Verizon’s Potential Redbox Partnership Looks Smart But Questions Remain

Close on the heels of reports that Verizon (NYSE:VZ) is planning on providing stand-alone streaming services next year, TechCrunch reports that it may be partnering with Redbox to put its plans to action. ^[1] Redbox, a subsidiary of Coinstar (NASDAQ:CSTR), operates automated retail kiosks across the country that enable customers to rent out DVDs, Blu-Ray disks and video games. The joint offering will not only pose a threat to cable operators, such as Comcast (NASDAQ:CMCSA) and Time Warner (NYSE:TWC), that are concerned about cord-cutters dropping their pay TV subscriptions in favor of cheaper web-based alternatives but also Netflix, which has also been shifting its focus to concentrate on its online streaming business.

See our complete analysis for Verizon

Partnership will improve relationship with studios

In an earlier article, we raised concerns about Verizon’s service eating into its margins in the near-term as it struggles to negotiate favorable deals with studio owners that are reluctant to burn their existing relationship with cable operators.

Although Verizon will not offer this service in its FiOS markets, that is still not much of a push to content providers as the FiOS TV service has only 4 million subscribers as opposed to the nearly 85 million TV viewers Verizon is targeting. Alone, Verizon may not have had much bargaining power with its currently minimal streaming subscriber base, but a partnership will help Verizon leverage Redbox’s established relationship with content providers to get more favorable deals. This could lead to less of an impact on gross margins than had it decided to go alone.

Will it still target markets outside FiOS?

Also, its plans to avoid launching the streaming service in its FiOS markets, though primarily aimed at mitigating concerns of cannibalization of its broadband TV offering, may turn out to be a double-edged sword by limiting  its reach to only those customers who have never used a Verizon offering for their TV connection. If it does enter into a deal with Redbox, it doesn’t look like it will be able to go ahead with its earlier plans as a national player as Redbox will not want to limit the availability of its digital content to a few markets.

We will have to wait and see how this plays out. Will a launch in FiOS markets cause customers to drop their FiOS TV connections in favor of the streaming service?

If Verizon manages to convince Redbox and launches the service in outside markets only, will it be able to effectively market its offering to customers who have never used a Verizon TV connection before?

Having a recognized movie-rental brand for a partner should address the last concern to some extent though.

Our price estimate for Verizon’s stock is $43.50, which is about 15% above market price.

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1. Verizon and RedBox Planning Major Partnership For Early 2012 Launch, TechCrunch, December 7th, 2011 [↩]