Redbox DVD Rentals to Cost More - Will It Impact Netflix? - Analyst Blog

Recently, Redbox announced a price hike on its DVD rentals. The news led to speculations regarding whether it will impact Netflix Inc. (NFLX), which operates in the same space in the near term.

Redbox is a subsidiary of Outerwall Inc. (OUTR) and specializes in DVD, Blu-Ray disc, and video game rentals via automated retail kiosks. Currently, it is the operator of more than 42,000 DVD rental kiosks across the U.S. owned by its parent company.

Shares of Outerwall surged 12.32% ($7.83) to close at $71.39 on Nov 24, 2014 following the news of the price hike.

Per the new rental structure, effective Dec 2, the daily rental rate for DVDs will increase from $1.20 to $1.50 while the daily rental rate for a Blu-ray disc will increase from $1.50 to $2. Moreover, the daily rental rate for video games will increase from $2 to $3 commencing Dec 6, 2014.

In the recently concluded third quarter, Redbox revenues declined 11% on a year over year basis to $438 million. Overall the company's top line missed the street estimates. Owing to the disappointing results, management provided a pessimistic outlook for the fourth quarter.

We believe that alarmed by the dismal performance, Outerwall initiated this price hike in order to bolster its top line going forward.

Redbox competes for home entertainment business with video on demand services such as Netflix, Amazon.com (AMZN) and Hulu. However, we believe that Redbox has an advantage over the video on demand services as it can instantly supply customers with newly released movies, often at a lesser price than at-home, video-on-demand options provided by cable and satellite TV providers.

We believe that  this price hike will provide some relief to Netflix's sagging DVD business which experienced a decline of 16% on a year over year basis in the recently concluded third quarter.

We believe that though such price hikes may certainly help video streaming service providers like Netflix in the near term, however, in order to deliver robust performance in the long run, the companies should focus on building up a robust and innovative product pipeline as well as concentrate on curtailing expenses. Moreover, we believe that Netflix's applications for both Google's (GOOGL) Android and Apple (AAPL) devices will help it to expand market share in the space of streaming services going forward.

Currently, Netflix has a Zacks Rank #5 (Strong Sell).

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