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J.P. Morgan: Kiosk Disc Rental Business Nears Saturation

29 Nov, 2011 By: Erik Gruenwedel

The market for kiosks renting DVD and Blu-ray Disc movies soon will hit a ceiling, which could impact long-term growth possibilities for the publicly held companies that own them, a J.P. Morgan analyst said.

In a Nov. 28 note, Paul Coster, an analyst with J.P. Morgan, said Coinstar, which owns Redbox, has seen its shares rebound 17% in November, despite his view that the kiosk disc rental pioneer’s growth will stall in 2012.

With Redbox and Blockbuster Express (which is owned by NCR Corp.) operating more than a combined 50,000 kiosks, the assumed market cap of about 60,000 kiosks is within sight. Coster said that when factoring in transactional and subscription video-on-demand, the packaged media business’ trajectory is mirroring VHS and music CDs.

“We believe the DVD kiosk rental opportunity will be saturated by late 2012,” he wrote. “[Sixty-eight percent] of households are already within a five-minute drive time of a Redbox kiosk, and we note that NCR is looking to shed the Blockbuster Express business segment.”

Indeed, Express kiosks generated a $13 million operating loss, which has prompted NCR to seek “strategic alternatives” for the business, according the company’s most recent fiscal report.

Coster also noted that consumer adoption of UltraViolet, the industry initiative to reinvigorate electronic and physical sellthrough, has been “a bit of a disappointment, so far.”

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