The new joint venture offers unlimited video streaming and four one-night credits for DVDs for a nominal $8 per month. By providing cheap monthly subscriptions coupled with some exciting features bundled as one, the new streaming service expects to outdo its competitors. However, it must be noted that its strategy is predominantly price centric and, thus lacks originality.
Where has Verizon gone wrong?
In the online video-streaming business, offering optimum quality and diverse content provides a company sustainable competitive edge in the long run. Online users give much higher preference to high-quality content, unique features, and multiple-device compatibility. Offering only cheap subscriptions will not allow it to penetrate deeper into the market, resulting in Redbox losing more ground to competitors such as Netflix, Inc. (NASDAQ:NFLX).
In addition, Redbox does not offer TV shows unlike Netflix, which recently revealed that two third of its online viewership is for episodic content. Moreover, Redbox does not offer any original content like HBO Go; nor can the streaming services be accessed on multiple Internet-enabled devices. In contrast, rivals such as Amazon.com, Inc. (NASDAQ:AMZN)‘s Prime service offer a large variety of content that can be streamed on multiple devices.
What can Verizon learn from its peers?
In the streaming business, price leadership is not enough to ensure user engagement. In order to capture market share from its competitors, it is imperative for the company to offer a wider range and better quality content. So far, Redbox does not offer any original programming, in addition, it has access to limited movies and TV shows.
Redbox competes directly with Netflix, which is the largest video streaming service in the U.S., as it holds nearly 30% of online web viewing with 36 million subscribers. It recently signed a deal with Warner Bros and an exclusive content deal with Disney for an unprecedented access to Disney’s titles from 2016 onwards. This is expected to bolster its already large user base.
Amazon has 10 million Prime members that pay an annual fee of around $80 to access books and online videos. The company offers downloadable content that enable users the freedom to view videos offline. It strategically offers a large mix of products and services, which includes movies, TV shows, digital books, and shipping services on a variety of Internet enabled devices.
To further develop and establish its content library, Amazon signed an agreement with A&E after Netflix failed to reach a deal with the company. The new deal will allow Amazon to offer some of the highest rated television shows such as the Pawn Stars and Storage Wars.
Similarly, HBO too clocked an exclusive 10-year deal with Universal for content acquisition until 2022. It is noteworthy that Netflix spends approximately $2 billion on content acquisition. For Redbox in order to compete with HBO and Netflix, Inc. (NASDAQ:NFLX) successfully, it must commit to multiple-year spending on content acquisition. Although this will substantially increase its operating costs, such investments are necessary to report a consistent growth rate in user base.
It is absolutely essential for Redbox to offer content across multiple platforms in order to capitalize on the growing demand of Internet enabled devices such as smartphones and tablets. Furthermore, growing broadband penetration in the emerging markets makes it crucial for Redbox to target growing economies such as Latin America. Its main competitor Netflix already has a strong presence in several international markets.
Key takeaway for Verizon
Verizon Communications Inc. (NYSE:VZ) has taken an initiative to enter the growing, highly competitive video-streaming market, where its telecom peers have avoided this business so far. This brings a certain degree of diversity to its business, which will allow it to offset for any future bumps in its telecommunication business.
However, its present offering through Redbox lacks in several areas, and needs to add a lot if it expects to challenge Netflix.
It is essential for Verizon to focus on improving its content portfolio and gradually expand internationally in order to enhance its user base. This may involve hefty cash investments in the near term; however, the company will reap benefits going forward.
Presently, video streaming is a very small part of Verizon Communications Inc. (NYSE:VZ)’s business and may seem insignificant to investors. Then again, I believe this is a highly strategic move, which can gradually turn into a big revenue driver for the company, if it improves and incrementally develops on its current offering.
Kiran Gulati has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix.
The article Can Verizon’s Redbox Challenge Netflix? originally appeared on Fool.com.
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