IT PLAYED LIKE THE PLOT OF A SCHLOCKY direct-to-DVD thriller: As if seduced by the dark side, the once-heroic Netflix turned on its customers in July, announcing that it was jacking up the price of its bundled DVD-by-mail and online streaming plan by 60 percent. Embracing its newfound villainy, Netflix next announced it was splitting those services into two companies that would require separate accounts (“Meet my evil twin, Qwikster”), further enraging its once-faithful followers. Then, just as quickly as it had gone bad, the company came back, ditching the proposed division and begging for a second chance. But the damage was done: More than 800,000 subscribers abandoned Netflix in the three months after the price hike was announced.
The implosion was morbidly engrossing to anyone watching, but no one could have enjoyed the drama quite like Redbox. Before last summer the DVD vending machine business owned by Bellevue’s Coinstar was the second-biggest player in the rental market, trailing only Netflix’s red-envelope empire. Then, with its biggest competitor reeling, Redbox had a chance to—if not knock out Netflix entirely—land a serious haymaker. Instead it all but dropped its gloves. “Their silence was deafening,” says Michael Pachter, an industry analyst, who in September predicted Redbox could scoop up as many as two-thirds of ex-Netflixers. Redbox did run a series of online ads and a handful of promotions, like one offering a free rental to anyone who “liked” its Facebook page, but it never called out Netflix by name. Maybe it didn’t want to draw attention to its PR issues.
Since early this year, Coinstar execs have promised Redbox would roll out a streaming program sometime in 2011. Rather than invest in the content and build its own service, analysts like Pachter believed Redbox would partner with an existing brand, most likely Amazon, which has steadily amassed more than 10,000 titles for its own digital offering. But then Netflix announced it was dividing its business, prompting many in the industry to wonder if Amazon was actually planning to buy the DVD-by-mail division to complement its streaming service. (Confused yet?) That deal never went down, and Netflix backtracked on its decision to split—suggesting that Redbox was Amazon’s second choice all along.
Then there was the price hike—not Netflix’s, but Redbox’s. Effective October 31, the price of a DVD rental went from $1 per night to $1.20. The company insists it was a direct response to new federal legislation that alters the way banks can charge merchants for accepting debit cards. (Before, businesses paid a surcharge of roughly 6 percent per transaction. Now they pay a flat fee of about 22 cents, which is good for those selling large-ticket items but bad for companies like Redbox that operate on much smaller margins.) And that makes sense, but higher prices are higher prices, no matter the reason.
We are talking about movies, though, so surely you saw this twist coming: Redbox’s revenue jumped 7 percent in the third quarter. And its customer base grew 8 percent, putting it—at last—on top of the DVD rental market. As for lack of streaming, by late October the company hadn’t announced anything official, though Coinstar CEO Paul Davis says it’s still coming this year, and analyst John Kraft says the holdup is just proof of the company’s methodical nature.
In the end, Redbox did just what it needed to do to capitalize on Netflix’s stumbles: nothing.