Will Verizon Shares Also Benefit From Its Joint Venture With Coinstar?

| About: Verizon Communications (VZ)

Since the February 6th announcement of a joint venture between Verizon (NYSE:VZ) and Coinstar (NASDAQ:CSTR), shares of Coinstar have soared over 21%, while Verizon shares have risen roughly 2%. At this point it's almost safe to say the market has written off much of a chance that this new venture will display any meaningful benefit to telecom behemoth Verizon.

In the joint venture, Coinstar, through its Redbox movie service, will provide content for Verizon's "video on demand streaming." From Coinstar's prospective the benefits are obviously huge, Redbox makes up about 86% of their revenue (as of Q4), so any growth in that category will be huge to their bottom line. Currently Verizon's FiOS TV service only generates $3.7 billion in annual revenue, which isn't much considering overall revenue topped $110 billion in 2011. But the fact is any additional streaming revenue would be higher margin than their other businesses, and is already growing at an exceptional rate.

Currently analysts are projecting FiOS revenue to grow by 28% in 2012, and another 23% in 2013. These numbers are calculated using very conservative market share projections, which now are likely to be too low. If Verizon can manage to stream the types of movies Coinstar currently offers through its Redbox stations, directly to consumers, then growth should dramatically increase. All the movies stored in Redbox kiosks are very popular and newly issued on DVD, essentially the products highest in demand. Netflix's (NASDAQ:NFLX) service is notorious for never having any of the newly released Blockbuster favorites, so the fact that FiOS has these is a huge advantage. FiOS had already managed to grow at a respectable rate (and gain market share) with out a competitive movie service.

This new Redbox streaming service will not be implemented until mid 2012, thus the bulk of the market share growth (for FiOS) will come in 2013 and beyond. Currently FiOS is expected to increase its market share from 5.25% in 2012 to 6.25% in 2013. Ironically, this is the same growth rate as from 2011 to 2012 (4.25% to 5.25%) thus the potential impact of Redbox has not been priced in. If Redbox simply increases Verizon's market share by 3%, the year after its introduction then FiOS revenue would jump to a little over $8 billion in 2013. If FiOS could generate that much in additional revenue, assuming margins stay the same, a little over $400 million could be added in free cash flow.

In all of 2011 Verizon generated about $6.6 billion in free cash flow. An additional $400 million from FiOS would represent a 6% overall increase, or enough to warrant a $0.14 raise of Verizon's annual dividend. This directly contradicts the notion brought up in another SA article that by going through with the Coinstar Venture, Verizon would be putting its dividend in jeopardy.

Overall, Verizon bolstering its FiOS service by partnering with Coinstar will benefit both parties. The only difference between the two stocks is that Coinstar has realized this potential already and Verizon has not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Telecom Services - Domestic
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here