RedBox- The Dinosaur will be Washed Away by Streaming
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"Ain't giving up my vinyl records, for the new dangfangled CD's. Besides, CD Players cost too much, I like my records just fine."
"The idea that my grandfather will ever have a DVD player is a joke. He's still using Betamax."
"I'll always shoot on film, the image quality is superior, and will always be so."
Throughout human history, new technology has been met with resistance from those with entrenched profit interests (companies,) those with ego driven viewpoints on a subject matter (bloggers, individual investors) and those who simply don't like change. (95% of humanity)
In my recent column, "Microsoft (NASDAQ: MSFT) Declares the DVD Dead," I noted that Softy is not including a DVD decoder in their default setting of Windows 8, and this is another symptom bubbling-up in the demise of the DVD. I suggested that this does not bode well for Coinstar's long-term future, and unless CoinStar (NASDAQ: CSTR)could innovate, as to their credit they did with Redbox, the stock would suffer a similar fate that befell Kodak, Tower Records, and other such companies littered throughout the history of technological progress.
So, let's take a look and examine Coinstar in more detail and see whether we can predict the company's future prospects.
Originally named after their original Coinstar machines, which helped "launder" America's change (morphing unusable pennies into a clean, crisp credit or bills) the company's primary driver of revenue today is RedBox, the kiosk dispensing DVDs like a soda machine does Cokes.
They have recently formed a partnership with Verizon, (65% owned by Verizon,) which will offer what will likely be the old Netflix package of streaming and DVDs, using RedBox to distribute discs, and Verizon pipes the streaming, putting the venture into direct competition with Netflix (NASDAQ: NFLX), and Amazon (NASDAQ: AMZN).
The company also has kiosks in the works to distribute coffee, as well another for cell phone recycling/ distributing refurbished electronics.
If you take a look at their numbers in recent quarters, they have been fabulous:
In the quarter ended March 31, total company revenue rose 23% to $568.2 million, while income from continuing operations jumped 262% to $53.7 million. Margins widened to 13.8% from 7.4% in the same 2011 quarter, largely due to a 20% increase in the price of a DVD rentals which was increased from $1 to $1.20.
Coinstar's Redbox division represents 90% of its revenue, has nearly 37,000 kiosks, and grew revenues 39% to $502.9 million on the back of a 28.1% gain in same-store sales.
If you just look at the numbers, they are rather eye popping, with a stranglehold on the DVD market, replacing inneficient stores like Blockbuster, taking up FAR less space and resources, and with a P/E ratio of a relatively low 13.2, you could reasonably think to yourself, "Oh My God! Buy buy buy!"
Hold your horses there pardner. Not so fast. With Blockbuster shutting down, and Netflix CEO Reed Hastings putting DVDs on the backburner, Coinstar earned its near monopoly on DVD rentals by default, which is what enabled them to squeeze an extra 20% per DVD (explaining the rise in same store sales) as dinosaurs had no other sources from which to derive their entertainment sustenance.
First off, is there really that much barrier to entry from someone wanting a piece of this monopolistic market? How about a Blockbuster (now owned by Dish Networks (NASDAQ: DISH) or heaven forbid a Netflix branded kiosk. If someone were to enter the market, under a known brand, with gusto, wouldn't that likely push the price back down, and split sales between them? Sure, Redbox has a big head start, but the farther they push the price, the more enticing it becomes to compete.
The case for RedBox's continued gains are largely built on two shaky pre-suppositions:
1. They will maintain their monopoly over DVDs.
2. Demand for DVDs will go down slowly.
My primary objection, once again, is that the DVD is a dying product. I realize that MANY dinosaurs still roam the earth using them, employing the same peanut sized collective brain that argued technologies such as vinyl, tapes, CD's, and VHS would be around for a long time. In all cases, early on the new technology was Substantially more expensive, and most of the same objections to change existed.
The closest parallel between the DVD and streaming, is the CD and mp3s.
"CD's will always be around, how else will I listen to music while I jog, or in the car?"
"There is a big difference in sound quality. Get your MP3 outta my face."
"Computers and fast Internet access or sooooo expensive."
"The music companies won't even let me buy a MP3 legally. What am I a criminal using Napster?" (yes you were)
How MP3's overcame, quickly, these objections:
Hardware: The Ipod.
Internet access: Cheaper, faster, free at Starbucks etc; ubiquitous.
Legal distribution: Itunes.
Yes, I do realize there are movies (like Mission Impossibe) that are better watched on large screens with surround sound. Yes, I realize most households have DVD Players, and some don't have broadband access, and I admit there are two, no, hold on, one just closed, check that, 1 Compact Disc store still open in America.
You want hardware specifically made to support streaming content, what do you think the IPad and Kindle are for? Want it at a higher level? Just wait til Google and Apple TV come out. Will they be expensive and beyond the reach of the average Joe Sixpack? Likely so. IPods were a lot more expensive back in the day too.
Microsoft announcing that they will not be including a DVD Decoder in their Windows 8 operating system and that they anticipate streamed content to surpass physically watched movies in 2012 exemplifies the downward spiral the DVD is in. You no longer need to bring a DVD on the plane to watch, you can download it to your computer if you so desire/ if worse comes to worse (via Kazaa if need be, as Hollywood tries to protect content, much in the same way record companies tried to insure that you would have to buy a whole album instead of that one song you love) or you could watch Amazon/Netflix/YouTube through the airplane's WiFi system.
With Canada eliminating the penny, (another trend--we are becoming more and more a cashless society) will the Coinstar machines likely be doing more or less business 10 years from now?
Warren Buffet, of Berskhire Hathaway looks for companies that will make good long term investments for him. Products that won't go away. Chocolates, grocery stores, insurance, cola, banks, etc. Now Coinstar doesn't have to be a Buffet investment, hell, he doesn't understand Google enough to put money into it, but absolutely ask yourself this, will RedBox be around 10 years from now, and if by some Miracle they are (while you were reading the last few paragraphs, I regret to inform you that America's last CD store closed!) will they be doing more or less business?
Coinstar might not be overpriced enough for me to actually short them, but I sure as hell wouldn't consider buying the stock. If I own shares, I run away with profits from its recent upwards spike.
If you still use DVDs and believe they will be in existence ten years from now, feel free to weigh in as to why, and while you're at it, I'm truly curious, what's it like to eat vegetation from a branch 60 feet off the ground?
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funspirit is short Netflix, long MSFT, and BRKB. The Motley Fool owns shares of Amazon.com, Microsoft, and Netflix. Motley Fool newsletter services recommend Amazon.com, Microsoft, and Netflix. 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.