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Analyst: Large Misperception That Nobody Rents Discs Anymore

25 Mar, 2013 By: Erik Gruenwedel, Chris Tribbey

With the influx of subscription video-on-demand services, subsequent decline in the numbers of video stores, and Wall Street hype, the assumption that consumers aren’t renting movies on disc anymore is gaining traction.

Which would be a mistake, according to B. Riley & Co.'s Eric Wold. The Los Angeles-based analyst contends shuttering video stores represent a largely underappreciated asset to Redbox and its newly launched Redbox Instant by Verizon multiplatform rental service.

Indeed, there are about 1,500 specific video stores in the United States, which include about 300 separate Blockbuster and Family Video locations, in addition to about 900 independent stores, according to Home Media Magazine data.

B. Riley Caris projects the physical rental market will generate approximately $5.3 billion in revenues in 2013, with the lone growing segment being disc rental kiosks, which is predominantly spearheaded by Redbox.

Indeed, the research firm estimates less than $1 billion in revenue will come from video stores this year, with kiosks and by-mail roughly splitting the remaining $4.3 billion in revenue. Those percentages will change through 2017, with video stores dropping to about $500 million in revenue compared with slightly less than a $1 billion for by-mail, and the bulk ($3.25 billion) of the remaining revenue generated by kiosks.

Redbox generated $1.9 billion in revenue in 2012.

“We continue to believe there is a large group of consumers that prefer and will continue to prefer renting DVDs or Blu-ray Discs for a number of understandable reasons: the large cost differential between DVDs and VOD, a lack of appropriate broadband access, or a desire for the better quality and enhanced content of Blu-ray versus downloads (i.e., alternative endings, additional features, etc.),” Wold wrote in a March 25 note.

The analyst projects that as the dollar value of the total physical rental market continues to shrink in the coming years, with in-store disc rental revenues declining by 10% annually between 2014 and 2017, Redbox will gain 25% of those displaced revenues.

Wold believes the projection is conservative considering Redbox has the potential to actually gain 50% of the displaced rental transactions as physical stores close — albeit at increasingly lower per-unit rental transactions (i.e., a $3.99 or 4.99 store rental becomes a $2.50 kiosk rental).

Redbox is also expected to reap 20% of displaced by-mail rental, which is projected to decline by 10% to 20% annually between 2014 and 2017.

“We believe that the launch of Redbox Instant will prove attractive to current Netflix disc subscribers and do not find it unreasonable (and probably conservative) that Netflix disc subscriber defections are likely to accelerate beginning later this year,” Wold wrote.

The analyst says it wouldn’t be unreasonable to that Redbox’s existing customer base increases its rental activity by 5% annually — driven by more targeted marketing and increased disc capacity within the kiosk (keeping key titles available for longer periods). In addition, with no cap-expenditures spending (i.e. no new kiosks installed) beyond normal maintenance (which is estimated at $7 million to $9 million), Wold expects Redbox margins to expand materially during the next several years.

Finally, the analyst believes Redbox Instant has a legitimate threat against Netflix due to its focus on theatrical content compared to mostly TV fare for the SVOD pioneer.

Specifically, Redbox Instant has a good chance of usurping a sizable percentage of Netflix’s 8 million disc subscribers, according to Wold. Both subscription plans cost the same at $8 per month. Netflix can offer a larger selection of disc titles than a Redbox kiosk can (including catalog).

“We believe the ability to get same-day discs at the kiosk (vs. waiting a day for Netflix delivery), along with the addition of unlimited streaming content could prove to be a motivating factor to get Netflix subscribers to cancel,” Wold wrote.


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