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Analysts: Kiosk Business Sound, Despite Redbox Missteps

14 Jan, 2011 By: Erik Gruenwedel

The day after Redbox parent Coinstar Inc. affected damage control by pre-releasing disappointing fourth-quarter financial results and lowering 2011 fiscal guidance, analysts Jan. 14 rallied in support of the kiosk vending business model.

Despite issuing notes earlier in the week foreshadowing Coinstar’s announcement, the severity of the news appears to have caught Wall Street by surprise.

“Given a number of weak DVD titles and delayed release dates, we were comfortable with our low-end estimate as recently as last week — but apparently, even those assumptions proved to be too aggressive,” Eric Wold, with Merriman Curhan Ford in New York, wrote in a note.

Coinstar placed much of the blame on product mismanagement and 28-day embargoes imposed on new releases by Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment. Indeed, many of the quarter’s strongest releases had street dates in December, meaning the 28-day window pushed Redbox’s own release date for these titles into the first quarter this year.

There were eight releases (Robin Hood, Iron Man 2, The Karate Kid, How to Train Your Dragon, Toy Story 3, Grown Ups, The Last Airbender and The Expendables) with street dates from September through November that grossed more than $100 million domestically at the box office, typically key to kiosk vendors. More importantly, top movie rentals subject to the 28-day window released in December, included Wall Street (Fox), The Town (Warner), Machete (Fox), Inception (Warner) and The American (Universal).

Analysts believe the impact of the embargoes could propel the studios to extend the window from 28 days to as much as 90 days.

With the 28-day predicament also impacting Netflix, analyst Ralph Schackart with William Blair & Co. in Chicago wondered where consumers are going for new release rentals.

“What puzzles us is where are consumers going for new releases since Netflix is telling the market DVDs are transitioning away, digital is still in its infancy and Blockbuster stores are closing,” Schackart wrote in a note.

Michael Pachter with Wedbush Securities in Los Angeles countered that Blockbuster and other video stores, and sellthrough, coupled with transactional video-on-demand, accounted for more than 50% of Redbox’s loss. Pachter said Coinstar revenue “missed” by $30 million, reflecting about 14 million fewer rental transactions than the company had expected in the quarter.

“We believe that approximately 25% of these “lost” transactions reflected the purchase of DVDs; we think that around 25% were market share losses to VOD on cable or the Internet; we think that around 25% reflected a shift to Blockbuster (which aggressively promoted its 28-day advantage during the quarter); and we believe that the remaining 25% were “walk away” customers who didn’t find the breadth of product they were seeking when visiting a Redbox kiosk,” Pachter wrote in a note.

The analyst said the share losses were not singularly significant, with the net gain of DVD sellthrough at around 3 million discs, or around $50 million, out of approximately $5 billion in DVD sales for the quarter. He said the net gain to Blockbuster was around 4 million transactions, or around 3% of its quarterly sales; the net gain to VOD was also around 4 million transactions, or around 5% of quarterly sales.

“In our view, these share losses are unlikely to grow next year, particularly if Coinstar management takes steps to address the inventory imbalances it experienced in Q4,” Pachter wrote.

John Kraft, analyst with D.A. Davidson & Co. in Lake Oswego, Ore., said Redbox’s underperforming Blu-ray Disc rentals underscored the format’s strength with action/adventure movies compared to romance and comedies.

“Management is already learning from its mistakes and claims to have taken a number of decisive steps to better align content with demand,” Kraft wrote in a note.

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