Investors panic as Redbox sets out on Netflix's path
There’s a lesson to be learned in Netflix’s massive stock plunge: don’t jack up your prices suddenly and without explanation. Which is exactly what Redbox has decided to do. Aaaand down goes the stock…
Parent company Coinstar’s stock dropped nearly 10% in pre-market trading Friday morning following the company’s announcement in Thursday's earnings report that it will raise Redbox DVD rentals by 20%, effective October 31. This, obviously, does not amount to much—it’s the difference of $1 a day and $1.20 a day (about what you end up paying in tax anyway). But the timing is all wrong, considering Netflix just shaved a good $2 billion off its market cap by essentially doing the same thing.
Of course, the price hike is not as dramatic as Netflix’s. While Netflix raised its streaming + DVD package by 60% to $16 from $10 a month, Redbox’s price hike will hardly make a dent in your wallet. But it’s the principle of the thing…
What’s really interesting to note is the fact that Coinstar’s Redbox business is booming. Coinstar’s revenue for the third quarter jumped 22.5% over last year to $465.6 million, which—by the company’s own admission—was driven primarily by Redbox revenue, which was up 27.7% to $389.8 million. Coinstar CEO Paul Davis announced that Redbox revenue alone had surpassed $1 billion in the year to date. Meanwhile, net income for the first nine months of 2011 was up 90% to more than $72 million, compared to $39 million in the same period last year.
The results exceeded analyst expectations, which forecasted about $3 million less in revenue. And it's probably not that far-fetched to posit that the increase in sales is likely due to customers fleeing Netflix. So why the price increase?
The company explained that the price increase is based on the increase in operating costs, which includes higher debit card fees that went into effect October 1. “This is the first time in eight years Redbox has raised our daily DVD rental price,” the company explained in a statement.
To make the transition a little easier, Redbox will continue to allow customers to rent DVDs for $1 for the first night throughout the month of November, but will charge $1.20 for each additional night thereafter.
Tread lightly, Redbox.
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