Blog Post

Verizon teams up with Redbox to cash in on video

Verizon (s vz) and Redbox (s cstr) are creating a joint venture to provide movies on demand using the web as well as Redbox’s physical DVD rental kiosks around the country. The deal is seen as a blow against Netflix (s nflx), which offers a DVD-by-mail and a streaming service, but it’s also a chance for Verizon to make money from streaming content and show off how awesome its fiber network is.

Details around the deal are limited, but here is what we know.

  1. Verizon will own 65 percent of the joint venture while Coinstar, Redbox’s parent company, will own 35 percent.
  2. The service will offer something Netflix currently doesn’t — a download option, which makes it more competitive with Amazon’s (s amzn) video offerings.
  3. The offering will be available nationwide, not merely to Verizon customers.
  4. Using Redbox helps the joint venture get access to new releases as content companies are trying to add more “windows” to the movie release process. Windowing is what content companies use to spread out the time between a movie released in theaters, when it hits rentals stores and when it makes its way to other services such as premium TV channels. The general thinking is this increases profits for each movie, but opinion is divided on that, and consumers hate it.
  5. Verizon is counting on its existing relationship as a pay TV provider to get more content to the joint venture.
  6. Whatever the end product looks like, it will launch in the second half of this year.

Given these facts, as scant as they are, it’s easy to see the threat to Netflix, as people could view the two offerings as fairly interchangeable as long as the pricing is competitive and the content is relatively equal. But without knowing about pricing or the content, the deal still has the potential to be a win for Verizon, given video is huge bandwidth suck on wireline and wireless networks. Netflix traffic was estimated to take up 20 percent of U.S. broadband traffic during peak hours according to Sandvine in the fall of 2010.

For Verizon, a streaming joint venture has three benefits. One, if it makes money from the service, that’s an additional revenue stream as well as a way to capture some value from its customers who cut the cord. Two, if the service can really deliver a video product that consumers love and will use, it will help drive traffic across Verizon’s networks. Customers in the FiOS areas will have a reason to sign up for the service if they haven’t already, while the joint venture will help drive traffic to mobile devices and other areas of the country. Verizon has a business selling bandwidth on 100 gigabit per second backbone pipes as well as leasing its fiber to cell phone providers to use as mobile backhaul.

Finally the joint venture gives Verizon a seat at the table with content companies as the industry tries to find new economic models based on the reality of an IP infrastructure that can deliver any content to anyone, anywhere. Sure, content companies are fighting the future with windowing and complicated rights agreements, while ISPs are trying to protect their business with broadband caps, but the future is coming, and Verizon is trying to get in on the ground floor rather than watch it pass it by.

3 Responses to “Verizon teams up with Redbox to cash in on video”

  1. Robert M. Enger

    This is going to create a LOT of traffic outbound from UU/MCI/VZ backbone, onto long-haul competitor and last-mile networks. Some of these networks may balk, claiming imbalance in traffic flows, violating settlement-free peering arrangements. (Level-3 and Cogent have had these problems in the past.)

    Also, some last-mile networks simply will not upgrade their peering point bandwidth enough to support quality streaming (intentional move to preserve their existing Cable-TV video revenues). How will VZ/Redbox handle complaints from customers on those networks? (The internal test servers of those last-mile networks will show that the “last-mile” is working ok; but video quality will suck due to bandwidth squeeze at the inter-network handoffs.

    Maybe we’re missing the big (strategic) picture? If use of Netflix and Redbox explodes, it will cause numerous customers to exceed the usage-caps on their ISP accounts. Maybe VZ is counting on this to spur customer dissatisfaction with their incumbent ISP?

    • I’m glad you brought up the peering issues here. Although are you suggesting that Verizon is hoping to propel ISPs to upgrade their last mile access points with a hot bandwidth intensive application in order to drive more traffic across its wholesale lines? As a consumer, I’m all for that if it prompts upgrades. As a broadband reporter, that would be pretty awesome to watch.

      • Robert M. Enger

        Last-mile operators may be buying their transit BW from someone besides VZ (perhaps a cocktail of providers in an attempt to minimize cost). So path may be VZ -> ISP-X -> last-mile-provider . (Perhaps multiple intervening providers; although that is becoming less common.)
        VZ’s relationship with ISP-X may turn sour if traffic balance becomes highly asymmetrical. OR last-mile-provider may refuse to upgrade pipes that complete path from VZ (either direct, if they exist, or the ISP-X pipe, as indicated above).
        In either scenario, streaming could suffer, but speed-tests internal to last-mile-provider’s own network would look stellar.

        Telco and cable have a pretty sordid background (e.g. astroturfing). We can only speculate as to how much subterfuge will take place. There is a LOT of money at stake here. Probably any tricks that can be played, will be played; and almost certainly to the detriment of the consumer.

        A depressing final thought. We’ve all spent our hard earned money recently purchasing high quality HDTV sets. Real Bluray quality HD requires 25mbps average and peaks to 40Mbps (even with AVC or VC1 coding). There’s no free lunch: cut back on the data rate and video quality suffers. I’d love to see Redbox and Netflix streaming away at 50Mbps, but most people don’t have that sort of last-mile connection. So, after all the hoopla, we’re about to take a step BACKWARDS in image fidelity. (And just as a few directors are starting to wake up to the idea of shooting in 48 frame-per-second to improve temporal resolution).