Redbox Parent Buys Maker Of Blockbuster DVD Kiosks

UPDATED, 10:25 AM: The new streaming video deal between Verizon and Redbox-parent Coinstar has all of the hallmarks of an announcement that had to be made — even though the companies weren’t ready. Coinstar CEO Paul Davis promised in October to announce his streaming video plans by the end of 2011, and probably felt he had to say something before he meets with analysts later today to discuss his company’s 4Q earnings. All he has to offer, though, are puffy promises, and few details, about the subscription service to be offered in the second half of this year. We don’t know whether it’ll be competitive with Netflix because the companies won’t say what they’re offering consumers and how much they’ll pay. The proposition will be “simple, affordable, and fun,” Verizon Telecom VP of Consumer Product Management Eric Bruno tells me. We don’t even know what studios — if any — have agreed to participate. “We both spend a lot of money with studios, and they love this idea,” Redbox SVP of Finance Galen Smith tells me. Even Warner Bros? Last month the DVD kiosk company let its disc purchase contract with the studio lapse rather than accept its requirement for Redbox to wait 56 days for new releases. “I wouldn’t presume that because of how things are going on the DVD side that they won’t have their content as part of this venture,” Smith says. 

So what will Verizon and Redbox offer? The general feeling is that TechCrunch was probably right in December when it reported that the companies were working on a service that would give subscribers a certain number of points that they could cash in to rent DVDs or video streams, or buy electronic downloads. The potentially complicated plan leaves some analysts cold, especially in comparison to a simple all-you-can-eat service like Netflix, or Apple and Amazon which provide TV shows for about a buck and non-current movies for $2 or less. Wedbush Securities’ Michael Pachter says that “people will likely balk” at the offer “unless pricing is comfortably lower than pay-as-you-go services.”

Execs tip-toed away from the extravagant-sounding ambitions for the venture outlined in a Coinstar filing at the SEC. It says that the companies plan an “over the top” digital service — the jargon term for an online offering that competes with cable and satellite. It would be huge if Verizon planned to take on the pay TV industry just months after signing a non-aggression pact that includes the $3.6B purchase of cable-controlled airwave spectrum. But Verizon’s Bruno says that the companies are using the term “over the top” to simply mean that “it’ll come to you if you have a broadband connection wherever you are in the U.S.” The filing also says that the service could include “linear content” — another jargon term that usually means live broadcasts like broadcast and cable channels offer. “That’s one thing that definitely could be included as part of the service,” Smith says. But he adds that it “wasn’t meant to be prescriptive of what might actually be a part of the service.”

Meanwhile investors lost a lot of their initial enthusiasm for the announcement when they saw how little was in it. Coinstar shares opened up 5.5% this morning, but quickly retreated to less than +1% — and Netflix, which opened -3%, is +1.8% at mid-day. Wells Fargo’s Marci Ryvicker says that the announcement is “more of a positive than a negative” for content providers who may have another buyer for their movies and shows, but offers “noise” for cable providers. Bernstein Research’s Craig Moffett says that the combination of Verizon’s customer list with Coinstar content and distribution ubiquity “is perhaps better viewed as another step in the transformation of Verizon into a marketing machine, a la its joint venture with the cable industry.”

UPDATE, 7:08 AM:
 According to a Coinstar filing at the SEC, the JV with Verizon has big ambitions. Using industry jargon for an online service that competes with pay TV, the parent of Redbox says the venture intends to offer a “nationwide ‘over-the-top’ video”  service. And unlike most digital services including Netflix, which offer videos on demand, Verizon and Redbox could include “linear content, delivered via broadband networks to video-enabled viewing devices.” Consumer offerings also will include rentals of DVD and Blu-ray discs at Redbox’s kiosks. The venture expects to have $450M. Coinstar will start off by contributing $14M for its 35% stake, but may be required to contribute more. If it keeps up with its pro rata share of the $450M, then its stake can’t be diluted below 10%. Redbox will have two directors on the five-member board, and some decisions — including any sale or dissolution of the venture, or inclusion of additional companies — will require approval of at least 75% of the board. There’s a vague reference to a provision in the agreement that bars members from selling or transferring their interests in the JV to outsiders for five years. Also after five years Redbox will have a right to force Verizon to buy its interest — and Verizon will have a right to force Redbox to sell. Conditions on those agreements are not spelled out. Coinstar says that it is licensing use of its Redbox brand to the JV.

PREVIOUS, 5:40 AM: Look out Netflix: Verizon and Coinstar’s Redbox say that they’ll launch their streaming and download service in the second half of this year. The initial release doesn’t say what it will be called, how much it will cost, or what videos it will offer — but does note that Verizon will own 65% of the venture, with Coinstar owning the rest.  Verizon’s Bob Mudge says that it will “combine the accessibility and value of Redbox with Verizon’s vision for a borderless lifestyle.” We should find out a lot more later: Coinstar reports 4Q earnings after the market closes, and is scheduled to talk with analysts. Its shares are up 6.7% in pre-market trading and Netflix is down 3.5%. Here’s the release:

NEW YORK – Verizon and Coinstar, Inc. today announced the formation of a joint venture that will create a new choice for quality- and value-conscious  consumers seeking a simple and affordable way to access the video entertainment they crave. The venture’s services will offer all of the convenience, simplicity and value of Redbox® new release DVD and Blu-ray Disc® rentals combined with a new content-rich video on-demand streaming and download service from  Verizon.

The joint venture plans to introduce the product portfolio in the second half of 2012. It will offer subscription services and more in an easy-to-use, flexible and affordable service that will allow all consumers across the U.S. to enjoy the new and popular entertainment they want, whenever they choose, using the media and devices they prefer. Additional brand and product information will be revealed in the coming months.

“When you consider the core elements the parties bring to this venture – our powerful brands; our national rental kiosk footprint; our anytime, anywhere network presence; and our mutual commitment to customer-focused innovation – it’s clear that Verizon and Redbox are a powerful entertainment team,” said Bob Mudge, president of Verizon consumer and mass business markets.

“Consumers rely on Redbox for the latest new release movies at a great value, and our joint venture with Verizon will enable us to bring them even more  value by offering expanded content offerings and greater flexibility for how and when they enjoy entertainment,” said Paul Davis, chief executive officer of  Coinstar, Inc. “This alliance is the result of a deliberate and strategic process to identify a partner who shares our commitment to delivering innovative solutions to consumers. We look forward to rolling out the shared benefits this venture will bring to consumers, retailers, and shareholders.”

This venture between Verizon and Redbox will create the kind of national multi-platform product that customers are demanding from video entertainment service providers. It will leverage Verizon’s industry-wide relationships with entertainment content providers, its advanced cloud computing technologies and state-of-the-art IP network infrastructure to distribute video on-demand content to its customers.

“The joint venture will combine the accessibility and value of Redbox with Verizon’s vision for a borderless lifestyle – where consumers easily accomplish what they want or need to do, on their terms, through the power of the network,” said Mudge. “Together, we are erasing old technology boundaries, freeing people to spontaneously enjoy the entertainment they want, whenever they choose, using the devices and media they prefer, at home or away.”

By offering instantly available online and mobile content with immediate access to physical media through rental kiosks, Verizon and Redbox will be uniquely positioned to deliver the best of both worlds – digital and physical – to consumers across the country.

The joint venture is a limited liability company with Verizon holding a 65 percent ownership share and Redbox holding a 35 percent ownership share at the outset.