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NCR at Kiosk Crossroads?

28 Jul, 2010 By: Erik Gruenwedel

With nearly two-thirds of its planned 10,000 Blockbuster Express rental kiosks allocated, NCR Corp. appears uncertain whether to increase the install base or focus on alternative distribution channels for home entertainment.

Duluth, Ga.-based NCR is funding the rollout and fulfillment (acquisition of DVD titles) for Express kiosks through a license deal with Dallas-based Blockbuster.

During a financial call with investors last week, CEO Bill Nuti said he would not look beyond implementation of the remaining 3,500 Express kiosks nationwide as to whether the company would increase its involvement in DVD rental kiosks or related entertainment.

“The hurdle rates get higher over time from our perspective because we do feel strongly that other channels to market going forward might be better investments for the company,” Nuti said. “But we’re not going to make that determination until we get towards the end this year. Right now, we’ve got to get 10,000 done and 10,000 put in the right places.”

Indeed, NCR is deploying 100 to 200 Express kiosks on a weekly basis, with an emphasis on retail location rather than market penetration. Industry leader Redbox has deployed more than 22,000 kiosks with plans to deploy another 3,000 units.

“If we wanted to, we could ramp up faster, but right now it’s about making smart choices on deployment,” Nuti said.

In the quarter, NCR rolled out Express kiosks — many replacing non-renewed Redbox units — at more than 300 Kwik Trip convenience stores in the Midwest, 105 Tom Thumb and Randalls locations in Texas, 80 Xtra Mart stores in the Northeast and 100 Mapco Express locations in the South.

NCR said it expects to generate pre-tax earnings (EBITDA) on Express kiosks by the fourth quarter, in addition to $25 million to $35 million EBITDA in 2011.

Nuti said he expects negotiations with studios regarding revenue-sharing agreements to conclude this summer, and would likely not preclude 28-day delays (windows).
CFO Bob Fishman said distribution agreements with studios involve more than windows, including factoring in technology costs and sellthrough initiatives such as downloads.

“We are looking at the total automated retail offering in the industry, and what does a retail store look like in the future versus what does it look like today?” Fishman said. “That’s why it includes more than just rental.”

Specifically, NCR is exploring expanding distribution of digital content via streaming, a channel currently controlled by Netflix, with Redbox eyeing a streaming initiative in the fourth quarter. The company said it would likely commence alternative distribution channels (including securing content digital rights) through the Blockbuster brand.

“We’re looking at the core investments of what it is we need to do to deliver it into a portable format,” said EVP John Bruno. “Then we will make investments as we see the market unfold. We see that’s going to be a market that’s going to continue to grow and have pretty deep technical demands.”

Nuti said he expects Express kiosks would continue should Blockbuster file for bankruptcy, saying NCR would maintain its business strategy with whoever emerged as holder of Blockbuster’s assets.

The executives’ comments were made before this week’s departure of Alex Camara, SVP and GM of NCR Entertainment.

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, said apprehensive comments from NCR executives regarding the DVD kiosk business have been ongoing.

“Replacing their entertainment division head indicates they are not bullish (like Redbox), and it may be a signal that they are going to significantly slow down DVD investment in 2011,” Woo said.

NCR Entertainment contributed to NCR’s Americas segment generating $117 million in second-quarter (ended June 30) operating income, up 17% from operating income of $100 million during the previous-year period. The segment posted revenue of $515 million, compared with revenue of $505 million last year.

Overall, NCR reported income of $31 million, compared with income of $23 million last year, on revenue of nearly $1.2 billion, up from revenue of more than $1.1 billion last year.

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