Redbox Is Finally Feeling the Netflix Effect

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For years, Redbox has been flying high with DVD kiosks that offered cut-rate movie rentals for $1 a day. But Redbox might want to launch a digital rental service soon, before it sees its DVD kiosk business affected by Netflix and other services that allow consumers to rent and purchase movies from the comfort of their own homes.

Redbox parent Coinstar announced Thursday that its fourth-quarter revenue numbers would come in well below the company’s previous guidance. Revenues for the quarter topped out at $391 million, but that missed Coinstar’s forecast of $415 million to $440 million, which it provided during the company’s third-quarter earnings report. It also revised its earnings forecast for the quarter down, from a range of 79 to 85 cents a share down to between 65 and 69 cents a share.

The good news — if you can spin it that way — is that Redbox rental revenues continue to grow; they’re just not growing at the fantastic pace that Redbox hoped for. Redbox’s revenues in the quarter were up 38 percent year-over-year, but they only grew by $11 million from the third quarter. The revenue miss is telling, however, because Coinstar had a full month’s worth of rental data to go on when it gave its forecast, and yet it still missed the low range by nearly $25 million. So what happened?

In short, Redbox said it overestimated the strength of titles in its kiosks during the quarter and removed older, more popular DVDs too early. It also suffered from inventory imbalances due to a new “rent and return anywhere” policy that allows customers to rent a DVD at one kiosk but return it to another. And finally, it expected more traction on its new, higher-priced Blu-ray disc rentals.

To a certain extent, Redbox is beholden to the movies that the big Hollywood studios create. It notes that theatrical box office was down 16 percent for scheduled releases coming out in the period. In other words, people don’t want to rent crappy movies, even for $1 a day.

There are other factors at work, though. For one thing, Redbox is betting big on Blu-ray, adding high-def discs in kiosks throughout the U.S. But it might not be getting the traction on $1.50 rentals that it expected, as customers don’t see the value in paying a 50 percent markup for higher-quality discs. If Blu-ray titles aren’t renting as well as Redbox hoped, those discs are merely taking up limited space in already-crowded kiosk inventory.

The bigger issue, however, seems to be that Blu-ray players are Internet-connected by design, and many new Blu-ray players are sold with Internet services like Netflix, Vudu and Amazon Video on Demand built-in. That is, rather than go to the nearest Walmart or grocery store to rent a film for $1, consumers are finding it more convenient to simply choose and watch movies from the comfort of their own living rooms.

Redbox hopes to combat Netflix and others with an online offering of its own, but it’s been slow to launch. While the company announced on its third-quarter earnings call that it would roll out that service with a partner beginning this year, the specifics about what that service will look like — whether it will be a subscription offering like Netflix or a pay-as-you-go service like Vudu — were unclear. Given its slowing growth and pressure it’s seeing on the DVD kiosk side, it will want to introduce that service as soon as possible, especially if it hopes to leverage its brand with a new generation of connected devices.

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