Wall Street (Again) Fumbles Movie Rental Story


Wall Street (Again) Fumbles Movie Rental Story

10 Sep, 2013 By: Erik Gruenwedel

The day (Sept. 10) Netflix shares set an all-time valuation record (above $311) based on news Virgin Media would enable its subscribers to separately access the streaming pioneer, a pair of Wall Street analysts declared death on Redbox’s disc rental business model.

Both extremes underscore the effects of Wall Street’s war on packaged media, including movie sellthrough and rental, and its desire to declare digital distribution winner — however prematurely.

Virgin Media said it would rollout Netflix to its 1.7 million multichannel video distribution subscribers in the United Kingdom  — access they have to pay for separately. While it was noteworthy that for the first tme a MVPD agreed to expose its subscribers to Netflix (over-the-top streaming services are seen as direct competition), the reality is that most of those subs can already access Netflix.

It would appear that Virgin Media knows that, and is more interested in being an ISP — selling subs the broadband connectivity required to stream TV shows and catalog (not new release) movies. But that didn’t stop investors from driving Netflix’s stock further into the stratosphere — ignoring billions due in content license agreements and profit at break even.

Then Pacific Crest Securities analysts Andy Hargreaves and Corey Barrett issued a note saying Redbox’s parent, Outerwall (formerly Coinstar), faced a looming financial squeeze due to its kiosk movie rental subsidiary.

Specifically, Hargreaves and Barrett contend fewer people are renting DVD and Blu-ray Disc movies, which they say will drop Redbox revenue up to 30% annually over the next few years.  They buttress their POV with data from The NPD Group that showed disc rental revenue fell 37% over a five-year period through 2012.

The analysts say Redbox rental volume would need to increase about 5% annually to support Outerwall’s current stock price — a premise the Pacific Crest duo deem unlikely.

What Hargreaves and Barrett ignore is the fact the NPD data referred to total disc rentals, which also included by-mail and video stores. It’s no secret what Netflix thinks about its by-mail disc rental business — despite the fact the segment generated nearly 50% of the service’s operating profit in the most recent fiscal period.

Meanwhile, Redbox revenue increased 4.5% to $479 million in its most recent fiscal quarter. Its share of the disc-rental market passed 50% for the first time.

B. Riley & Co. analyst Eric Wold, who is bullish on Redbox, said the Pacific Crest note makes the false assumption that declining disc rentals are primarily due to consumer migration to digital channels such as transactional VOD and streaming.

“While I agree that overall revenue generated by the DVD/Blu-ray market will decline in the coming years, that is not due to a technology switch from discs, but rather a switch from older rental channels [Blockbuster, video stores, etc.] to the comparatively smaller Redbox channel,” Wold said.

Indeed, Wall Street scuttlebutt that transactional VOD will supplant disc rentals is nonsensical. If the $3.99 to $4.99 nightly rental fee for a new release movie at Blockbuster or video store is considered a premium, why would someone pay just as much (or more) to access a movie at home through their cable channel when it can be rented at Redbox for $1.20 ($1.50 for Blu-ray)?

As disc rental revenue declines due to shrinking physical access (beyond kiosks), the number of rental transactions should remain unchanged. That’s because Redbox doesn’t care what people used to pay for disc rentals, it only cares that people rent a movie from a kiosk.

“For the population base that could not afford renting discs for $5, offering VOD for $5 and also requiring broadband access (vs. a $20 DVD player) doesn’t make their lives any better,” Wold said.



Add Comment