Coinstar + Verizon = Attention From Shorts
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On February 6, Coinstar (NASDAQ: CSTR), parent of Redbox which distributes movie DVDs through kiosks, and Verizon (NYSE: VZ) announced their joint venture. The two teamed up for movie streaming and downloading for multiple platforms – PC, TV, tablet and smartphone. The announcement was short on facts and strategy.
What we do know is that Coinstar will own 35 percent, Verizon 65 percent and the product portfolio will be introduced in the second half of this year. Here is the press release. The press conference was structured not to allow questions. Coinstar expects early development costs of about $19 million, with the total amount for getting up to speed at about $157 million. Some see that as nowhere near what a startup itself, plus the eventual licensing fees for content would be for this 35-percent partner.
That information vacuum, along with the low-ball estimate of expenses, seems to me like a red flag. Either the partners haven't thought this out or not well enough. Shorts are probably paying close attention to the situation and there should be those considering cashing out at the current stock price. At about 56.40, with a 52-week range of 37.43 to 60.84, that is still aglow from Coinstar’s fourth quarter earnings per share of $1. That beat analyst consensus of 64-cents. The Redbox business, which operates in the lobbies of major retailers like Wal-Mart, has been a home run. I have never been at Wal-Mart when there wasn't a line. In addition, Redbox added customers when Netflix lost 800,000 subscribers because of its cursed pricing experiment.
However, investor euphoria could fade quickly as concerns about the new direction deepen. To begin with, the joint venture is a latecomer entering an already crowded market. That includes solidly positioned players. The dominant one is Netflix (NASDAQ: NFLX). Its questionable pricing move was exactly the kind of failure that can lead companies to the next level of success. Incidentally, some investors are wary of Facebook’s Mark Zuckerberg because he hasn't had a major failure. Therefore, he hasn't demonstrated that he can bounce back the way Apple's Steve Jobs and Starbucks' Howard Schultz had. With Netflix’s stock price at 123.93, after it had fallen to 74.25, it’s showing it understands how to come back.
Other strong players are Amazon (NASDAQ: AMZN) and Google's (NASDAQ: GOOG) YouTube. A relative newbie has been Wal-Mart (NYSE: WMT). Both Amazon and Wal-Mart have the resources to cut prices to gain market share. Does the joint venture have the staying power to hold on during a sustained price war? Given that Amazon took on Apple with a significantly lower price for a tablet, it probably wouldn’t hesitate taking aim at the relative upstart in Coinstar and Verizon. Another entry could be AT&T, speculates Macquarie Capital’s Kevin Smithen to CNET NEWS. Investors have to wonder what level of investment Coinstar+Verizon really needs to go up against these competitors.
There is also the negotiating challenge of licensing content and the ongoing expense of it, year after year. In the streaming business content providers have the upper hand on what they will license, when, and at what price. One obstacle is that they usually can make more money through DVDs. So why jump at offers to stream? Another is that streamed content is more vulnerable to piracy. That has been a major issue.
Last September Netflix signed a multi-year agreement with Dreamworks Animation SKG. Amazon signed with 20th Century Fox. In its DVD negotiations, Redbox has alienated some content providers such as Time Warner. However, Verizon brings the advantage of relationships from its paid TV service with movie studios and TV networks. Nevertheless, the joint venture still has to pony up a lot of money for licensing in the deals it can nail down. According to StreetAuthority’s David Sterman, Netflix already pays out $2 billion annually to movie studios.
Third is the possible “distraction” this venture could be to the cash cow, that is the DVD business. Given Coinstar’s $100 million purchase of NCR’s Blockbuster Express, it is banking on DVD being around for a long time. It is probably on the money on that one. So, it has to keep focused on that niche. Yet, at the same time it needs to pump resources into this new business. And will any problems in streaming reflect negatively on DVD operations?
The market usually responds negatively to this much uncertainty, especially about the price tag for the initiative.
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