Analyst: Dismissal of Redbox Claims Could Undermine Kiosk Viability

5 Oct, 2009 By: Erik Gruenwedel

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Should a judge rule in favor of motions filed last week by 20th Century Fox Home Entertainment and Warner Home Video to dismiss legal claims filed against them by Redbox, investors could question the kiosk movie rental operator’s business model and sustainability, an analyst said.

Merriman Curhan Ford analyst Eric Wold said dismissal of Redbox’s antitrust lawsuits would represent a “worst case scenario” for the kiosk vendor, which he said had still managed to grow and prosper despite adverse conditions that included having to purchase Universal titles via third-party retail channels.

Wold said he doubts the suits will be tossed, and if anything the cases would likely be watered down as a judge did with Redbox’s similar antitrust litigation against Universal Studios Home Entertainment.

“Anything is possible at this point, and dismissals of the Fox and Warner claims could easily lead to a reverse decision and dismissal in the Universal lawsuit,” Wold wrote in a note.

Indeed, access to new-release titles from Warner and Fox will get complicated later this month when the two studios and their distributors stop delivering content to kiosks on street date.

Wold said the two studios represented 33.7% and 28.4% of home video rental revenue in 2008 and in the first half of 2009, respectively. He said that would equate from $338 million to $401 million of Redbox’s total revenue ($1.19 billion) estimate for parent Coinstar Inc.’s DVD rental division in fiscal year 2010.

He said Redbox acquiring Warner and Fox new release titles via retail channels would add between $1 and $2 per unit DVD cost, resulting in a $12 million to $25 million impact to fiscal year 2010 pre-tax earnings estimate of $292 million.

“Redbox has still been able to obtain the Universal DVDs and generate solid mid- to high-teens [pre-tax] margins over [the 2008-2009] period,” Wold wrote in a note.

The analyst said he remains concerned about “the flow of headlines between Redbox and the studios,” which he said shouldn’t hinder the kiosk vendor’s ability to operate profitably.

“For this reason, we would continue to use any weakness caused by the various headlines as an advantage to accumulate long-term positions in [Coinstar] shares,” Wold said, reiterating a “buy” stance on the kiosk and ATM machine manufacturer’s stock.

The analyst made no mention of last week’s announcement about the departure of Coinstar’s CFO.

Coinstar’s stock was up 55 cents to $31.85 per share in midday trading.
 

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