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On a day where Blockbuster (BBI) Video had to admit that they were forced to close 343 net stores over the last quarter, Coinstar (CSTR) reported their earnings and gave the investment community a very different outlook on the current state of the DVD kiosk industry.

In short the DVD kiosk industry is strong. Redbox has done exceptionally well this year and over the long term, Coinstar expressed confidence that Redbox can get to over 10,000 locations in the next 3 - 5 years.

Over the last quarter, Redbox has added approximately 200 new kiosks to their program. For kiosks that have been open for over a year, they’ve seen an astonishing 147% improvement in rentals from just a year ago. This is up from the already amazing 105% same store growth that was announced last quarter.

If you look at Redbox’s progress, over the first 9 months of 2006, Coinstar reports that they rented 13.8 million DVDs with the average rental period being 1.5 nights for most consumers. Due to stronger then expected demand for DVD kiosk rentals, Redbox now expects to show a $1 - $1.5 million loss for all of 2006, compared to previous estimates that had placed that number at closer to a loss of $5 million.

With over 900 DVD kiosks having been rolled out over the last 9 months, Redbox now has approximately 1,600 kiosks nationwide. Of these 1,600 machines, approximately 1,000 are located in McDonald’s restaurants and the other 600 are currently, either being tested or in the process of being rolled out by 30 other merchants.

Of these merchants two particularly important relationships were forged over the last quarter. The first was with Walgreens (WAG) who is currently testing 38 Redbox machines in Houston and Chicago. The second and more significant partner is Walmart (NYSE:WMT) which has been testing Redbox vending machines in their Atlanta based stores. While Coinstar stopped short of giving the exact number of Walmart stores that were participating in the tests, by doing a little online sleuthing, I was able to find over 20 Georgia Walmart locations that were listed on the Redbox website.

If these tests with Walmart go well, it would be a huge development for Redbox. With 2006 largely turning out to be a testing phase for most retailers, 2007 is increasingly begining to look like it will be the year that the DVD kiosk begins to go mainstream. Retailers are now showing clear demand for the advantages of bringing DVD rental into their stores and after Walmart tried and failed with their own DVD by mail program, it will be interesting to see if they embrace the kiosk as an alternative way to provide DVD rentals in their stores. While the Walmart program is still very much in a test phase, Coinstar said that they expected that they could see a decision on whether or not an expansion will happen between November 2006 - February 2007.

The DVD kiosk is in an excellent position to take advantage of the misfortunes of the video store. While the selection at a kiosk isn’t the same as a full retail store and certainly isn’t anywhere close to the same as the 65,000 DVDs that Netflix offers, the technology is here to do burn on demand DVDs and I believe that this will be the future of the DVD rental. In the near term, the DVD kiosk will offer short head content that is popular with many consumers and DVD by mail will offer the longtail content that I personally prefer, but as DVD burning gets closer to becoming a reality and if Redbox or any of the other kiosk providers ever combines DVD kiosks with DVD by mail, we will see a very different business model present itself.

DVDXpress has already announced that they are experimenting with a subscription rental business model and with Coinstar owning an option to purchase their company over the next two years, I believe that we could also see Redbox adopt a similar strategy. If the subscription model proves lucrative, it could not only put pressure on Blockbuster and Movie Gallery to innovate, but Netflix as well. With more and more rental options becoming a reality, the end result will be that the consumer will win most of all. While it’s exciting to see Redbox demonstrate such phenomenal growth, it’s even more exciting to realize that the company is still very young. As they move from 1,600 kiosks to 5,000 and then to eventually 10,000, it will be fascinating to watch the effect it has on the DVD industry.

Source: DVD Kiosk Industry: Coinstar/Redbox Seeing Strong Growth