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Redbox to See $50M Quarterly Gain From Movie Gallery Exit

26 Jul, 2010 By: Erik Gruenwedel

Redbox should realize $50 million in incremental quarterly revenue with the end of liquidation sales at shuttered Movie Gallery and Hollywood Video stores, analysts said.

Michael Pachter with Wedbush Morgan Securities in Los Angeles said the projected windfall for the kiosk vendor should help it realize more than $297 million in second-quarter (ended June 30) revenue, up 57% from the same period last year.

Redbox parent, Coinstar, reports quarterly results July 29.

The departure of former No. 2 video rental chain, Gallery, is expected to help Coinstar generate more than $1.6 billion in revenue this year, up 40% from last year.

“Given that the Gallery run rate was $1.8 billion just three years ago, the migration of its customers should have a positive impact on Redbox’s top line growth,” Pachter wrote in a July 26 note. The analyst remained unimpressed with Redbox’s planned digital (streaming) initiative aimed at countering successful first mover Netflix and said to be unveiled in October.

Pachter said the proposed service would have no competitive advantage over Watch Instantly due to content restrictions imposed by several studios.

Netflix has made streaming a cornerstone to subscriber/business growth in large part to the format’s lower operating costs and higher margins compared with physical media such as DVD and Blu-ray Disc.

Studios are reluctant to offer new-release content to subscription-based streaming services, opting instead for transactional video-on-demand (VOD) and physical sellthrough and rental. It is not immediately clear if Redbox’s combined $1.1 billion distribution agreements with Sony, Paramount, Lionsgate and Summit Entertainment include digital distribution.

Regardless, observers contend it will be difficult for a vendor known for its low-cost transactional business model to sign up for monthly subscriptions.

“The best Redbox can hope to do is play catch-up with an increasingly online-entrenched competitor,” Pachter wrote. 

Separately, Eric Wold, analyst with Merriman Curhan Ford in New York, said the call would focus on the first quantified impact 28-day studio windows had on kiosks. Wold said internal analysis indicated consumers are willing to wait four weeks for select new releases (and increased copy depth) as evidenced by surges in rentals of impacted titles during the fifth week of release.

"We remain comfortable that the lack of DVDs initially during the windows will not be an issue for Redbox," Wold write ina note. "We continue to believe the windows will be accretive to both revenues and margins compared to under the workaround programs."

The analyst said recent liquidation of shuttering Movie Gallery and Hollywood Video stores likely impacted consumers looking to acquire discounted catalog fare.

"We believe consumers would likely use the opportunity to build libraries of previously-viewed movies – but would still have a need to rent recent releases," Wold wrote, adding the closures will put about $160 million in rental revenue up for grabs.



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