Coinstar: Standing Up to Continued Challenges from Hollywood

I'd like to hear why anyone in their right mind still rents movies from Blockbuster (BBI) or any other brick and mortar store. Perhaps you feel like a good samaritan helping the good folks at Blockbuster pay their crippling leases or functionless employees (congrats for getting a job, but seriously...), but in doing so you pay two to 20 times market value for each rental, depending on rental frequency, gasoline consumed, etc.

I have a Netflix (NFLX) membership and see no better option for anyone who watches movies on their computer or somewhat regularly. For those less computer savvy and occasional renters there is still a far better option than driving out of your way to pay Blockbuster $5 a pop. Redbox $1 DVD rental vending machines, owned by Coinstar (CSTR), are no longer exclusive to Wal Mart (WMT) and select grocery store locations. CSTR's latest quarterly report describes recent expansion into 7 Eleven stores, gas stations and other high traffic locations, with expected future growth to many times the current number of units.

Why, then, is CSTR tanking to levels only briefly seen since March? Hollywood shadiness, of course! We Californians have high living standards and no work ethic, so don't count anything out when it comes to the creme de la creme (de la merde) maintaining their lifestyles. GE's (GE) Universal Studios and Time Warner (TWX) don't allow Redbox to rent their movies until they've been available for retail purchase, or rental at Blockbuster, for a month. This entirely unethical practice has persisted for over a year and Redbox has still performed well, however the lack of a resolution increases uncertainty about future growth and has invited an abundance of short selling.

I believe the movie studios are idiotic for playing their little game and are forgoing serious profits. People who buy movies are going to buy them regardless of whether or not they rent them first. I don't buy movies and there is no movie I would ever buy because I'd have to wait to see it otherwise. Movies are cheap entertainment to me, not collectibles, life lessons or even re-watchable in all but very few cases. My girlfriend, on the other hand, buys every movie her favorite actors are in and anything else she likes a lot after watching it. We may be fairly polar on the spectrum of movie watchers, however I'm confident that most people are and treat movies like either one of us. Therefore, Hollywood doesn't sell more movies by disallowing cheap rental of new releases (I ain't buyin' squat), it merely hides most of its inventory from movie buyers (if my girlfriend didn't use Netflix she would only by her favorite actors).

My best explanation for the kamikaze abuse of Redbox is that there is a lot of middle management to pay at Time Warner, Universal and Blockbuster and their interests are being served ahead of shareholder's. Lion's Gate (LGF) recently got $158 million for a 5-year distribution agreement with Redbox, so Time Warner and Universal would likely receive deals worth 9 figures annually. And I'm supposed to believe current policies increase sales enough to turn a deal like that down? Sorry.

It would surprise me if government regulators (CSTR has filed lawsuits) don't rule to disallow continuation of the predatory practices taken against Redbox, Time Warner and Universal shareholders, and the American Consumer. Still, my biggest reason for investing in CSTR is that the product offers great value and people would serve themselves to use it over alternatives. Institutional ownership is both extremely high and diverse and the company trades for less than annual sales.

There is significant risk in trying to catch a falling knife, but I think Coinstar is worth a few cuts (and then some).

Disclosure: Long CSTR

Comments

[joey554]

You are so off base in this article. The only one using predatory practices is Red Box. They are using predatory pricing to gain market share also they are only showing profit through growth that will fall apart once the market is saturated. Not only that the pricing they are using is devaluing the entire Video Industry along with packaged media. Please tell me why a studio would trade away pennies with red box when they can get dollars at retail. The reason CSTR stock is taking a beating is because they have no work arounds in place that they can use that is finiancially sensiable to get these titles and they don't stand a chance of winning these lawsuits. Also they have done some price increase test in two different markets and consumers are not reacting favorably to them. They thought with these friviolous lawsuits they would get some leverage in negotiations with the studios. Alls they've ended up doing is uniting the studios to stand against the company (CSTR) that is trying to dictate to an industry what their product should be worth ( good luck with that). The stock will probabally take even more of a hit once Paramount voids their deal come December with Red box. The time to dump this stock is now.

2009 Nov 18 04:49 PM

[WD216]

Why are you surprised that Hollywood is using tactics to hurt the free market? From Hollywood to the general media to the actors they are all what I call Convenient Socialists. The ironic thing is that they are shooting themselves in the foot and preventing widespread availability of their products and hurting their own profits. Typical Hollywood, so out of touch.

2009 Nov 18 05:39 PM

[Danny Furman]

My point is that rental fees are so high that only a fool would rent at BBI, which is why most sane analysts expect them to go bankrupt and the mkt cap is 8 figures. If the rental business is to continue, it's through Redbox and Netflix. Otherwise it's done.

2009 Nov 18 06:08 PM

[Danny Furman]

<img class="authors_reply" src="static.seekingalpha.co...">
I guess movies shouldn't be cheap entertainment and are more of a fine art. DVDs should cost 7 figures because that's what Tom Cruise wants.
Your comments about growth and profit make no sense. Saturating the market will mean lowered marketing and R & D costs and improved margins as long as sales stay close to even. Regardless, the market is maybe 15% saturated in the US and less so abroad.

On Nov 18 04:49 PM joey554 wrote:

> You are so off base in this article. The only one using predatory
> practices is Red Box. They are using predatory pricing to gain market
> share also they are only showing profit through growth that will
> fall apart once the market is saturated. Not only that the pricing
> they are using is devaluing the entire Video Industry along with
> packaged media. Please tell me why a studio would trade away pennies
> with red box when they can get dollars at retail. The reason CSTR
> stock is taking a beating is because they have no work arounds in
> place that they can use that is finiancially sensiable to get these
> titles and they don't stand a chance of winning these lawsuits. Also
> they have done some price increase test in two different markets
> and consumers are not reacting favorably to them. They thought with
> these friviolous lawsuits they would get some leverage in negotiations
> with the studios. Alls they've ended up doing is uniting the studios
> to stand against the company (CSTR) that is trying to dictate to
> an industry what their product should be worth ( good luck with that).
> The stock will probabally take even more of a hit once Paramount
> voids their deal come December with Red box. The time to dump this
> stock is now.

2009 Nov 18 06:52 PM

[User 510432]

What's wrong with the studios making big profits on their new releases ? Would you invest a hundred million dollars in a film and then give the product away at $1 a shot ? New movies should go to the theaters first and then to the rental companies like Netflix / Coinstar after the 1 month or so delay assuming the box office holds up. I still cannot understand the urgency of wanting to see a new major release for $1. People should get out of their damn house and go to the movie theater. It's the American thing to do.

2009 Nov 18 11:25 PM

[crimsonguy]

yeah you are right maybe about the tanking, sort of like the studio's wonder boy Blockbuster with the emphasis on "Buster"(seen their debt to equity lately).....studio's had better embrace change, since Redbox is only the first challenge knocking on their door.


On Nov 18 04:49 PM joey554 wrote:

> You are so off base in this article. The only one using predatory
> practices is Red Box. They are using predatory pricing to gain market
> share also they are only showing profit through growth that will
> fall apart once the market is saturated. Not only that the pricing
> they are using is devaluing the entire Video Industry along with
> packaged media. Please tell me why a studio would trade away pennies
> with red box when they can get dollars at retail. The reason CSTR
> stock is taking a beating is because they have no work arounds in
> place that they can use that is finiancially sensiable to get these
> titles and they don't stand a chance of winning these lawsuits. Also
> they have done some price increase test in two different markets
> and consumers are not reacting favorably to them. They thought with
> these friviolous lawsuits they would get some leverage in negotiations
> with the studios. Alls they've ended up doing is uniting the studios
> to stand against the company (CSTR) that is trying to dictate to
> an industry what their product should be worth ( good luck with that).
> The stock will probabally take even more of a hit once Paramount
> voids their deal come December with Red box. The time to dump this
> stock is now.

2009 Nov 18 11:32 PM

[crimsonguy]

you don't get it,,,,the model is broke, or going to be broke, just like mags and books


On Nov 18 11:25 PM User 510432 wrote:

> What's wrong with the studios making big profits on their new releases
> ? Would you invest a hundred million dollars in a film and then give
> the product away at $1 a shot ? New movies should go to the theaters
> first and then to the rental companies like Netflix / Coinstar after
> the 1 month or so delay assuming the box office holds up. I still
> cannot understand the urgency of wanting to see a new major release
> for $1. People should get out of their damn house and go to the movie
> theater. It's the American thing to do.

2009 Nov 18 11:35 PM

[joey554]

Please someone tell me how this business model can succeed? CSTR is only getting the studios who have signed with them because they gave them crazy guarantees with revenue sharing,destroying product, and huge % of the box. They have forced themselves to have to carry B titles to meet these percentages (not there strong suit). Also add to it that now they are paying full fair at retail. They have one of 2 choices not deal in day and date movies or raise their prices. Either decision destroys this business model. The only thing these box's are going to become is they will be like a $1 movie theatre no real profits to speak of.

2009 Nov 19 10:37 AM

[joey554]

I have a friend that works for Wal-mart as a asst manager and they were told to limit Redbox purchases. (5 copies per employee)

Also, it looks like the Better Business Bureau may not like Redbox too much either. (See link from MSNBC)

www.msnbc.msn.com/id/3.../

2009 Nov 19 10:57 AM

[longandshort]

If you can't beat them, join 'em. Hollywood would again have to embrace Redbox (just like VHS, DVD, internet, home theatre, etc,etc).

If you are shorting CSTR right now, you better keep an eagle eye on the tape, as CSTR and Hollywood will come to some sort of agreement. Don't forget Video game rentals and worldwide growth.
New Long to CSTR.

2009 Nov 19 12:18 PM

[longandshort]

Anyone who disagrees with this artilcle must work for Universal or Time Warner. Just ask your neighbor or coworker if he/she rather buy a DVD for $25 or rent for $1/day with the option to buy later.

Walmart agrees with Redbox. Walmart is actually buying DVDs at wholesale market prices prices $18 and selling them for $10. Walmart loses money on DVD sales. They are using $10 dvd sales to lure shoppers in to buy higher margin goods. They make money leasing space to Redbox.

So if you want a DVD, rent it from a Redbox for $1, if you like it buy it at Walmart for $10...consumer wins, Hollywood gets less greedy.

latimesblogs.latimes.c...

2009 Nov 19 03:13 PM

[joey554]

The only agreement that Hollywood and CSTR are going to come to is a windowed approach for the titles 30-45 days after release. Which is when all the money is made on a rental. What walmart is doing with the $10 DVD's doesn't cost the studios a penny it helps them, the only one losing money on that is walmart (loss leader) studios are all for it they're making the same $ on each dvd. Where as the studios aren't willing to let redbox continue to decimate and devalue packaged media xosting them millions. On top of that the way red box has gone about this whole thing with their PR campaign has only stiffened the backs of the studios.

2009 Nov 19 03:28 PM

[longandshort]

So, I guess what you are implying is that Sony Pictures, Paramount, Alliance, LionsGate and Summit have weak backs?


On Nov 19 03:28 PM joey554 wrote:

> The only agreement that Hollywood and CSTR are going to come to is
> a windowed approach for the titles 30-45 days after release. Which
> is when all the money is made on a rental. What walmart is doing
> with the $10 DVD's doesn't cost the studios a penny it helps them,
> the only one losing money on that is walmart (loss leader) studios
> are all for it they're making the same $ on each dvd. Where as the
> studios aren't willing to let redbox continue to decimate and devalue
> packaged media xosting them millions. On top of that the way red
> box has gone about this whole thing with their PR campaign has only
> stiffened the backs of the studios.

2009 Nov 19 03:40 PM

[longandshort]

Reasons to go long on CSTR-Redbox:

As an invester you have to ignore the white noise has analyze the business. Just some facts about Redbox:

- RedBox is successful because of its Supply Chain model. No it did not land from mars but was created by another successful Supply Chain business..McDonalds (McDonalds is not about the burger, but rather its Supply Chain and Real Estate).
- RedBox COO= Mitch Lowe, former cofounder of NETFLIX (hmmm)
- Prime candidate for a buyout
- Dividends coming soon
- Oh, I'll be renting the new Star Trek tonight for $1

2009 Nov 19 03:55 PM

[bigbenchitown]

great article. REDBOX is the next amazon and google. This thing is spreading like wildfire and with BBI most likely to go bankrupt CSTR is bound to get even more users then it already has. I think this stock is so cheap for the potential it has. Think of the posibilities once BBI is gone. Eventually, CSTR can raise the rate to $2 or even 1.50 a night and double their profits. People don't think about these things. This company is the wave of the future. No need to lease expensive buildings and pay hourly employees when people can do it themselves with these low cost REDBOX's. LONG cstr!!!!

2009 Nov 19 06:08 PM

[casey00001]

Contrary to Joey554 Redbox thumbed their noses at the studios and bought the DVD's the Studio's would not sell to them for thirty days at retail prices. Then they are legally entitled once they own the use of that copyrighted DVD to rent them to the General Public. So the studios gained nothing. There is absolutely nothing the studios can do. Redbox is also at every McDonalds.

2009 Nov 19 08:33 PM

[kenscarcare]

Who's the idiot who wrote this article. No name, no email....Seeking Alpha? What a bunch of idiots!

2009 Nov 20 09:31 AM

[Danny Furman]

Would you like to grab lunch sometime?


On Nov 20 09:31 AM kenscarcare wrote:

> Who's the idiot who wrote this article. No name, no email....Seeking
> Alpha? What a bunch of idiots!

2009 Nov 20 10:30 AM

[billddrummer]

I agree with the article.

I work at BBY, and we've seen our DVD sell-through shrink significantly for both new release and catalog titles. Even a DIS executive stated recently that consumers weren't building their libraries like they had in the past.

The BBI business model is on its way out, and consumers are seeking more convenient ways to get their entertainment fix. BBI used to be a standard stop on the way home from the grocery store. Now, with a Redbox vending machine in the grocery store, Mom and the kids don't have to make a separate stop.

Look for this trend to accelerate in the next year. CSTR plans on installing another 10,000 machines by the end of 2010, a reach that BBI won't be able to match, no matter how many kiosks they plan on opening next year.

2009 Nov 20 07:23 PM

[joey554]

red box currently does not get access to 50% of their titles from the studios. When forced to get them at retail they are losing money just to have the titles. After Dec if Paramont decides to void their deal that # jumps up over 60%. It has been proven that customers are not willing to support redbox at a higher price point. So what that leaves redbox is a broken business model that has only shown profit through growth. They are not going to have the same revenue streams to grow in turn are not going to even be able to support their own growth. Finially the life span on a kiosk is 5 years those kiosk initially deployed are going to be maturing and are going to need to be dealt with at an added expense. There is a reason this stock is dropping through the floor and it's a very valid one

2009 Nov 23 02:20 PM