Is Redbox Dumber Than Netflix?

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The buck stops here at Redbox.

Renting a DVD from one of the shiny disc-spewing kiosks will set you back $1.20 a night starting this week, up from the round $1 price point that Redbox parent Coinstar (CSTR) has been promoting for years.

Hiking its DVD rental rates by 20% is a gutsy call. It comes on the heels of Netflix (NFLX) facing 800,000 net domestic cancellations in its latest quarter after a poorly received move to begin charging subscribers on its unlimited DVD plans for streaming -- and that's despite lowering the price of its stand-alone DVD plans. Brick-and-mortar rival Blockbuster has been embracing lower price points on its rentals.

It's the wrong move at the wrong time, and the sad clincher is that it's not even necessary.

Seeing Red over Redbox

"This marks the first price increase for a Redbox standard-definition DVD rental in eight years," Coinstar CEO Paul Davis explained last week. "The change is primarily due to the increase in operating expenses, including the recent increase in debit card interchange fees as a result of the Durbin Amendment."

Consumers know all about the debit card interchange fees that recently went into effect. It's what inspired the notorious $5 monthly fees at Bank of America (BAC) for debit card holders who use the plastic for purchases. It may seem like a case of double dipping -- getting hit at both the bank level and merchant level -- but the bigger question here is why Coinstar isn't limiting the 20% increase to debit card users.

Coinstar points out that this is just one of the new cost components it's passing on to end users. However, its financials tell an entirely different story. Coinstar's revenue and earnings from continuing operations climbed 23% and 73% respectively in its latest quarter. Anyone who sees profitability growing three times as fast as actual sales would question why customers are being hit with an increase at a time of widening margins.

Is Coinstar hoping that Redflix customers can't interpret an income statement, or are costs about to ramp up substantially?

Four Weeks at a Time

Movie studios have always hated the way that Redbox, with its cheap rentals, and Netflix, with its video buffet model, devalue their product.

Warner Bros. parent Time Warner (TWX) came up with a solution last year. Realizing that 75% of its DVD sales take place during a movie's first four weeks on the retail market, it struck deals with Netflix and Redbox. If they would agree to hold off on making their new releases available for 28 days, Warner Bros. would provide the two companies with more DVDs at lower price points. It was a win-win for the parties. Time Warner would get the bulk of its DVD sales before the cheap renters began stocking the releases. Netflix and Redbox would get even cheaper DVDs. Couch potatoes were the ones who got mugged here, but you didn't see Redbox lowering its prices just because its costs got cheaper.

Why should prices go higher now? The Warner Bros. deals expire this year, and Time Warner is reportedly aiming for an even longer release window. There doesn't seem to be any conceivable way that Redbox goes through with a price hike in November when some of its discs are about to get even cheaper next year, unless Redbox doesn't think that its celluloid buffs know how to read distribution contracts either.

Blockbuster Gets Busy

Dish Network's (DISH) Blockbuster has been playing up the 28-day delays for many new releases at Netflix and Redbox since last year. Now it's armed with new ammo.

"First Netflix raises prices, now Redbox has you seeing red again," rival Blockbuster shrewdly Tweeted shortly after Redbox's 20% hike last week.

It's not a fair knock to Netflix, since the cost of its unlimited DVD plans fell by $2 a month when it began charging for streaming. Blockbuster doesn't offer unlimited streams with the exception of the new $10 a month Blockbuster Movie Pass, but that's only available to existing Dish satellite television subscribers.

Then again, Blockbuster can probably get away with a few mistruths while Netflix is in the doghouse.

Bucking the Trend

Redbox had a good thing going with its optical rentals at a round price. There's nothing magnetic about $1.20. Just ask McDonald's (MCD).

Mickey D's isn't the world's largest restaurant chain by accident. It has mastered the art of fast food at compelling price points. One of its biggest winners is its Dollar Menu. When franchisees began complaining of the hit that they were taking offering double cheeseburgers for a buck, the McDonald's solution was to introduce the McDouble in 2008. Offering two meat patties but a single slice of cheese would save operators a few pennies per burger, while also allowing them to charge a little more for the double cheeseburger itself.

Redbox could learn a thing or two about McDonald's -- a company that was actually an initial investor in Redbox.

Why didn't Coinstar work with more studios to be able to afford its buck rentals? Why didn't it stick to its old price, but offer brand-new releases at a slightly higher price? Redbox, after all, already offers Blu-ray discs and video games at higher price points.

This is just the wrong time to introduce an across-the-board hike. Two dimes may not seem like much, but the consumer perception of an insensitive -- and by most accounts unnecessary -- move can prove to be more costly.
Dumb move, Redbox -- and that's just my two dimes' worth.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services have recommended buying shares of McDonald's and Netflix.





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8 Comments

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Shawn Dalton

I live in Austin, Texas and this is the 2nd price increase in 4 months. The first was to $1.20 and now it $1.50! That is nuts, I will just pay the extra for Netflix DVDs and make sure I mail them back quickly so I can watch the extra 8 bucks worth a month.

November 01 2011 at 9:26 PM Report abuse rate up rate down Reply
neick

I love Redbox but in light of the Netflix episode and now a fee increase the only way to make a statement is to cut back your rental habits by say 20%. In a few weeks, Coinstar will capitulate and go back to the dollar menu. That's my plan.

November 01 2011 at 1:16 PM Report abuse rate up rate down Reply
S

So dropping Netflix in favor of Redbox is SUCH a great idea, eh? Because you'll save SOOOO much money, right? AHAHAHAHA.

Pull all the tantrums you want, whiners. Netflix is STILL the best deal in town.

November 01 2011 at 12:09 PM Report abuse rate up rate down Reply
jockmassage26

if people in this country had any common sense.. they'd just stop renting for a few months.. and i guarantee the prices would fall.. consumers in this country are idiotic at best.. DO SOMETHING.. we are the ones that have the power.. dont buy... seriously.. would it hurt anyone to not rent a movie for 90 days.. i say we all skip all the day after thanksgiving nonesense and let the news report that NO BODY showed up for all the alleged sales.. if we all did that.. i guarentee the prices would be slashed even more by the week b4 christmas.. and EVEN MORE the week after.. if enough people stood up for themselves.. we ALL would benefit becuase it would make these big corps think twice..

November 01 2011 at 11:31 AM Report abuse +1 rate up rate down Reply
obama fools

i alwas thought demand and suppley set prices if people dont like the price they will go somewere else case closed.............

November 01 2011 at 11:15 AM Report abuse rate up rate down Reply
shortb240

I don't know about your library but mine charges $2.00 for dvd/blu rentals. I'll still be hitting up the redbox for my new releases.

November 01 2011 at 10:13 AM Report abuse rate up rate down Reply
Rob R.

Redflix?

November 01 2011 at 10:06 AM Report abuse rate up rate down Reply
Kirk

I decided not to rent a movie just this week because the price was up $1.20. I can go to the library instead!

November 01 2011 at 9:40 AM Report abuse +2 rate up rate down Reply