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Zediva: The Love Child of Netflix and Redbox?

What would happen if you mashed up Redbox’s (s CSTR) $1 a night movie rentals with Netflix’s (s NFLX) online streaming service? You’d probably get something like Zediva, which lets you rent DVDs online and stream them — subtitles, special features and all — over the Internet.

Viewers can rent DVDs from Zediva for $1.99 a piece — or buy a pack of ten movie rentals for $10 — and stream them to their PCs, Android mobile phones and select Internet-connected TVs, Blu-ray players and other devices running the Google TV (s GOOG) operating system. Viewers then have access to the movie for up to 14 days, and can watch or re-watch it as many times as they’d like during that time. That’s pretty generous, compared to the industry-standard 24 or 48 hours that viewers have access to digital copies of movies they’ve rented from other services.

For $1.99 price, viewers also get access to special features, like director and cast commentary, as well as the ability to listen to the film in all available languages and view all supported subtitles. Of course, the downside to streaming a DVD is that viewers are forced to sit through various trailers, FBI warnings and other introductory junk before the movie actually starts.

While it’s a compelling idea, Zediva’s business model is legally questionable. Unlike Redbox and Netflix, which have deals with various studios giving them access to cheaper DVDs in exchange for a 28-day window after DVDs go on sale, Zediva purchases its movies at retail and rents them right away, invoking the first sale doctrine to do so. (The first sale doctrine also helped Netflix get off the ground when it first started its DVD-by-mail service, and was used by Redbox as well before they began striking deals with the Hollywood studios.) And because Zediva’s streams have a physical DVD and DVD player connected to them, it argues that it’s offering a DVD rather than a digital rental, allowing it to circumvent requirements to strike digital licensing deals with the Hollywood studios.

That might make for a compelling argument for some, but content owners have rarely been pleased with companies that try to mix physical media with digital sales or rentals. Take the case of Michael Robertson’s AnywhereCD, for example: The company was founded on the concept of providing DRM-free digital downloads of music that was connected to a physical CD sale. AnywhereCD’s value proposition was that it would do the work of ripping the MP3s for you and throw away the physical disc if you didn’t want it. But it wasn’t long before the company was forced to pull its MP3-only sales and offer a mix of instant-gratification DRM-less MP3s along with a CD that was shipped to the consumer later. Constrained by that business model and a legal fight with the music labels, AnywhereCD eventually failed.

But putting aside the legal issues associated with its business model, there’s also a question of scale: Each viewer gets access to a single copy of a DVD and a single DVD player for up to four hours. While it’s seen limited strain during a private beta test of the service, they ability to service thousands (if not millions) of users could come into question if the service actually catches on.

While this might seem like a monumental task, Zediva co-founder Vivek Gupta told us in a phone interview that the startup’s business model is actually more efficient than Redbox, which has tens of thousands of rental kiosks around the country. Since all the DVD players are stored in its Silicon Valley data center, he said that it doesn’t have all of the costs associated with maintaining and restocking locations around the country. Not just that, but since DVDs are only available for four hours at a time, it can turn over the inventory much faster than Redbox, which rents each out for a night at a time.

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