Redbox Raises Rates: Why Netflix Wins

DVD rental service Redbox announced this week it will raise the price of renting a DVD for a day to $1.20 from $1. It's the first hike since 2003. Twenty cents may seem marginal compared to Netflix's recent 60 percent price hike but the 20 percent jump is enough to mar Redbox's signature $1 marketing plan.

The change is primarily due to the increase in operating expenses, including the recent increase in debit card interchange fees as a result of the Durbin Amendment, Bellevue, Wash.-based Redbox said when it announced third-quarter results.

The Durbin Amendment sets a limit on the fees banks can charge retailers every time a debit card is swiped, but many banks have worked around it by charging customers a nominal fee for using them, or incorporating the fee directly into their offerings. Redbox, which accepts debit and credit cards, is employing the latter tactic to offset the fee.

Even with the fee included, Redbox will still suffer every time customers use their debit cards. The Durbin Amendment creates a debit interchange fee floor, as well as a fee ceiling, so small transactions can become very costly for the retailer. John Kraft, a research analyst at D.A. Davison & Co., predicts the new law will cost Redbox about 10 cents per rental when debit cards are used.

Redbox has another reason to raise its prices: Coinstar, Redbox's parent company whose green kiosks convert coins to cash, has also been hit by Durbin. Coinstar machines allow customers to either receive cash for their coins and pay a small fee, or accept the money in the form of a gift card and skirt the fee. Coinstar offers free gift cards because their costs are covered by the interchange fees that retailers pay, which has now been curbed by Durbin.

Coinstar could have instead charged a fee for receiving a gift card, but the company likely wanted to keep this option more attractive than the cash option. If both the cash and gift card options charged fees, people might be less likely to use Coinstar.

Coinstar only had to look at Netflix to know Redbox could survive a price hike. After Oct. 31, even if a customer rents five Redbox DVDs a week, they'll only be paying $1 more than they would have before the price increase; Netflix's DVD customers have to pay $6 more a month for the same service.

But in an ironic twist, the math now actually favors Los Gatos, Calif.-based Netflix over Redbox. Since the Netflix price hike, customers are no longer required to pay for its streaming service if they just want the DVDs. Netflix's DVD-by-mail service by itself costs $7.99, so customers could theoretically rent and return as many as nine movies a month; with Redbox, $7.99 only gets six DVDs and some change.

While Netflix may beat Redbox in pure DVDs for dollars, nobody wins in their price war, with the exception of Blockbuster, which is loving every minute. The company, now owned by Dish Network, recently lowered its own rental prices to 99 cents a day, although those 99-cent rentals only apply to its older library of movies; newer releases can cost as much as $4.99. Blockbuster also launched its own streaming and DVD-by-mail service called Blockbuster Movie Pass, which charges only $10 per month, but the service is only available to Dish Network customers.

Redbox did not increase the nightly pricing for Blu-ray discs, which cost $1.50, and videogames, which cost $2.