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Analyst Advocates Redbox, Amazon Partnership

18 Oct, 2010 By: Erik Gruenwedel

Redbox and Amazon’s potential forays into streaming could be better realized through a mutually beneficial partnership, an analyst said.

Eric Wold with Merriman Curhan Ford in New York said Amazon, which currently offers packaged media sellthrough and transactional video-on-demand (VOD), could launch a subscription streaming service more cost-effectively partnering with Redbox.

“I’m suggesting a partnership for a subscription model where subscribers would have access to both digital rentals via Amazon and physical rentals via Redbox,” Wold said in an email.

Spurred by the success of Netflix streaming, Coinstar-owned Redbox has said it is pursuing a streaming model, while reports suggest Amazon could bow a service by the end of the year.

The analyst said that by gaining access to Redbox’s kiosks, Amazon could avoid having a physical presence in all states, thereby avoiding sales tax issues he believes might have been a reason Amazon has not pursued an acquisition of Netflix.

Wold, who questions Redbox’s real need to offer streaming, said Redbox should link together with a strong third party to minimize additional spending requirements, give it easier access to studio relationships and digital content, and foster broader consumer appeal.

“While we do not believe Redbox necessarily needs a digital strategy to be successful, we believe it has become necessary to offset concerns about the demise of DVDs and obtain a more appropriate valuation multiple,” Wold wrote in a note.

Regardless, the analyst expects Redbox to bounce back positively in the third quarter (which ended Sept. 30) from a disappointing second quarter, when excess supply and a 28-day embargo imposed by three major studios combined to undermine results.

He said liquidation of 2,400 Movie Gallery/Hollywood Video stores caused a glut of DVDs in second quarter as well.

But with access to discs from all studios in the quarter, Wold said average disc costs declined as well due to agreements with Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment. He said Blu-ray Disc rentals should also have increased average transaction revenues in the quarter.

Coinstar/Redbox reports third quarter results Oct. 28.

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