Redbox and Verizon to create streaming movie service

Redbox is hooking up with Verizon Communications Inc. as part of a major step forward to compete with Netflix Inc. in both the digital and physical worlds.

The company famous for its ubiquitous red DVD rentals kiosks announced Monday that it would form a joint venture with telecom giant Verizon to create an online movie subscription service.

Redbox also agreed to spend up to $100 million to acquire the Blockbuster-branded DVD kiosks operated by NCR Corp., its largest competitor in that business, adding about 9,000 machines to its existing base of 35,400.

The digital delivery service, expected to launch in the second half of 2012, will be majority owned by Verizon, which will become the first telecom or cable company to stream video to customers who are not already its subscribers.

That marks a significant step: Until now, Verizon, like Time Warner, Comcast, AT&T and other telecom and cable providers, has gone after customers only in the markets where it delivers television and Internet services. Now Verizon will be seeking a national audience.

For customers, Redbox will become a much more formidable competitor to Netflix, adding a robust streaming Internet option to its near-total control of the popular kiosk rental market.

Though Redbox and Verizon have yet to announce pricing details for their unnamed service, they did say it would include both streaming and kiosk rentals for a single monthly subscription rate. Kiosk rentals are expected to stay at $1.20 per night.

The companies are betting that the combined offering will provide the most complete package in a fractured media landscape where studios limit the availability of titles online, particularly new ones.

“The most instant way for customers to access content is to have the option of either pushing a button or going on a two-minute drive to the store,� Bob Mudge, president of Verizon consumer and mass business markets, said in an interview.

That comment sets up a direct comparison with Verizon-Redbox’s competition: Netflix subscribers can get instant delivery of some movies online, but they typically must wait two days to get a new DVD after sending in an old one.

Redbox Automated Retail is the nation’s top DVD rental company and has nearly 30 million active users, compared with 24.4 million Netflix subscribers in the U.S. (Of those Netflix customers, 11 million subscribe to the DVD delivery service.) But Netflix is a bigger moneymaker, generating $3.2 billion in revenue last year compared with $1.6 billion for Redbox.

Redbox’s kiosks offer newer movies on DVD and Blu-ray at grocery stores and other retail locations, which the company boasts are a five-minute drive or less from 68% of Americans.

But the machines carry only about 200 titles each, while the online shelf is immensely bigger and limited only by studios’ willingness to provide their films, many of which are controlled by pay cable networks for up to a decade after debuting.

“Consumers who instantly want a new release can go to a kiosk and get it,� said Paul Davis, chief executive of Redbox’s parent company, Coinstar Inc. “For titles that are a bit older, there will be streaming capability.�

Netflix offers nearly 10,000 movies through its streaming service, according to the website InstantWatcher.com, but many are part of deals that are or will soon be non-exclusive. That means Verizon and Redbox could offer their subscribers many of the same films.

According to a regulatory filing by Redbox parent Coinstar, the joint venture will be owned 65% by Verizon and 35% by Coinstar. While full financial details were not made available, Coinstar is initially contributing $14 million for its stake, an amount expected to increase significantly as the joint venture’s capital needs increase.

“The question is: How much are [Redbox] and Verizon willing to invest, and will they go up to and over the billions of dollars that Netflix is paying?� said Daniel Ernst, an analyst at Hudson Square Research.

Netflix has made clear that it is letting its DVD business wither, and will not invest more money in it.

By spending up to $100 million to add NCR’s Blockbuster kiosks to its network, Redbox is sending a different signal.

Although DVD sales have fallen precipitously over the past several years, consumers seem more interested than ever in spending $1.20 a night to rent discs from Redbox. The business announced Monday that its revenue surged 40% during the final three months of 2011 to $445.6 million. Operating income grew 43% to $76.6 million.

Coinstar stock surged 17% in after-hours trading Monday. Before financial results were released, the shares closed up nearly 2% at $50.56.

And this year Redbox will begin testing kiosks in Canada in the first step of an international expansion that could see it challenging Netflix overseas. The latter company offers video streaming, but not DVD rentals, in Canada, Latin America, Britain and Ireland.

Verizon has nearly 109 million wireless customers and 9 million broadband Internet customers. It will market the new video service to them, as well as to the broader public.

Redbox and Verizon will enter a competitive landscape for digital movie rentals that includes not only Netflix but also Amazon.com Inc., Dish Network Corp. and its subsidiary Blockbuster, and Wal-Mart Stores Inc.’s Vudu.

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Times staff writer David Sarno contributed to this report.