There's no accounting for taste, whether it involves comedy, movies, or your spouse. I like my humor subtle, my movies gory, and my wife however she orders me. Fortunately, despite our differing comedic tastes, my wife and I both enjoy renting a good zombie flick -- so she can watch it through her fingers.
These differences are also the reason why I think investors might want to take a closer look at toy-crane game operator Coinstar (Nasdaq: CSTR ) . Let me explain.
Until recently, my movie preferences meant that my Netflix (Nasdaq: NFLX ) queue was dominated by horror movies, thrillers, and action-adventure pieces. But I also like my films plausible -- and that means I exhausted the inventory pretty quickly. I ended up putting movies in my queue that I really had little interest in watching, just to maintain my $15-per-month subscription. The better alternative was Coinstar's Redbox kiosks. I paid a dollar for a movie I wanted to see, even though it meant schlepping across town to the supermarket.
It's no Grauman's Chinese Theatre
I'm under no illusions that Redbox will supplant Netflix as the top movie-rental destination. There are probably other movie sources that will spell the death of the DVD, but I think Redbox's kiosks provide a good supplemental source of movies for videophiles, and a strong, primary source of revenue for its parent company.
Blockbuster (NYSE: BBI ) thinks so, too. That's why it has partnered with NCR to develop its own line of kiosks. It plans to have as many as 10,000 in place by the end of the year.
Yet that will only be half the number Redbox plans to have installed by then, and that's why I like Coinstar. Earlier this year, it bought the remaining ownership interest in Redbox from McDonald's (NYSE: MCD ) , and the big red boxes are now appearing everywhere -- in grocery stores, and even in your local Wal-Mart (NYSE: WMT ) and Walgreen (NYSE: WAG ) . One was just installed at a 7-Eleven two blocks from my house -- even more convenient for me.
A star on Hollywood Boulevard
Until the fourth quarter of 2008, Coinstar derived the bulk of its revenues from the coin-counting machines and coin-operated games and rides you find along a store's fourth wall: that unused space typically at the front of a supermarket or convenience store. Today, very likely, you'll also find a Redbox movie-rental kiosk.
DVD rentals now account for more than half of Coinstar's sales, with Redbox rentals having soared to almost $400 million in 2008. That growth has come primarily from new kiosk placements, but part of it has also come from growth at existing kiosks. According to CEO Paul Davis, sales are expected to climb by an additional 80% this year, to reach a sales figure of $650 million to $700 million.
That figure might need to be revised in light of the recently announced deal to have movie titan Sony provide new releases directly to Redbox for the next five years. This is the first such deal Redbox has signed, although other movie studios -- its court battle with Universal notwithstanding -- might want to jump on the bandwagon, too. With new releases appearing in the kiosks, Redbox will attract more renters.
Lights. Camera. Action!
And there's the opportunity for Coinstar. The company is making the Redbox kiosk so ubiquitous that the old complaint about inconvenience is disappearing rapidly. Moreover, in providing yet another source of revenue, Coinstar is now monetizing its order screen. While waiting for my movie to vend at the 7-Eleven the other day, for example, the kiosk featured an ad offering me a deal on a Spicy Bite.
It's not necessary for Coinstar to beat Netflix, or even Blockbuster, at the video-rental game for investors to win. Coexistence is possible. Since 2002, when it started with just 12 kiosks outside McDonald's stores, it has grown to more than 15,000 installed units at supermarkets, retailers, convenience stores, and fast-food locations and is slated to have as many as 20,000 in place by the end of the year.
Couple that growing presence with a simple pricing structure and the possibility of alternative revenue streams, and both Coinstar and investors can enjoy greater returns.
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