Article

DVD kiosks may steal Netflix market share

Netflix's decision to split its streaming and mailing services into separate businesses may create opportunities for DVD kiosk companies.

September 26, 2011

 Netflix's recent decision to split its streaming and mailing services into separate businesses is alienating customers, according to industry analysts, who predict the move may have created an opportunity for DVD kiosk companies such as Blockbuster and redbox to pick up disgruntled Netflix customers.

Only about 15 percent of consumers rent DVDs from both kiosks and by mail, according to NPD research, so it may take some convincing to get Netflix customers to drift to kiosk usage; however, it's highly possible, according to Russ Crupnick, an NPD entertainment analyst.

"In the short run I do think there is an opportunity for kiosks to reach out to angry (Netflix) customers and engage them," he said. "But there will be competition for that viewing experience from Watch Instantly, DVR, VOD and other options so it won't be quite as simple as moving them from one rental option to another. Those days are over; say when Blockbuster closed, a kiosk or (Netflix) was the only option. Now there are many options."

Who will step up?

Ron Bowers, executive vice president over the Self Service Kiosk division of the Digital Screenmedia Association, said owners of DVD kiosks are probably breathing a sigh of relief over Netflix's decision.

"Netflix has had an exceptional opportunity to turn their product into a category buster, but they continue to force their business strategy rather than respond to the needs and convenience of the consumer," he said. "DVD kiosks have a window of opportunity ... now, the question is, who will step up and listen to what the consumer is asking for."

Soheil Samimi hopes his company can have such a story. The president of iMOZI, a DVD kiosk company with more than 300 kiosks deployed in the United States and hundreds more throughout Canada, Latin American, Australia and New Zealand, is confident that Netflix's recent decision to raise prices and split its mailing and streaming services into two businesses will only help that growth. The company is on pace to have more than 1,000 kiosks in place throughout the U.S. over the next year and is already producing hundreds more for its international markets.

"Perception and consumer sentiment is often a key driver determining where they chose to do business," Samimi said. "Right now, the No. 1 alternative to Netflix is DVD kiosks, so we can fully expect that some disgruntled customers look towards that option to replace their cancelled membership. One should also not forget about Blockbuster, which following its purchase by DISH, is certainly benefiting from Netflix's blunders."

Even before the Netflix price hike took effect and before the company announced it would split its services, consumers were already looking around for a new provider, according to a study conducted by Frank N. Magid Associates Inc., a research-based consulting firm. A week before the announcements, it surveyed 1,000 U.S. consumers, including more than 700 subscribers and more than 350 non-subscribers and found that consumers were already showing a growing interest in DVD kiosks. Findings concluded that 16 percent would likely drop the service.

About 60 percent of Netflix subscribers also use redbox, according to Mike Vorhaus, president of Magid Advisors, who said the study also found that 30 percent of them said they would more frequently rent from redbox because of the Netflix price change.

Redbox announced in Julythat Q2 revenue jumped 33.8 percent and profits saw a large increase as well. Redbox also announced that it had reached the four million mark in video game rentals.

Although redbox wouldn't comment on the Netflix split, a Sept. 19 blogpost published on insideredbox.com, which isn't affiliated with the company, asked readers if they thought it was a smart move.

"Netflix, it's like we hardly know you any more. In a few short months, you've gone from beloved to baffling in the eyes of millions of consumers, and today's news isn't likely to change that move by Netflix," it stated.

Although the company's main competitor Blockbuster Express kiosks, operated by parent company NCR Corp., reported a $17 million second-quarter (ended June 30) operating loss for the kiosk rental business, revenue grew 65 percent to $38 million from $23 million last year.

CEO Bill Nuti said he expects the kiosks to be profitable in 2012 and that the Express business can grow revenue from 10 to 15 percent.

NCR would also not comment on the Netflix split.

Netflix going down?

Netflix shares dropped nearly 19 percent last week after Netflix admitted that it is poised to lose 600,000 subscribers this quarter, ending Sept. 30. The prediction would leave the company with about a million fewer subscribers than it previously told investors to expect.

"We definitely believe that subscription growth at Netflix in the U.S. in the next 12 months will be more modest than Netflix or Wall Street is saying currently," Vorhaus said. "No doubt some of the folks who cancel Netflix in the months ahead will do it because they don't want to sign up for both the streaming and the DVD services."

Those customers have to go somewhere, and Samimi hopes iMOZI can gain some of the business, citing lower prices and easy access as reasons why consumers may go with kiosks.

Reaching out to Netflix customers

Samimi is unveiling a kiosk membership program as part of a new pricing model to "allow consumers to have a physical DVD plan like Netflix, but enjoy the convenience of being able to come and get a DVD any time that they want," he said.

For example, with a $9.99 per month plan, a customer could get one DVD per day/out on the kiosk network. In theory, someone could watch up to 30 rentals in a month for only $10.

“This approach also kind of allows us to boast an even better perceived value on the ‘lowest movie rental pricing on the market’ via the DVD Kiosks.”

DVD kiosk companies hoping to snag disgruntled Netflix members could always take a page from Blockbuster’s play book. The company launched a promotion after the Netflix price hike, giving customers who switched to Blockbuster Total Access a 30-day free trial. After the free trial, customers continue to receive the service  for a new everyday price of only $9.99 per month for one Disc at a time or $14.99 per month for two Discs at a time.