Verizon Could Gain ‘Missing Piece’ for Online-Video Service With Redbox

By Scott Moritz - Dec 9, 2011 4:13 AM GMT+0700

Verizon Communications Inc. (VZ)’s talks to combine with movie-rental kiosk operator Redbox for an online-video service could lead to the phone company gaining expertise needed to start a business rivaling Netflix Inc. (NFLX)

Verizon, the second-largest U.S. phone company, has been meeting with Redbox, a unit of Coinstar Inc. (CSTR), in an effort to work out a content-distribution plan, according to a person familiar with the talks. The carrier has also met with other potential video partners and final details for any arrangement haven’t been determined, said the person, who declined to be identified because the talks aren’t public.

Phone companies and pay-TV providers are seeking ways to enter the online-video market dominated by Netflix and Hulu LLC as consumers increasingly watch movies and TV shows over the Internet. A combination with Redbox, known for its DVD-rental vending machines, would provide New York-based Verizon with knowledge about working with content providers and a brand consumers associate with movie distribution.

“There’s a missing piece that they are looking for,” said Sam Greenholtz, an analyst with Telecom Pragmatics in Westminster, Maryland. “They need the expertise that goes with this business, like how to make it run and what to charge.”

Marci Maule, a spokeswoman for Bellevue, Washington-based Coinstar, declined to comment.

“Verizon talks to a lot of companies,” Deidre Hart, a Verizon spokeswoman, said in an e-mail. “There are no definitive agreements to discuss with anyone at this time.”

Part of Strategy

Coinstar rose 7.8 percent to $47.45 at the close in New York, the biggest gain in more than a year. The stock has lost 16 percent this year. Verizon declined 1.3 percent to $37.81.

“I would definitely see it as a positive” for Redbox, said Eric Wold, a B Riley & Co. analyst in San Francisco. “It could create a fairly attractive combination plan for consumers.”

Yesterday, Verizon Chief Executive Officer Lowell McAdam said online video will be part of the company’s strategy as it seeks to expand distribution. He also said the company had looked at Hulu when its owners sought buyers for the business.

“Hulu is out and they’ve moved on to Redbox,” said Greenholtz, a former Verizon employee who has consulted for the company, and who was briefed by Verizon about the video plans. “Everything is on the table and nothing has been nailed down.”

Verizon is interested in Internet Protocol TV technology, or IPTV, to compete with Netflix and cable companies such as Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC), Tony Wible, an analyst at Janney Montgomery Scott LLC, said this week.

‘Recognized Name’

Streaming video to televisions, computers and portable devices is a market that has attracted other technology companies, including Apple Inc. (AAPL), Google Inc. (GOOG) and Amazon.com Inc. (AMZN)

Yesterday, TechCrunch reported that Verizon and Redbox plan to start a joint service on May 28. The service will be credit- based and include several tiers, some of which include rentals of physical discs, TechCrunch said.

Verizon has “some of the key pieces,” Greenholtz said. With on-demand movies and TV shows for its FiOS service and an extensive landline network, “you can see where it’s not much of a stretch to get this stuff on a wireless signal also,” he said.

What’s missing, Greenholtz said, is more video-distribution knowhow.

“They need a recognized name, the Hollywood knowledge and the talent,” he said. “That’s something they think Hulu or Redbox would give them.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net