Blu-ray’s a Go for Redbox

29 Jul, 2010 By: Chris Tribbey

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Redbox has started offering Blu-ray Disc rentals for $1.50 a night at more than 13,000 of its 23,000 kiosk locations. The company said it plans to have Blu-rays available in all its kiosks by the fall, and Blu-ray would represent about 10% of kiosk inventory by the end of the year.

“Offering Blu-ray rentals is an exciting opportunity for Redbox to expand our product offerings and build on the relationships that we’ve established with millions of consumers nationwide,” said Redbox president Mitch Lowe.

The Book of Eli, The Bounty Hunter, Brooklyn’s Finest and Green Zone are among the first Blu-ray titles now available for rent. Customers can check for Blu-ray availability in their area at redbox.com/bluray.

July 29 Redbox parent Coinstar reported a profit of $13.4 million — up from $7 million in the same quarter the year before — on revenue of $342.4 million during the second quarter (ended June 30). Revenue was below analyst estimates.

“We are very pleased with our second-quarter results and the performance of our core businesses,” said Coinstar CEO Paul Davis. “We continue to have great momentum in our DVD business as demonstrated by our increasing market share and expanding relationships with key partners.”

Revenue was up 34.9% compared with the same quarter of 2009, with DVD revenue up 43.9% to $271.9 million. Coinstar executives said Redbox rented more than 123 million DVDs during the quarter. The value of its DVD library was $87.3 million as of June 30, Coinstar reported.

Davis said that the 28-day delay on new releases from Warner Home Video, Universal Studios Home Entertainment and 20th Century Fox Home Entertainment — which collectively represent 30% of Redbox’s DVDs — did have a negative effect on the company’s profit, but Davis said the company needs to see the results from a few more quarters to gauge if the impact is permanent. He added that a weaker release slate contributed to the lower-than-expected earnings.

June 15 Paramount Home Entertainment extended its revenue-sharing license agreement with Redbox through 2014, giving Redbox Paramount DVDs on street date. Davis said the studio spent 10 months studying the impact of Redbox on sellthrough and found Redbox rentals had minimum impact on DVD sellthrough.
For the year, Coinstar is estimating revenue of between $1.4 billion and $1.5 billion.

Michael Pachter with Wedbush Morgan Securities in Los Angeles said Redbox ordered too many disc copies and was adversely affected by the 28-day window on 30% of new releases in the quarter, which led to a decline in transactional volume per kiosk.

Pachter said Blu-ray should boost transaction revenue going forward.

“If standard DVD rentals (at $2 per rental on average) comprise 90% of sales and Blu-ray (at $3) comprises 10%, the average transaction would be $2.10,” Pachter wrote in a July 30 note. “Each 1% increase in Blu-ray rental share should drive average transaction size higher by $0.01.”

The analyst said Redbox’s biggest box office title in April earned just $1.7 million, leading to negative comp in the month. Also, he said an early spring break/Easter negatively affected revenue. Same-store (kiosk) revenue increased 3.5% in the quarter compared to a 21% increase in the previous quarter.

“Despite the solid finish to the quarter, we believe the positive momentum from June may subside somewhat as the availability of more copies of Avatar and Alice in Wonderland at the end of Q2 most likely skewed results,” Pachter wrote.

The analyst said the lower average cost of new DVDs (via revised distribution agreements) should more than offset the increased cost associated with destroying older DVDs as opposed to selling them as previously-viewed product.

“We estimate that the all-in cost of movies under these wholesale arrangements (net of the sale of previously-viewed merchandise) will be approximately $6 per disc lower [than what it was before the deals],” Pachter wrote.

In addition, he said Redbox was on the hook for $2.2 million in license fees to Sony and Paramount in the quarter, revenue share with retailers, credit card fees, and supply chain expenses, which all contributed to lower operating margin.

“Although operating margin did suffer in Q2, we expect it to increase in the long-term as the company’s distribution agreements  allow Redbox to purchase more copies at lower prices,” Pachter wrote. “Despite the lower comp, we think that Redbox’s demise has been greatly exaggerated.”

Indeed, Eric Wold, analyst with Merriman Curhan Ford in New York, noted that Redbox’s rental market share grew to 25.2% from 18% a year ago and that Coinstar upped 2010 revenue guidance from $15 million to $20 million, despite the windows and dearth of key releases.

“The [second quarter] was an anomaly,” Wold wrote.

Finally, Pachter speculates Redbox will soon announce a major retail agreement with a marquee chain such as Target, which will help the kiosk company expand faster.

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