How Coinstar Changed My Mind

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I was never sold on Coinstar (Nasdaq: CSTR  ) -- until a twist in its business model completely changed my mind.

I always loved the basic concept behind the company. Who wouldn't? I was sick of counting coins out by hand, stuffing them in rolls, and cashing them in at the bank. Battery-operated counters got jammed all the time. Yet as a stock idea, I wondered what the company would do once it got its kiosks into all the stores it could.

Investors were also skeptical. After peaking in 2002, shares fell; they wouldn't return to the company's historic heights for another five years.

But in 2005, Coinstar executives made a brilliant decision: They bought a sizable stake in Redbox, a company originally started by a subsidiary of McDonald's. Redbox used the same kiosk model to rent DVD movies for just $1 a night. Its prices undercut other rental companies like Netflix (Nasdaq: NFLX  ) and the slowly dying Blockbuster (NYSE: BBI  ) , and the kiosks benefitted from their ease of access. With the world of streaming video not yet ubiquitous or convenient, Redbox pried open a space in the DVD rental market. Coinstar liked the results so much that it bought out all of Redbox in 2009.

Yet there are still obstacles to this new business. Coinstar has been in litigation against News Corp.'s (NYSE: NWS  ) 20th Century Fox, General Electric's (NYSE: GE  ) Universal, and Time Warner's (NYSE: TWC  ) Warner Brothers studios over how soon Redbox kiosks can stock new DVD releases.

Still, investors shouldn't worry -- Coinstar's already passed its most crucial test by proving that the kiosk model works. Going forward, a little imagination and strategic thinking should allow Coinstar to jump into all kinds of markets. Anything that could be sold through a kiosk is a potential candidate, opening countless possibilities for the company. For example, kiosks for commonly requested generic prescriptions, linked to an automated order and approval system, could save pharmacists and customers time, and increase productivity.

Scenarios like this drove me to buy Coinstar the other day. Investors will need patience as the company's model develops over the next few years. But by then, we'll probably be able to buy Coinstar stock certificates in the kiosk next to the Coinstar change machine.

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Fool contributor Rick Steier owns shares of Coinstar. Netflix is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2010, at 9:11 AM, jb757 wrote:

    How come when I go to a Red Box kiosk I can't see any movies worth renting ? Duh!

  • Report this Comment On May 31, 2010, at 3:14 PM, emptygestures wrote:

    Because nothing good has come out at the box office in a very long time... (Yes I know Avatar came out and I still thought it was terrible). This is why Coinstar is excelling. When people just want to watch something they will go Coinstar. Blockbuster has the same titles they just get the garbage in 28 days earlier. So if you're desperate to pay $5+ for trash like "Couples Retreat" then you succumb to supporting the worst business model in America.

    They cannot survive..Mark my words the BBI-B shares will be combined with the BBI-A by the end of June. This will follow by an inevitable reverse split and then someone will buy them out. Short term BBI is a rollercoaster of a gamble... not an investment. BBI lost that status years ago

  • Report this Comment On June 01, 2010, at 10:16 AM, BioBat wrote:

    The first poster is right, the movies in Redbox by and large are pretty crappy but they're only a buck so if you're looking for some cheap (mild) entertainment for a few hours, a Redbox movie will do just fine.

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