Why the writing may be on the wall for Redbox Instant

Redbox Instant has a problem that may just break its neck: The video service disabled sign-ups for new users because of criminal activity three months ago, and has yet to open up the gates again. Redbox Instant’s website had been used by criminals to verify credit card numbers they illegally obtained elsewhere, and the company was quick to assure users their payment information wasn’t compromised, explaining on its website that “current customers can continue to watch great videos to their heart’s content without reason for worry.”

If their credit card doesn’t expire, that is. [company]Redbox Instant[/company], which is run as a joint venture between [company]Redbox[/company] and [company]Verizon[/company], has also been preventing existing users from changing their payment information, leading to numerous complaints on the site’s Facebook page. Browsing through these complaints also reveals that this isn’t a temporary problem. One of the first posts mentioning the issue is from the end of June.

In other words: Redbox hasn’t been able to acquire new users, or retain existing users with expiring credit cards, for all of the third quarter.

A wild rumor, and a non-denial

But that’s not all: Late last week, a rumor surfaced on Reddit that Redbox Instant would also shut down its service for existing users come October 1. On a whim, I sent Rebox and Verizon a quick email, asking them whether there was anything to this at all, and whether Redbox Instant was going to shut down or introduce any significant changes to its service. The reply? “No comment.”

As a journalist, I’m pretty used to companies declining to comment. Write about an unannounced product or a business deal in the making, and you likely won’t get an answer at all, or a boilerplate answer to the effect that the company in question won’t comment on “rumor and speculation.”

However, the one instance when people usually comment is when there is talk about a company shutting down, and that company wants to make it clear that it will continue to operate. You just don’t confuse your customers leaving that option on the table. So when a Redbox Instant spokesperson sent me that “no comment,” I started to wonder: what the heck is really going on at the video service?

Redbox’s website doesn’t even link to Redbox Instant

Redbox Instant launched in early 2013 with a novel take on [company]Netflix[/company]-like video subscriptions: The service offered users all-you-can-eat access to a catalog of a few thousand movies, and complemented the offer with four Redbox DVD coupons per month. Redbox Instant users also had access to a few thousand movies on a transactional basis, meaning that these titles could be rented or bought either with or without a subscription.

The team behind the service spent the first year or so bringing it to a wide variety of platforms, including Roku, Xbox One, Xbox 360, Playstation 3 and 4, Chromecast, smart TVs, iOS and Android. The service also began to add more titles, but never spent as much as competitors like Netflix or [company]Amazon[/company] on content, which also meant that it never really was able to differentiate itself from the competition with regards to streaming content. Instead, Redbox Instant hoped that it would appeal to Redbox users that also occasionally wanted to stream a movie. “It’s a disc plus offering,” then-CEO Shawn Strickland told me when the service launched in March 2013.

However, for that to work, Redbox would have had to promote the service to its customer base, and that seemingly never happened. If you go to Redbox’s website and search for a movie title, it shows you whether the title is available on DVD or Blu-Ray — but you won’t find any link to Redbox Instant, even if that same movie is available as part of the service’s streaming subscription package. And the one promotional page of the Redbox website that does mention Redbox Instant doesn’t even include a link.

Redbox and Verizon were not happy with subscriber numbers

With that, it’s no surprise that Redbox Instant’s business didn’t develop as planned. J. Scott Di Valerio, CEO of Redbox parent Outerwall, said during the company’s Q2 2014 earnings call that both his company and Verizon were “not pleased with where the subscribers are to date.”

That’s not only significant because Outerwall has been partially bankrolling Redbox Instant, contributing a total of $70 million to date. The company also has an option to terminate the venture early next year if Redbox Instant doesn’t get a certain amount of subscribers by that time. Said Di Valerio: “If we don’t hit certain subscriber thresholds, then we have some decisions to make in March.”

In that context, disabling sign-ups for new subscribers for three months seems like a death wish.

Redbox Instant’s future: A VOD store for Verizon?

I’ve heard a while back from people close to the company that internally, Redbox Instant had been preparing to deemphasize or possibly even get rid of subscriptions, acknowledging that it simply can’t compete with Netflix. It would instead focus on digital rentals and sales. That notion was also echoed by Di Valerio, who remarked during the Outerwall earnings call that the Redbox Instant’s transactional business was increasing.

Of course, that was before the credit card issue hampered that part of Redbox Instant’s business as well. And while movie rentals may have performed better for the service than subscriptions, it’s hard to envision how it would compete with transactional services alone in the long term. It’s a market that already has a lot of competition, including from iTunes, Google Play, Walmart’s Vudu and Technicolor’s M-Go.

That’s not to say that Verizon, and possibly also Redbox, couldn’t make use of a transactional video store. In fact, the Redbox Instant infrastructure is already powering Verizon’s On Demand video store, which up until recently was called FlexView. And with Verizon getting ready to launch an internet-based subscription TV service some time next year, it could make use of the same infrastructure to power movie and TV show rentals.

To be honest, I don’t know how soon we are going to see these changes. But the extended payment processing problems may force the joint venture to make a move sooner rather than later.