The company isn't simply following Netflix's recent rate increase -- it's responding to new financial regulation
This post has been corrected (see "update").
Has Redbox learned nothing from Netflix? By now, you're probably familiar with what Netflix did: it raised prices dramatically, driving a million customers (and counting) to cancel the service. Since the price hike was first announced in July, its stock price has plummeted about 73%. So what would possess Redbox to imitate that blunder? The company says that last summer's Dodd-Frank financial regulation bill deserves part of the blame.
Redbox announced this week that it intends to raise the price of renting a DVD for a day to $1.20 from $1. That's a pretty straightforward 20% increase. This price hike may appear smaller than Netflix's increase, which was as much as 60% for some subscribers.
Still, Redbox customers aren't likely to embrace the change -- especially since they won't get anything in return. Its third quarter earnings announcement states: "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."
I know what you're thinking: what can financial regulation possibly have to do with DVD rentals? You know how they say that when a butterfly flaps its wings it can have unexpected consequences on the other side of the world? This is kind of like that. When politicians in Washington regulate, unintended -- and sometimes even strange -- consequences can follow.
You may have heard about the new debit card fee rule referred to above. It limits the interchange fees that retailers must pay banks when debit cards are swiped. It has already agitated consumers since its implementation earlier this month. You probably recall that Bank of America and others said that they will soon charge customers a fee to use their debit card in response to the new rules. This same rule also had a hand in prompting Redbox's rate hike.
How could this be? The Durbin Amendment also creates a debit interchange fee floor, which makes small transactions -- like those to rent a DVD from Redbox -- much more costly for retailers. John Kraft, an equity research analyst at D.A. Davison & Co, estimates that the new law will increase transaction fees for Redbox by about 10 cents per rental when debit is used. He concludes that this will average out to all rentals being about 5 cents more expensive.
Netflix Provided Cover
Under the circumstances, Redbox might not feel so worried about scaring off customers with a small price increase: its competitor Netflix continues to suffer from a price hike debacle. Redbox's price hike may appear much smaller than Netflix's increase. For a customer who uses Redbox once a week and returns the movie on time, they'll pay around $1 more per month. A Netflix subscriber on its basic plan would pay about $6 more per month after its price change. You would have to add together the rate increase on 30 DVDs from Redbox to equal Netflix's rate hike.
But Is Redbox's Move Really a Wise One?
The cover that Netflix appears to provide might not be so effective, however. The analysis above doesn't go deep enough. Remember, Netflix is really only charging more money for DVD plus streaming service. In fact, Netflix customers who just wants DVDs -- which is all that Redbox offers -- would actually see their monthly bill decline after Netflix's price changes. Before, they couldn't strip out streaming and paid $9.99 per month. After the change, they could subscribe to DVDs only for just $7.99.
Suddenly, the calculus for pure DVD-rental might actually lean in Netflix's favor. Before, $7.99 would get you about eight DVDs from Redbox. After its price hike, $7.99 will only get you six movies and change. For the same price through Netflix, you can get as many DVDs as you can watch and return in a month, which could theoretically be as many as nine. With Netflix, you also don't have to worry about late fees if you can't watch your rental promptly.
Many consumers remain very angry about Netflix's rate hike. Redbox doesn't want any of that animosity directed towards it -- even if its customers aren't quite as furious. After all, movie renters have a viable third option: Blockbuster. The company, now owned by Dish Network, is loving all of these fee increases. The movie rental veteran recently lowered its rental price to 99 cents per day. At a time when consumers have become savvy about finding the lowest prices, Redbox may have been wise to keep its rental fee more competitive.
Update: When I originally published this piece, I cited Coinstar's (Redbox's parent company) coins-for-gift cards as the source of the additional cost imposed by the Durbin Amendment. As it turns out, the source that I got this from was mistaken. According to Coinstar, the Durbin amendment will not result in facing more expensive gift card fees.
So the entire reason for the price hike is the higher flat rate under the Durbin Amendment that the company must pay in debit interchange fees when customers use debit cards. I had cited this cost in an update shortly after posting. This doesn't change the fact that Congress is in large part responsible for the rate hike, but it does show that the price hike wasn't avoidable by simply creating a fee for their coin-exchange for gift cards instead, as I originally suggested. I apologize for any confusion. If only financial regulation was simpler!
Image Credit: REUTERS/Fred Prouser