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Redbox and Amazon gunning for Netflix's online subscription business [updated]

September 3, 2010 |  9:00 am

Netflix won't have the online movie subscription business to itself for long.

Two of the biggest players in DVD sales and rentals, kiosk company Redbox and online retailer Amazon.com, have told Hollywood studios that they are looking to launch streaming movie services similar to the one offered by Netflix.

Their interest comes in response to the rapid growth of Netflix over the last few years as many consumers are now paying a flat monthly fee to access thousands of movies, instead of paying separately for each film.

Netflix had 15 million subscribers as of June 30, a jump from 10.5 million a year ago, with 61% of them having watched a movie or television show via the Internet on computers and Web-connected TVs. Chief Executive Reed Hastings has said that over the next decade he expects the company to phase out of shipping DVDs and focus entirely on Internet streaming.

As attractive as the business is becoming, however, it presents significant barriers to entry, most notably laying out hundreds of millions of dollars to studios for the rights to their content.

"The recurring revenue stream from subscriptions is very attractive for anybody who wants to create a digital business," said Michael Olson, an analyst at Piper Jaffray. "But Netflix had an advantage when it started spending hundreds of millions on Internet rights because it already had a massive base of DVD subscribers."

Redbox has, along with Netflix, been one of the most disruptive forces to the home video business in the last few years. The company had nearly 27,000 of its $1-per-night DVD kiosks in grocery stores and other retail locations as of June 30, up from 17,900 a year ago. Revenue from its DVD business was up 44% in the most recent quarter to $271.9 million.

But Redbox President Mitch Lowe has said in interviews that the company needs to develop a digital distribution strategy to succeed in the long run as consumers increasingly use computers and Internet-connected televisions to access movies. The need to quickly adapt to technology has been evident this year in the rapidly deteriorating state of video rental giant Blockbuster, which has told the studios it expects to file for bankruptcy later this month.

Several people familiar with the situation said Redbox executives have told studios they are looking at launching an online subscription service that is integrated with its kiosks. For a monthly fee consumers would be able to stream movies over the Internet and also rent a certain number of discs from kiosks.

The plan would make Redbox competitive with Netflix's plans that mix DVDs shipped by mail and online streaming.

Redbox is still mulling over exactly how the digital plan would work, the people said, and isn't expected to launch its service imminently.

[Update, 4:10 p.m.: In a recent interview with Bloomberg, Paul Davis, chief executive of Redbox's parent company Coinstar Inc., said the company's digital strategy will likely involve a partnership and will be detailed on its quarterly conference call with investors next month.]

Amazon.com is said to be closer to launching its online subscription service, however. After years of weighing a move into the business and persistent rumors that it might acquire Netflix, the Seattle-based company's board of directors determined at a recent meeting that it would develop its own online movie and television subscription service, people briefed on the matter said.

The company would look to integrate the subscription plan with Amazon Prime, a plan that offers frequent customers unlimited two-day shipping on products for $79 per year. It's not yet clear how much movie and television streaming would add to that cost.

Amazon, Redbox, and Netflix probably will each have a different mix of movies on their services, much like pay cable networks HBO, Starz, Showtime and Epix on television.

While movies more than a decade old are relatively easy to access for the right price, newer films are tied up in deals with pay cable networks. Epix, for instance, has signed an exclusive digital distribution deal with Netflix for recently released movies from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer for which it controls the rights. Starz has a non-exclusive deal with Netflix for films from Walt Disney Studios and Sony Pictures. HBO, meanwhile, has been unwilling to let any online subscription services get access to its movies from 20th Century Fox, Universal Pictures and Sony Pictures.

“There are a lot of land mines when it comes to content controlled by the pay TV channels,” said Janney  Montgomery Scott analyst Tony Wible.

Amazon and Redbox will each have their own advantages in the business, however, analysts said. Amazon owns the popular movie website IMDB and, like Netflix, has a recommendation engine that can help guide consumers to products they would like. In addition to selling DVDs, it already lets customers download movies and TV shows to rent or own.

Redbox, meanwhile, can use its 27,000 retail kiosks to promote its online service.

Spokespeople for Redbox and Amazon declined to comment.

Google, meanwhile has been making plans to sell and rent movies through its YouTube website, as Apple already does on its iTunes store. Retail giants Wal-mart and Best Buy have been moving into the movie download business as well by acquiring online video companies.

News of Amazon.com's plan for an online subscription business was first reported by the Wall Street Journal.

--Ben Fritz

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