Redbox: New Video Rental Competition for Blockbuster and Netflix

One of the investment strategies Peter Lynch touches on in his book One Up on Wall Street is to invest in companies that that you see every day. For instance, if you notice a new restaurant or retail store is performing really well you should check out the company’s stock (assuming it’s a publicly traded company) and see how the stock is performing. This can lead to potentially profitable investment opportunities.

One company that I have recently checked out is Redbox. If you don’t know the company by its name you have probably seen its DVD kiosks at a McDonald's (MCD), Walmart (WMT), or Walgreens (WAG). I first saw Redbox kiosks a couple of years ago but I never rented a movie from one until a few months ago. Now that I have tried it out I will only use Blockbuster (BBI) as a second option to Redbox.

The kiosks offer about one hundred new releases and other popular movies for only a dollar a night. This is significantly cheaper than Blockbuster (the last time I rented a movie from Blockbuster it was around $4.50 for a two day rental). In addition to being significantly cheaper than Blockbuster, Redbox kiosks offer another big advantage. You can return a DVD to any Redbox kiosk location. This makes renting a DVD from a Redbox kiosk significantly more convenient than renting from a Blockbuster location (where you can only return a DVD to that particular location).

Due to the significant advantages over Blockbuster I decided to check into Redbox and I found that it is owned by Coinstar (CSTR) (majority owner), McDonalds (MCD), and a handful of other companies. Redbox planned to go public through an IPO but those plans got delayed due to the brutal market conditions.

The company is also growing very quickly. Redbox saw a 200% growth in revenue last year. It will only be a matter of time before the company goes public and when it does it would probably be a good idea to pick up some shares (depending on valuation).

The success of Redbox is also going to accelerate the decline of Blockbuster, which is already facing significant competition from Netflix (NFLX). Therefore, I would recommend against taking a long position in Blockbuster and I would consider shorting the stock.

Disclaimer: I do not have a position in any of the companies mentioned.

Comments

[iPuck:]

This article its so cheap, no fundamentals, you are comparing orange to apples. If they are paying you to write an article about Redbox, at least try not to be so obvious.

2008 Aug 24 02:17 PM

[casey00001:]

Phillip. Can you please explain how a company having 200% growth would be experiencing "brutal market conditions", that would stop it from going public?

2008 Aug 24 03:23 PM

[DVDfan:]

After using Redbox for more than 2 months, I found the following problem:
(1) Kiosk malfunction: could not accept DVD return, I had to burn more gas to find another kiosk and to make it worse I was on the way to work. (and no, I don't have time to to return to the Kiosk later on that extremely busy work day. return dead line is 9pm or another $1/night).
(2) Kiosk malfunction again: DVD was returned to the Kiosk, taken in but not recorded. I found out by receiving a $27+ bill from one rental. Redbox refunded it and acknowledged the DVD was retrieved later by a technician. However, I don't like the late finding especially after I already received the false penalty bill.
(3) If I forget to check Kiosk inventory online, the chance is the DVD is not available at the specific Kiosk I went to. Especially the new DVD release or hot titles.
(4) Long line of customers looking for the DVD that is not available from the Kiosk. This is a time waster. Instead of having a fixed movie posters display, they should consider a real time monitor that shows the movie titles available from that specific Kiosk, let people know what titles are sold out from the Kiosk to avoid wasting people's time especially when the Kiosk itself does not provide very fast transactions.
(5) indecisive customers (another time waster) in the front of the line. I wish they can separate the movie browsing activities (by a new curious customer) from the real transaction (DVD return, pick up ..etc by existing customer).
(6) I believe McDonalds now own the majority share of 51%, not Coinstar. Please feel free to correct me if I am wrong.

To me, Redbox fits the market well as a temporary solution before Video On Demand becomes main stream. However, it won't have a great potential for the long run. That's probably what caused the delay in IPO. Redbox's days will be over when I am able to buy a VuDu (vudu.com) box for less than $99 and rent new released movies for $1 per night without leaving my house, and perhaps the latest theatrical movie release straight from the box.

2008 Aug 24 08:55 PM

[DVDfan:]

Forgot to mention that I am still bullish about Blockbuster for the long run. Even though they are in a temporary setback, but the company is going toward the right direction and the emphasis in providing convenience and value to their customers. Netflix pathetically hides ALL the latest movie releases from it's website and keep promoting "OldFlix" from it's website, I canceled Netflix after getting tired of looking for new releases from other website only to find out the status of those new DVDs as "Long Wait" or "Very long Wait" from Netflix. Netflix seems to evolve to "OldFLix" (the junkie Roku's low quality streaming seems to confirm that), and now "NoFLix" with the website failure. Blockbuster should have no problem raising more money to fight this war as they are in a much stronger position with physical brick & mortar stores in providing the Convenience to the customers in a TIMELY manner. This is exactly why I keep my brokerage account with Schwab (office within 5 minutes from my house or office) and canceled E-Trade 8 yrs ago. Timing & convenience are way more important to me.

2008 Aug 24 09:16 PM

[svosavvy:]

Funny, I see the exact opposite out of nflx than what dvdfan sees. I personally have had a nearly seamless renting experience with nflx, I cancelled my bbi online due to their lack of hard to find titles. The instore swap was nice with bbi until they imposed multiple restrictions which was a main reason why I left a year ago. I do not own a roku box, I stream content from my pc to my tv and it has been fabulous. Direct from the last nflx quarterly report, the redbox is going to deal a more significant blow to the likes of bbi than nflx (summarized).
To the author you think redbox

2008 Aug 24 11:05 PM

[svosavvy:]

is going to be the Leggs of our time. LOL

long nflx

2008 Aug 24 11:07 PM

[svosavvy:]

I find bbi's brick&mortar stance to be a real hindrance than a positive. People aren't afraid of their computers anymore. While on bbi's balance sheet these buildngs probably look like solid gold assets, they are money pits that become ever more worthless in the strip mall landscape.

2008 Aug 24 11:14 PM

[huerix:]

NFLX is the play. The key is how they are getting their software to work on various hardware through partnerships. The Roku box has been a strong start. Redbox's main problem is how few DVD's fit in a box. After walking indecisively all over a BB store unable to find a movie, I doubt Redbox could ever have enough selection to compete with anyone.

2008 Aug 25 12:28 AM

[DVDfan:]

svosavvy just confirmed that Netflix get pretty much the lower end of the market with lower expectation (most likely lower margin as well). If the online movie streaming is considered as fabulous and you don't mind watching OldFlix, then Netflix is definately for you!! The one that provides the most value will win the most demanding customer who are willing to pay more for good services & values. I am not saying NFLX won't be the one, but I find it very hard to believe if their main business strategy is to HIDE their newest movie release from it's very own customers (shame on Netflix!!). Restriction on in store exchange is still better than no store at all, think about it!! Good luck to your NFLX shares.

2008 Aug 25 12:50 AM

[Oldtrains:]

What do you mean "Hide their new releases"? All you do is type in a movie title and there it is. You can even add it to your queue before it it released and it automatically puts it in when it is released.

2008 Aug 25 08:26 AM

[kevinmick:]

How much are you getting paid to bash BBI??? It's so obvious BBI is undervalued and you morons from Seeking Alpha and the Motley Fool are obviously being bribed to put it down. There is no useful information in this piece of trash article. Just your own personal bias about some kiosk.....BBI is implementing kiosks - did you even know that?

BBI generates 5.5B in revenue (5X NFLX) - how about Redbox??? BBI is supposed to grow earnings 94% in 2009. How about you include that in your article next time???

2008 Aug 25 10:06 AM

[jayker:]

The problem with piece above in my mind is not about whether Redbox is a good product or not (in my mind it is, granted all the drawbacks but at around 20% of the cost of a BB rental this is a great impulse purchase). The bigger issue is that the writer thinks that the his discovery has not been discovered by the market. I question Peter Lynch's philosophy in a market that is laregely efficient. Unless one had some inside info on RB's expansion, Coinstar's price has pretty accurately reflected RB's value already. Same argument to shorting BB - its already trading at well below peer companies so its position vis a vis Netflix is factored in. For someone truly SEEKING ALPHA, the above article is all about jumping onto a BETA based gain. His "discovery" is only a year behind - take a look at the CSTR stock chart and the news from the compny. Come up with some better ideas folks and give us some info that is unique.

2008 Aug 25 01:30 PM

[DVDfan:]

Redbox revenue is estimated to be between $250 to $270 million in 2008. I am not sure where BBI's Kiosks are going to be located, but I suspect it will be able to help reduce the labor cost at each stores where the Kiosks are installed. Again, BBI is going toward the right direction as far as what I can see. Another KIOSK player is DVDPlay ($1.49 per rental night) with just 1,400 kiosks @ Safeway and they are adding 1,800 more. Redbox has more than 8,000 locations. Blockbuster's annual revenue is more than 5 Billions with a "B" !!!

"Oldtrains" definately either owns NFLX or works for Netflix. How are you supposed to know what to type & search on Netflix if you don't check the new movie releases List from Yahoo or Blockbuster's websites huh? Don't try to lower your intelligence level just to make excuses for NFLX, they are very shameful from hiding the new DVD releases from customers. *I had Netflix for 5 years until I got really fed up by their new website designed to hide the new releases earlier this year. I believe some new subscribers recently gained by Netflix will cancel sooner or later. My HD cable plays free movies in much better reolutions than Roku or internet streaming from Netflix. With the rapid increase in HDTV adaptation, the movie streaming from Netflix will soon become an eye sore (or your brain can automatically adjust to low resolution and still call it "fabulous").

Motley Fool's articles have been classified as "Noises" from my past investment experience, it is quite annoying but my "Noise Filter" is quite strong now. Just read what the fools/morons wrote about "SIRT" and see how much the stock price ended up after the buy out.

2008 Aug 25 02:19 PM

[svosavvy:]

How about a profit margin number for bbi instead of revenue. How much profit are they spending keeping up their little strip mall stores. Oh, and earlier in this thread their stores were supposed to be an asset, but, now kiosks are the way? It's one or the other. BTW when I put yet to be released movies in my queue I usually have them the day of the release, so much for your "oldflix" idea. I Like the service so much I cancelled cable. My subscription is also cheaper than bbi's online offer.

2008 Aug 28 11:05 PM

[svosavvy:]

oh yeah, long nflx I own a small position about as much as a months groceries, but, I love their service. Imagine that, a company that actually makes customers happy and turns a profit.

2008 Aug 28 11:07 PM

[cb5445:]

Blockbuster is rolling out its own kiosks. 500 over the next few months. They will also have the capabilities for direct downloads into hand held devices.
Also Blockbuster charges 4.50 for a two day rental. However there is a seven day grace period before a 1.25 restocking fee. That works out to .50 cents a day vs. Red box 1.00. With most DVD's out for 5-6 days Blockbuster has the advantage.
Additionally blckbusters on line service blows away both Redbox and netflix by allowing for online returns to any blockbuster store and in store exchange rentals. The optimal plan runs around 34.00 per month with unlimited online and instore exchanges.
Red box is limited to the amount of dvd it can hold in each location. Also has anyone brokendown the associated cost for attending to each facility. Picking up , delivering. servicing restocking, distribution and warehousing.
The limited amount of DVDs offered does not support a full blown operation when you calculate cost per rental.
This business is at best an way for McDonalds and Wal Mart to increase their net revenues by offering the service to their customers. Much like a gumball machine.
As a stand alone company its doomed to failure.

2008 Sep 01 01:38 PM

[cb5445:]

Regarding my comment on the servicing cost per DVD at kiosk locations. Both Netflix and Blockbuster already have the massive infrastructure needed to reduce the associated handeling costs and make the kiosk profitable. A start up like Red Box does not.

2008 Sep 01 01:42 PM

[DVDfan:]

svosavvy is another cheap customer that Netflix gets, a typical low margin customer. Make sure you stay with NFLX, don't come back to Blockbuster. Cancel everything in your house, watch everything on your PC !! You should long MSFT or APPL instead.

2008 Sep 25 08:13 PM

[ejaal:]

People, if you want to know whats the latest new releases, and are only interested in hit movies, check out ejaal.net

Unlike other new release lists, you dont have to wade through reams of lame movies to locate the one or two you want to watch. Have fun

May 14 06:24 PM