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Verizon-Redbox PairingBrings New Buyer to Table

Studios are welcoming the arrival of Verizon and Coinstar's joint venture, which is expected to bring a hungry new customer to the marketplace and potentially drive up prices for TV shows and movies.

"This gives us more opportunities to reach the consumer," says one studio executive. "We're in the business of monetizing our content. The more people watching, the more opportunity we have to get paid."

The joint venture, scheduled to launch in the second half of this year, will be an over-the-top subscription video-on-demand provider intended to compete head-to-head with Netflix and less directly with other online on-demand video services such as Amazon Prime, Dish Network's Blockbuster and Walmart's Vudu.

Coinstar owns Redbox, whose kiosks sit outside neighborhood grocery stores and offer customers DVD rentals for $1.20 each. The service is going like gangbusters—in last week's quarterly earnings statement, Coinstar reported that its revenue surged 40% to $445.6 million in 2011's fourth quarter. Wall Street is hugely bullish on the service, and they are hopeful regarding the upcoming streaming venture.

"They have a chance with the joint venture, but that chance will depend entirely on how good the content is that Verizon brings to the table," says Andy Hargreaves, senior research analyst at Pacific Crest Securities. "What's interesting about Verizon as opposed to Amazon is that Verizon has a lot of content deals that it's already done for its FiOS [broadband cable service]. If they are able to repurpose some of that content, they'll be able to launch with much broader and higher quality content than Amazon."

In most cases, repurposing content will require renegotiating contracts with providers because Verizon's original contracts for carriage on FiOS don't include streaming rights, say observers.

The leader in this category is Netflix, which has been on a spending spree over the past year—acquiring such product as Lionsgate's Mad Men, The CW's primetime dramas and many other shows—to the delight of the Hollywood studios. Increasingly, Netflix is acquiring content on an exclusive basis, which is the case for The CW deal, but that hasn't been a priority.

But exclusivity may be the key going forward. With more of these services coming online, each of them will need to distinguish themselves in consumers' minds. One way to do that is to offer original content, as Netflix has started doing with such shows as Lilyhammer and the upcoming House of Cards. But another way is to offer customers TV shows and movies they can't get anywhere else.

"I think their purchases have been very adroit," says one studio executive of Netflix. "But the fact that they are not paying…to get their content exclusively really has given their competitors an enormous advantage. If everything that Netflix has bought was exclusive right now, Coinstar and Verizon could never even get off the ground."

And while studios want to get top dollar for their TV series and movies, some executives say they are also interested in keeping the entire market healthy. Keeping these new services in business over the long term is more important to studios—especially those making multi-year deals—than selling them content they won't be able to support down the road.

For now, though, the arrival of another new player means "the price of content is going up," says Daniel Ernst, principal and consumer technology analyst with Hudson Research Group.

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