Netflix rate hike likely will boost DVD rentals for Redbox

SAN FRANCISCO — Netflix is giving Redbox a golden opportunity to gain some ground.

Beginning today, Netflix, the largest U.S. video subscription service, will hit its nearly 25 million U.S subscribers with rate increases of as much as 60 percent. The sticker shock is expected to make Redbox, which rents DVDs for $1 per day through kiosks, even more enticing to movie lovers.

"We are very cognizant of the value of the dollar," said Gary Cohen, Redbox's senior vice president of marketing and consumer experience. "Redbox is all about simplicity, convenience and value."

Netflix Inc.'s higher prices will drive business to video rental chain Blockbuster and other home entertainment rivals, too, but none are better-positioned to take advantage of the disruption than Redbox, according to Wedbush Securities analyst Michael Pachter.

That's because millions of people are expected to keep paying for a Netflix service that streams video over high-speed Internet connections, but will look for other places to rent DVDs at a low price. Most people won't have to go far before coming across a Redbox kiosk; two-thirds of the U.S. population lives within a five-minute drive of one of the company's red vending machines, which are largely stationed in Wal-Marts, drugstores, supermarkets and convenience stores.

Netflix, which is based in Los Gatos, has given its subscribers little reason to stray until now. Its service emerged as a household staple the past few years while bundling rented DVDs through the mail with unlimited Internet video streaming for as little as $10 per month. Keeping both of those options will cost $16 per month under Netflix's new pricing. Netflix predicts that about 10 million customers will avoid the higher prices by limiting their subscriptions to an $8-per-month streaming plan that doesn't include the latest theatrical releases available on DVD and pay-per-view.

Pachter believes 2 million to 3 million customers simply will close their Netflix accounts and abandon the service to protest the higher prices.

Without providing specifics, a Netflix forecast issued in late July acknowledged that its higher prices will result in an unusually high cancellation rate. During the past year, Netflix averaged 2.8 million cancellations per quarter, compared with an average of 5.2 million new subscribers every three months during the same period. Netflix isn't certain it will attract enough new customers to offset the cancellations in the three months ending in September.

If the projections pan out, a large audience of DVD renters will be up for grabs the next few months.

The Netflix backlash is expected to be a boon for Redbox, mainly because its in-store kiosks have become almost as ubiquitous as the red envelopes that Netflix uses to deliver DVDs.

In the past two years, Redbox owner Coinstar Inc. has more than doubled the number of DVD rental kiosks to 33,300. Compare that to Blockbuster, which is down to 1,500 stores in the United States after a bankruptcy filing last year led to its $234 million sale to Dish Network Corp. earlier this year.

Redbox also offers something Netflix doesn't: video game rentals for $2 per day. It plans to begin selling an Internet streaming service before the end of the year, but hasn't provided many details yet.

Higher prices may be looming at Redbox, too. In June, the company began testing DVD rentals at prices ranging from $1.10 to $1.20 in six markets: Kansas City, Mo.; Phoenix; Charlotte, N.C.; Portland, Ore.; Pittsburgh; and Austin, Texas. Redbox, which is based in Oakbrook, Ill., says it doesn't plan to raise its prices permanently.