Redbox's Machines Take On Netflix's Red Envelopes

JESSICA MINTZ

BELLEVUE, Washington (AP) — With more subscribers than ever flocking to its DVD-by-mail service, Netflix Inc. is one of the few companies to prosper during the worst U.S. recession in 70 years. Yet Netflix CEO Reed Hastings still has something to worry about: an even cheaper DVD rental service run by one of his former lieutenants.

Once just an incongruous experiment amid the burgers and fries at McDonald's restaurants, Redbox has emerged as the largest operator of DVD-rental kiosks, with more than 15,400 vending machines set up to dispense $1-per-day discs in supermarkets and discount stores.

With Redbox opening an average of one kiosk per hour to lure budget-conscious consumers, Hastings is concerned that this upstart might upstage Netflix, whose cheapest mail-order plan costs $5 for two movie rentals in a month.

"By the end of the year, kiosks will likely be our No. 1 competitor," Hastings said in a recent conference call. "There are already more kiosks in America than video stores."

The fight for DVD-rental loyalties figures to intensify as Netflix, Redbox, Blockbuster Inc. and others vie for the attention of frugal consumers looking for inexpensive home entertainment. According to research from PricewaterhouseCoopers, Americans last year spent less money buying DVDs and more on rentals from stores, kiosks and online services like Netflix. The trend is expected to continue this year.