Verizon (NYSE:VZ) and Redbox seem likely to make good on their plans to launch their joint online video streaming service by Christmas this year. Christened Redbox Instant, the online service will offer an unlimited video streaming plan along with four nights of DVD rentals for a monthly charge of $8-$9. The companies plan to launch an invitation-only beta version before the end of the year, according to the Associated Press.  The joint offering poses a big threat to not only incumbents Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) but also cable operators such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) that are concerned about cord-cutters dropping their pay TV subscriptions in favor of cheaper web-based alternatives.
While Redbox Instant (RI) may launch with a price advantage over rivals, it does have some major shortcomings going into a market that has long-time players such as Netflix. For one, the service is aimed at movie lovers and will therefore not include access to TV shows or game rentals initially. Moreover, when compared to Netflix’s over 60,000 titles, RI will launch with a library of only 5,500 movies. This may however change quickly as Verizon uses its bigger financial clout to win more content deals and promotes this service to its over 95 million retail wireless subscribers. We believe that the long-term goal of this venture is to drive the demand for mobile data on smartphones and tablets as 4G speeds become ubiquitous.
Our price estimate for Verizon’s stock is $45, about in-line with the market price.
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Verizon looks to drive wireless data consumption
The streaming market has seen tremendous growth, enabling market leader Netflix to grow its revenues by almost three times in the last four years. Entering this high growth market will not only enable Verizon to make a profitable venture out of it but also help it differentiate its mobile services from other telecom players in the market.
The advent of high-speed 4G LTE technology has made streaming good quality videos at high speeds possible. As a growing number of users access Internet on the go, the demand for video streaming from mobile devices is also set to rise. If Verizon starts offering streaming plans bundled with its existing wireless data plans, it will not only be able to monetize this growing need for video on demand but also put its high-speed LTE network to greater use. Even otherwise, a standalone streaming service can help drive the demand for videos up and cause customers to consume more data on their mobile devices. Having recently debuted their shared data plans, Verizon will be looking to increase mobile data usage and cause users to move into the higher tiers of their plans.
Content deals may be too expensive
However, for the streaming service to be successful, Verizon will need the backing of content providers who might think twice before striking new deals that might jeopardize their existing long-time relationship with cable operators. (see Verizon Will Ride New Streaming Service to $44) Redbox’s existing relationship with content providers will therefore come in handy in securing new deals.
Also, we believe content owners might be more welcoming to a disruptive force that could challenge Netflix’s ascent in this market. This would enable content providers to demand higher pricing for their movies and TV shows to avoid lowering the value of their content. Content owners hate a lack of competition in their sales channels as it leads to lower prices for content and that, in turn, waters down their brand value. This was a major reason why Netflix’s talks with Starz collapsed last year. (see Verizon Should Partner with Redbox, But Could Stream Solo Otherwise)
However, it is still unclear how big a plan Verizon has for this venture. Even if content owners are more welcoming to a new player in the streaming space, creating a rich enough content library to compete with the likes of Netflix will need large additional investments. Netflix has paid heavily to secure or renew content deals and, as of June 2012, Netflix’s content obligations stood at $5 billion, almost four times what it was at the start of last year. If Verizon wants to make a big entry into this space, it might have to spend heavily on content and then price its service cheaply enough to lure market share away from Netflix. But then, considering that it is planning on paying for content based on the number of users that choose to subscribe to the service, it is somewhat insulated from the risk of paying too much initially for the content. 
- Redbox Instant streaming plan takes on Netflix, Associated Press, December 12th, 2012 [↩]
- Redbox-Verizon Streaming to Challenge Netflix by Year-End, Bloomberg, September 22nd, 2012 [↩]