U.S. Markets closed

Redbox, Netflix decline as video competition increases

Aaron Pressman

Cable companies have been suffering lately as more of their customers have decided to opt out and use cheaper online services like Netflix (NFLX) and Hulu. But now it looks like some of the disrupters may be getting disrupted.

Monday night, Outerwall (OUTR) reported a plunge in business at its Redbox DVD rental service, the cheap alternative to cable on-demand movies. November was bad and December is worse, the company said in a pre-announcement that its year-end results won't meet previous guidance. The stock plunged 22% in mid-morning trading, leaving Outerwall investors staring at a total loss of 39% for 2015.

Redbox has been a classic low-end disrupter of the cable movie rental business. Its ubiquitous kiosks offer a slender selection of movies on the old-fashioned DVD format, but the price is cheap and the service convenient for people who shop for groceries at least once a week.

Now the disrupter may be getting disrupted by an even cheaper alternative. Tiny and inexpensive online video devices like Google's (GOOGL) $35 Chromecast and Amazon's (AMZN) $40 Fire TV Stick are among the top sellers this holiday season (prices were even lower on Black Friday). The low-end devices provide easy access to cheap movies, both rentable recent releases from Amazon and Google's video services and all-you-can-eat style streaming of older flicks on Netflix, Amazon Prime Video, and other services.

Netflix may not be the most popular alternative for former Redbox renters, however. The streaming service has been sharply cutting back on its movie library for the past few years as competition for content has driven up the licensing fees Netflix must pay the Hollywood studios. That's been a worry for Netflix investors, one that may be top of mind after the stock hit an all-time high this week.

Netflix shares have dropped 7% over the past two days, after initially hitting an all-time high of $133.27 early on Monday morning. The fall followed comments by Ted Sarandos, Netflix chief content officer, that some interpreted as a sign that competition was heating up for the online video company.

Netflix has had great success with its original shows so far. After winning awards for "Orange is the New Black" and "House of Cards," its latest offerings like "Jessica Jones" and "Masters of None" are making many critics "10 best" lists for 2015.

So the company will double down on originals, Sarandos said in a talk at the UBS Media and Telecommunications Conference in New York. Netflix will offer 31 original television shows next year, up from 16 this year, along with a slate of 10 movies that are in various stages of production, he said.

At the same time, Netflix is letting deals for the rights to big libraries of movies expire. With a few exceptions, Netflix "won't enter large output deals in the future," Sarandos said. "More studio output just means more 10-month-old movies."

Asked about whether a competitor like Hulu had driven up prices for shows Netflix wanted, Sarandos pushed back, saying his company would simply buy fewer shows. "They are possibly driving up pricing on themselves and on Amazon, but we're pretty disciplined."