The largest U.S. mobile service provider Verizon Communications (VZ) has formed a joint venture with Coinstar Inc. (CSTR) to launch nationwide video rental and online streaming services comparable to those of its rival Netflix Inc. (NFLX).
The venture would combine Coinstar’s Redbox new release DVDs and Blu-ray disc rentals with an on-demand streaming and download service from Verizon. The service is slated to be introduced in the second half of the year. While the financial terms were not disclosed, Verizon will hold a majority 65% stake in the venture while Coinstar own the remaining 35%.
The success of both Verizon and Coinstar will depend on the pricing of the video streaming services and the quality offered in the booming subscription video service market. The alliance would strengthen their respective competitive positions against Netflix and other online rivals like Amazon.com Inc. (AMZN) and Hulu Plus.
The pact represents Verizon’s first venture in video streaming beyond its operating region. The company currently offers Web video services through its FiOS TV service, which is gaining strong momentum in the U.S. market despite stiff competition from cable providers like Comcast Corp. (CMCSA) and Time Warner Cable (TWC).
We believe the venture is highly beneficial to Verizon, as it will attract new subscribers and add a new line of business, in turn drawing additional revenues. Coinstar revenue jumped 33% in the fourth quarter of 2011 largely backed by Redbox. In addition, we expect Redbox to boost Verizon’s profitability when the venture comes online, despite additional expenditure on the service.
At year-end 2011, Redbox had 35,400 kiosks nationwide in McDonald’s, grocery and drugstores while Verizon had 4.2 million FiOS Video customers and 4.8 million FiOS Internet customers.
While waiting for the company to move ahead with the venture and its pricing, we are maintaining our long-term Neutral recommendation on the stock. Currently, the stock retains the Zacks #3 (Hold) Rank for the short term (1-3 months).
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