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Can Verizon Communications Inc. (VZ)’s Redbox Challenge Netflix, Inc. (NFLX)?

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Prior to 2012, Redbox was just a kiosk video-rental outlet, while Verizon Communications Inc. (NYSE:VZ) was focused on its core telecommunications business. Both companies had absolutely no presence in the online video-streaming business. However, during 2012, Verizon made an initiative to form a joint venture with Coinstar, Inc. (NASDAQ:CSTR), in order to offer online streaming services. Verizon’s stake in the business stood at 65%, while Coinstar held the remaining 35%.

Verizon Communications Inc. (NYSE:VZ)

The venture has only rolled out recently; hence, its impact on Verizon’s stock price has not been realized yet. However, going forward this segment certainly has the potential to drive Verizon’s earnings.

Growth potential in video streaming

Since Verizon Communications Inc. (NYSE:VZ)’s streaming business is still extremely marginal, we can examine revenue numbers from Netflix, Inc. (NASDAQ:NFLX) in order to establish the potential of the underlying growth in the streaming business. According to the valuation offered by Trefis, at present, Redbox holds no value in Verizon’s stock price.

However let’s consider this, by the end of 2012, Netflix’s U.S. subscriber base stood at 27 million, which  enabled it to generate a revenue of $2.17 billion. Further, Netflix, Inc. (NASDAQ:NFLX) generates $288 million through international markets and $1.1 billion through U.S. DVD subscriptions. According to a recent press release by Informa Telecoms & Media, the online video market will surpass $37 billion by 2017. With new additions such as Comcast’s XFINITY, the market is expected to grow exponentially in the coming years.

Success or failure in the online streaming business predominantly depends on the content offerings. With Verizon’s exceptional cash resources ($9.5 billion in cash) it can certainly establish a superior content library than Netflix.

The numbers presented above are indicative of the the growth potential that video streaming offers. I believe it can match Netflix’s revenues in the next two years, however, it needs to be receptive and learn from its peers. How can Verizon’s Redbox tweak its content library and overall business to match Netflix, Inc. (NASDAQ:NFLX)’s numbers will be established later in the article.

What influenced Verizon?

The demand for broadband in the U.S. has grown considerably over the years. Internet penetration in the U.S. is close to 80% with around 245 million Internet users. The rapid growth in demand for online video has increased in proportion with Internet users. Revenues for competitors such as Netflix, Inc. (NASDAQ:NFLX) have increased exponentially over the past few years.

Such developments have influenced Verizon Communications Inc. (NYSE:VZ) into entering the rapidly growing online streaming market. The company can augment its product by combining the video-streaming services with its existing pay TV in order to enhance its existing user base.

This will enable Verizon Communications Inc. (NYSE:VZ) to gain a sustainable competitive edge in the wireless market and bolster its earnings in the future. Further, it can differentiate itself from rivals such as AT&T and Sprint Nextel, as both companies still do not possess any presence in the online video streaming market.

Verizon-Redbox’s business strategy

The online streaming service rolled out by Verizon, called Redbox Instant, differentiates itself through cost leadership, as it charges a mere $6 for its streaming services, which is relatively cheaper than its main competitor Netflix.

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