season is upon us, and with it thoughts of peace on earth, goodwill... and the latest electronic media. Visions of Kindles and Kinects dance in children's heads (and no doubt yours MOREDec 23, 2010 12:18 PM ET
A long time coming, the combined efforts of major players and successful startups have irrevocably changed the way consumers shop.
In the tech world, 2010 will be remembered for a few newsworthy events. The iPad launched last spring and took tablets mainstream. In August, sales of Android devices trumped iPhone sales for the first time. And just several weeks ago, the industry eagerly witnessed Google's (GOOG) jaw-dropping (and rejected) bid for Groupon.
Behind MOREJP Mangalindan, Writer - Dec 20, 2010 5:00 AM ET
By Michal Lev-Ram
SAN DIEGO, Calif. - For years tech-savvy movie buffs had to rely on illegal software to copy DVDs onto computer hard drives. Now a new program from Real Networks (RNWK) aims to make it easy -- and legal -- for anyone to rip their movie collection onto PCs.
Real, a Seattle-based digital media company, unveiled its DVD-copying software Monday at DEMO, a two-day technology conference in San Diego, Calif. The company says its MOREMichal Lev-Ram, writer - Sep 8, 2008 9:31 AM ET
The news that Time Warner CEO Jeff Bewkes let slip in a conference call on Wednesday -- that from now on Warner Bros. movies would come out as video on demand the same day as the DVD -- turns out to be bigger than he let on.
Apple on Thursday announced that not only would Warner Bros. titles be available for purchase on the iTunes store the same day and date MOREPhilip Elmer-DeWitt - May 1, 2008 12:54 PM ET
Now that Apple TV offers movie rentals in high definition, the question naturally arises: how does Apple's HD stack up against, say, a Blu-ray disk or the HD content offered by the cable networks?
To get at an answer, the folks at iLounge have done a favor for the rest of us (who don't necessarily have an Apple TV, a Blu-ray player or even an HD TV): they've posted side-by-side comparisons MOREPhilip Elmer-DeWitt - Feb 13, 2008 6:15 PM ET
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