Is There Life After Redbox for Coinstar?
Rob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since missing revenue estimates back in July, Coinstar’s (NASDAQ: CSTR) shares have fallen 22% and are now 35% off their 52-week high. Revenue grew 22%, but fell short of Wall Street’s estimates of 25% growth. Coinstar actually beat earnings estimates by about 7%, but that wasn’t enough to ease fears of slowing growth for Coinstar’s Redbox kiosks.
Redbox grew revenue at 26% last quarter. However most of the growth was fueled through a combination of price increases and a 15% increase of installed kiosks.
The main fear on Wall Street is that the growth at Redbox won’t last, as DVDs lose share to digital video streaming. Rentals of DVDs and Blu-ray discs declined by 17% over the past year, as digital video streaming grew by 5%. However, DVDs and Blu-ray discs account for 62% of the rental market, and Redbox grew its market share by 7% over the past year to 38.5% total.
Since Redbox accounted for 86% of Coinstar’s revenue last quarter, if Redbox cannot continue to dominate the shrinking DVD rental market it could spell disaster for its parent company. Coinstar looks to avoid the shrinking market by rolling out more kiosks through an expansion in Canada, and through the acquisition of NCR’s Blockbuster Express kiosks. Management is also looking to several new ventures to drive growth in the future.
The first of these new ideas is Redbox Instant, a joint venture with Verizon (NYSE: VZ). Coinstar will own 35% of the joint venture, which will offer digital video streaming across multiple devices by the end of the year. Coinstar and Verizon have yet to officially announce pricing and details, but the service is expected to launch in late 2012 and provide streaming rentals and access to rentals from Redbox kiosks. Coinstar will be paid a fee from the joint venture for rentals at Redbox kiosks, as well as 35% of the joint venture’s profit.
Redbox Instant is launching into a highly competitive field, facing off against Amazon Prime and Netflix. Redbox and Verizon have previously said they will focus more on movie rentals and value pricing. Though the success of Redbox Instant is far from a sure thing, rumors are that Verizon and Redbox will pay content providers by the subscriber instead of a flat rate like Netflix. This should limit the risk of entering a crowded market, but may limit the upside potential in the future.
Coinstar is also looking into launching several new kiosks over the course of the next few years. Coinstar wants to leverage its strong partnerships with retailers such as Wal-Mart, McDonalds, and Safeway. Several kiosks are currently testing across the country. Last year Coinstar had 63 kiosks testing across the country, generating $1.2 million in revenues.
Coinstar’s first concept-kiosk is Rubi, a coffee kiosk that serves single cups of coffee, lattes, and other hot beverages for as little as $1. Rubi is currently on track to launch in 500 grocery stores by the end of 2012. Coinstar is targeting to roll out up to 15,000 Rubi kiosks, each generating $11,000 to $12,000 thousand in annual revenues. This means that Rubi could add up to $180 million to Coinstar’s annual revenue after their rollout is complete.
Coinstar has 5 other concept-kiosks that are testing in different markets across the country. The concepts include selling refurbished electronics, beauty products, and prepared foods, as well as a kiosk to redeem unused gift cards for cash and an interactive photo booth. Coinstar also has investment in two other kiosks, SoloHealth kiosks, for screening blood pressure, weight, vision and other health assessments and EcoATMs, which recycle old electronics for cash.
Redbox isn’t disappearing overnight, but as the market for DVDs and Blu-ray rentals shrink, Redbox’s footprint will inevitably diminish. Coinstar does not see any of its kiosks as having the potential to replace their 38 thousand Redbox kiosks. However, it does have a wide variety of kiosks set to roll out over the next few years, as well as the relationship with retailers to install them easily. Coinstar seems well on its way to developing several streams of revenue to replace the looming losses from Redbox down the road, and I think this makes the company a good long-term buy.
AllPrologue owns shares of Coinstar. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.