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What's Good for Netflix Is Poison for Redbox

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What's good for the goose might kill the gander. Coinstar (Nasdaq: CSTR  ) learned that the hard way this holiday season. The 28-day delay on new releases that is working so well for Netflix (Nasdaq: NFLX  ) caused mayhem for Coinstar's Redbox rental kiosks.

The company just lowered its fourth-quarter guidance based on disastrous Redbox results, which is why Coinstar's stock is taking a steel bath today. The original forecast called for sales of $427.5 million and $0.82 of earnings per share at the midpoint of the ranges. Now Coinstar sees $391 million of revenue and roughly $0.67 per share of GAAP earnings. That's a significant miss, folks. The stock is suffering for a reason.

Management pointed fingers right at that 28-day restriction. "This was redbox's first holiday season with 28-day delayed titles, and we underestimated the impact that the delay would have on demand during the fourth quarter," said CEO Paul Davis.

That makes perfect sense to me. A four-week delay might not matter much to consumers expecting the supreme convenience of at-home delivery, but rental kiosks are an impulse-buy situation. Catch the customer's eye with the goods on hand or lose the interest and the sale. I fully expect NCR (NYSE: NCR  ) to report a similar dynamic, as the kiosk operator turned its back on the Blockbuster philosophy of immediate availability to save a few bucks. Bad choice, guys.

Coinstar is partly locked into this 28-day delay model now, at least when it comes to titles produced by Time Warner (NYSE: TWX  ) . Given this terrible holiday experience, I don't expect Coinstar to sign anymore of those deals, but the company does have to adjust to the crummy contracts already in place. Redbox is a promising service on a rapid growth track, but it has to be managed correctly, and copying whatever works for Netflix just won't cut it. Pay-per-rental kiosks and low-cost unlimited subscriptions are fundamentally different business models; the two don't really compete in the same space.

Coinstar will adjust its purchasing patterns and lower its reliance on Blu-ray discs. Is that good enough to counterbalance the impulse-killing delays in the long run? Add Coinstar to your Foolish watchlist and then discuss the matter in the comments below.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies discussed here. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

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 January 14, 2011, at 1:57 PM, cattywampus wrote:

    I'm a long time user of both services. I have to admit my rentals from Redbox have fallen off due to lack of good content. I still rent movies from Redbox that are listed as a long wait on my Netflix queue. The gaming aspect from Redbox is not a factor for me but perhaps for some renters sampling a game before you buy it is a smart play.

    I also still have doubts that Rebox will come out with a good streaming option that can compete with Netflix. On the plus side if Netflix is truly leaving the DVD by mail business Redbox and NCR gain market share by default. Question is what will that market look like in several years?

  • Report this Comment On January 14, 2011, at 1:59 PM, nickfinia wrote:

    Appears that the CoinStar leadership is not as bright/sharp as the Netflix's.

  • Report this Comment On January 14, 2011, at 3:45 PM, iversonj88 wrote:

    Yeah my caps got railed today and this was about the last place I expected the pain to come from. Redbox is a solid service that still has room to grow. I work at a financial instiution and no matter how solid the online experience becomes, some people still want the face-to-face, hands-on experience. that's why Redbox will continue to flourish. I'm alot less concerned about unpleasant contracts than I am about some government regulation that has them stuck in this 4 week delay forever. That's why I'm doubling down now and kicking back for some safe upside growth.

  • Report this Comment On January 14, 2011, at 5:54 PM, thedatadude wrote:

    "face-to-face, hands-on experience"...

    Maybe for a few more years, but every 15 year-old kid will be an adult in a few years, and they will be streaming, and the people who need the face-to-face experience are money is on Netflix.

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