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Redbox Instant, launched by Coinstar (CSTR) and Verizon (VZ), was once seen as a strong competitor to Netflix (NFLX). The new monthly subscription has struggled out of the gate with a weak streaming library that entices customers away from Netflix or other services. However, Redbox was never really after stealing away customers from Netflix, but rather trying to upgrade its own customer base or luring those still only renting movies to try its service.

On May 22nd, Redbox Instant offered the free download of "The Hobbit", one of the biggest box office movies of 2012. All customers had to do was sign up for a Redbox Instant account and tweet about the offer. It will be interesting to see if parent company Coinstar breaks down the number of subscribers to the new streaming service or what impact "The Hobbit" had on new customers. Coinstar reports second quarter earnings on July 22nd.

The deal of offering "The Hobbit" as a free streaming download was smart by Redbox Instant. Rather than spend millions of dollars on advertising for the new streaming platform, the company let customers do the work for them. Thousands of tweets were sent out showing off "The Hobbit" deal. These tweets showed off the new streaming service to potential customers.

Back in December, I discussed how Redbox was taking Netflix head-on with its instant service. Redbox was offering an $8 a month streaming service, which included four physical discs from kiosks as well. A $6 streaming only service was expected to be rolled out as well.

Analysts and investors are beginning to write off the power of the physical DVD. With the majority of Coinstar's revenue and profits coming from movies, investors would have reason to worry if kiosks disappear. However, I don't think that the DVD is dead and believe that Redbox Instant can flourish. In fact, in the first quarter of the current fiscal year, Redbox experienced six of its ten best rental days in company history. While this increase may be due to an increase in kiosks, the popularity of the disc is still holding true.

As far as the streaming service goes, I am reminded of Blockbuster. The former large movie rental chain offered a service where customers got movies through the mail and could return them in store for additional rentals. Blockbuster has gone the way of the dinosaur, due to a collapse of physical movie rental stores. Blockbuster stores came with large overhead and rental costs, while Redbox kiosks are relatively cheap and welcomed in partnerships with large retail chains. Redbox is offering streaming and physical discs together to showcase its value and offer something Netflix and Amazon (AMZN) can't.

Redbox continues to appeal to customers who miss the movie store experience and want to pick out a new movie to rent. By going after these customers who are already using their kiosks, Redbox is essentially upselling its streaming service to earn monthly revenue. As the number of paying monthly customers continues to grow, so will the library of content.

One area that will grow in the future will be original content. Similar to Netflix and Amazon, Redbox has hinted at original content. Coinstar chief executive officer Shawn Strickland had this to say, "I don't see how you can avoid having original content." The quote, which came at the Advertising Age digital conference, doesn't exactly lock down any details, but shows the company is considering it. Netflix has the hit "House of Cards" and will likely see an uptick in streaming customers once "Arrested Development" episodes air.

Coinstar also has other kiosk services in the pipeline, which I discussed in detail in March. One particular area to watch in 2013 is the Rubi coffee kiosks. After service in five locations, Coinstar will rapidly expand in 2013. By the end of 2013, an additional ten cities will have the kiosks that offer Seattle's Best Coffee from Starbucks (SBUX).

On Yahoo Finance, analysts are expecting full year revenue to increase 8.7% in fiscal 2013 to $2.39 billion. Earnings per share are projected to hit $5.08 for the full year. Analysts also see Coinstar posting earnings of $5.68 per share in fiscal 2014. Coinstar has guided for earnings per share to fall in a range of $5.05 to $5.55 per share. With analysts hovering on the low side, Coinstar has plenty of room to exceed expectations. Shares also trade for less than ten times the high side estimates from the company, offering significant value.

I will admit that I am a former Blockbuster and Netflix customer. I also use Redbox from time to time now. When looking at the companies from an investment perspective, I have to side with Redbox parent Coinstar. With shares trading at ten times projected earnings, investors are undervaluing what they think is a dying segment. Investors are also showing no love for the growth of Redbox Instant or other kiosk segments from Coinstar. Let others' weakness be your buying opportunity and buy this rental company stock.

Source: Could 'The Hobbit' Help Redbox Instant And Coinstar Shares?