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Will Redbox get left on the cutting-room floor? This Coinstar (Nasdaq: CSTR ) subsidiary may have to slow the exponential growth of its network of movie-rental kiosks, unless it finds an understudy to supply it with movie titles.
Warner Home Video, 20th Century Fox, and Universal think Redbox's $1-a-night rental fee is undermining the value of their cinematic masterpieces. If you can rent a movie for next to nothing, then maybe you won't buy them -- or worse, you may not even go to the theater. The three studios want to delay shipping new DVD releases to the kiosks for several weeks after they've hit shelves at retailers and other rental outfits like Netflix (Nasdaq: NFLX ) and Blockbuster (NYSE: BBI ) . The former company has already entered into a Faustian bargain with the studios to keep its inventory flowing.
Redbox is waging a court battle to force the studios to treat its kiosks equally. In the meantime, it's had to implement a workaround plan to circumvent the bottleneck: purchasing its DVDs directly from retailers.
Maybe it's just a drama queen
According to an SEC filing, Redbox purchases newly released movies at Wal-Mart (NYSE: WMT ) , Best Buy (NYSE: BBY ) , and Target (NYSE: TGT ) . But the company was recently thwarted in its attempt by new policies at some of the stores, which restrict customers to purchasing only three DVDs at a time. The retailers deny that they're in collusion with the movie studios -- Wal-Mart says it's up to individual store managers to decide whether they restrict purchases -- but Redbox amended its lawsuit against Fox to allege that the studios are leaning on the retailers.
Not every studio wants to kill off Redbox. Lions Gate Entertainment (NYSE: LGF ) , Sony, and Paramount have all entered into agreements to supply the kiosk company with new releases by their "street date," the day they're available to the public for rental. And the movie rental outfit is also going after bigger game. Its plan to add video game rentals to its kiosk offerings could create a potent one-two punch.
Indeed, Coinstar has already abandoned its coin-operated skill-crane business to focus on kiosk rentals and coin counting. Once the staple of seaside boardwalks and the "fourth wall" of supermarkets, toy-dispensing crane mechanisms just don't hold the same allure -- or profit potential -- as movie rentals. Redbox's operating income jumped 35% year over year, and it's already surpassed the revenue recognized in 2008 from coin counting and entertainment combined.
The casting couch
Like recording industry executives, movie studio honchos have ignored their own role in contributing to the slide in revenue. As Redbox points out, rather than taking money from the studios, it's actually adding to their income stream.
Still, Redbox needs to bring the curtain down on the lawsuits as soon as possible. Legal fees are growing (SG&A expenses, which include litigation costs, are up 47% for the first nine months of the fiscal year), and paying retail for inventory will sharply cut into its margins. Redbox also needs to be careful that it doesn't ruin its relationship with Wal-Mart, which accounts for almost 20% of its revenue.
With shares down by more than a third from their summer highs, it looks like investor reviews of Coinstar's studio scuffle have been worse than those received by Heaven's Gate. However, if Coinstar prevails in court -- as I think it should -- Redbox could end up as one of the leading actors in movie rentals, and a profitable investment, too.