Redbox's Digital Strategy Won't Challenge Netflix's Streaming Service, Here's Why

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Includes: NFLX, OUTR
by: Dan Rayburn

When Bloomberg reported Monday that Redbox was "developing an online strategy" to challenge Netflix (NASDAQ:NFLX), many seemed to think this was some kind of breaking news story. But in reality, those inside Redbox have been working on trying to develop a digital media strategy for over a year now and still face some major hurdles that will keep it from competing with Netflix anytime soon. Redbox's biggest problem is that the company has zero device penetration and can't get to a large install base anytime soon.

While many bloggers and analysts were quick to point out that Redbox could simply work with Roxio to license their platform, none of them seemed to actually do the math which shows that Roxio can't solve the device problem for Redbox. I see analysts saying things like, "Sonic technology is already in DVD players and TVs", yet they don't mention what the device penetration for Sonic is when compared to Netflix.

In a recent earnings call where Roxio spoke of device growth, the company said that the number of CE devices carrying their stores, under both their brand and those of their partners would be, "over 3M CE devices by June of 2010" and "nearly 30M by June of 2011". Yet for Netflix, simply between the Xbox 360, PS3 and Wii, Netflix already has more than 50M CE devices in the market today that are capable of streaming Netflix content. Not to mention, Roxio's platform still does not support Mac users, so even if Redbox licensed RoxioNow, it would do nothing in helping Redbox reach users who don't have a PC.

Redbox may come to the market with a digital strategy, but it will take them years to get on the 100 devices that Netflix will be on by the end of this year. While many are quick to talk about different companies challenging Netflix for their streaming service, I think they are forgetting that it took Netflix 3 years to get their streaming service to where it is today. It does not happen overnight, there is a lot of development work involved and it costs a lot of money. That's not to say that Redbox can't spend the money and time to offer something similar to Netflix in the way of streaming movies, but they won't be able to challenge Netflix with any scale for a very long time. And that's without even talking about how much inventory Redbox can amass and how long it will take them to do so.

I think many are forgetting or just don't know how difficult the online movie delivery business is. If it was so easy to replicate what Netflix is doing with streaming, then there would be many others offering the same service in the market, but there aren't.

Disclosure: I am a customer of Netflix and Redbox and use both services.