Is Coinstar Finally Ready to Take on Netflix?

Coinstar (Nasdaq: CSTR  ) is once again playing up a digital streaming strategy that doesn't currently exist.

Speaking before analysts yesterday, the company had little add on the Redbox streaming product that it's been promising over the past year. The only real material nugget to emerge yesterday was a $50 million accelerated share buyback plan.

There's nothing wrong with chowing down on stock, but where's the streaming sizzle?

"When we see ideas that really resonate with consumers and work well for retailers, we're

able to take those ideas and quickly scale them," CEO Paul Davis noted at the beginning of his presentation.

Well? Where's the Netflix (Nasdaq: NFLX  ) killer, Davis?  

A tale of two video renters
As Netflix hit new all-time highs earlier this month, Coinstar shareholders have been licking their wounds. The stock got slammed after Coinstar delivered weak guidance for the holiday quarter, and it still hasn't bounced back. Yesterday, shares closed 36% below their peak of three months prior.

With Coinstar plagued by studio release windows, and more recently an uptick in wholesale DVD prices from Disney (NYSE: DIS  ) , one would think that now might be the perfect time to show off a digital product.

Redbox head Mitch Lowe has a clear vision of what his company's foray into streaming will look like. We're talking about a bundled subscription service, where couch potatoes pay a set amount every month for unlimited streaming, backed by physical rentals at the corner kiosk.

That sounds like the right approach. No platform will ever have all studios on board for a digital smorgasbord, so taking on Netflix means also matching the physical distribution that it provides through its regional distribution centers. Hulu doesn't have that. Amazon.com (Nasdaq: AMZN  ) doesn't have that.

Coinstar can do that -- and yet, it can't. It's still trying to find a partner that can provide digital entertainment rights and a viable technology platform.

Essentially, Coinstar remains stuck where it was a year ago, when it promised to reveal its digital service by October 2010. We're still waiting.

Redbox is getting Zuckerberged
How hard is it to find a partner? Everyone's been throwing around Amazon.com and Wal-Mart's (NYSE: WMT  ) names for awhile. Both giants sell digital rentals on a piecemeal basis, in addition to their physical DVD strongholds.

This isn't really a heavy Rolodex, folks. The pool of potential partners is limited. Coinstar should have saddled up with Amazon several quarters ago. Why isn't this happening?

If you caught The Social Network -- now finally available through Redbox -- you saw the Winklevoss twins and Divya Narendra get schooled by Mark Zuckerberg. They're led to believe that Zuckerberg will get cracking on their concept for a Harvard-based social networking site; in reality, he's coding a similar site with his dorm pals to launch on his own.

Isn't this what's happening here? Coinstar may think that it has Amazon CEO Jeff Bezos eating out of its robotic-kiosk palm, but in reality, Amazon is gearing up to go it alone.

Amazon has already inadvertently served up pages in which it offers free streaming to members of its Prime loyalty shopping club. If Amazon sees streaming as the means to promote its Prime plans -- and take on Netflix, since it now has the lead in Europe --  why would Zuckerberg want to share with the Winklevoss twins?

"We could have moved a lot quicker quite a few months ago had we decided to do this on our own," Davis conceded yesterday. "We made a conscious decision as a team to not do it on our own because the price tag of doing that was prohibitive. We also didn't feel like we could have an offering working on our own that would distinguish ourselves and be a real winning proposition."

What? How will teaming up with Amazon, Wal-Mart or any company armed with the winning combination of digital rights and technology going result in a standout product? Redbox's desired partners can -- and apparently will -- go it alone.

Even if Redbox had launched a digital service a year ago, with limited content and deals for availability through a sliver of the devices now streaming Netflix, it would have been better off. Netflix had 7 million fewer subscribers then. Amazon has had that much more time to realize that it doesn't need Redbox, when it can just sell discounted DVDs or piecemeal rentals for the flicks it can't stream on an unlimited plan.

Redbox is running out of time
Coinstar itself is working on some neat gadgetry aside from Redbox and its namesake coin-counting devices. It discussed web-connected Face Cube photo booths and its Gizmo machines, which crank out refurbished consumer electronics.

But now, Netflix is landing roughly a million net new subscribers a month. How much longer can Coinstar keep its shareholders waiting for a digital strategy that's already several quarters too late?

Not long, I say.   

What will Coinstar do about its digital strategy? Share your thoughts in the comment box below.

Wal-Mart Stores is a Motley Fool Inside Value pick. Amazon.com, Walt Disney, and Netflix are Motley Fool Stock Advisor recommendations. Wal-Mart Stores is a Motley Fool Global Gains selection. The Fool owns shares of Wal-Mart Stores. 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.

Longtime Fool contributor Rick Munarriz has been a subscriber and shareholder in Netflix since 2002. He's owned Disney even longer. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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

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 February 17, 2011, at 3:27 PM, Valuestocksonly wrote:

    Rick missed out again. You are now being referred to as RICK FOR CLICKS on the SIRI board.

  • Report this Comment On February 17, 2011, at 4:11 PM, darkmobbrow wrote:

    Article makes very good points. Coinstar does seem to rise and fall with a great deal of momentum these days - but a Netflix killer? I don't think so. Go to redbox and see their lineup of "new" movies. A few quality (but dated) films and a bunch of 'B' titles. Granted Netflix can't rise forever, but Coinstar won't be the reason IMHO.

    Disclosure - i currently hold some NFLX shares.

  • Report this Comment On February 17, 2011, at 5:27 PM, moneymoney24 wrote:

    Despite all its problems, I believe that Coinstar will reach the sixty dollar mark within three months. It is currently at discount prices and should eventually work something out. You should buy Coinstar today, wait a little and see what happens. Imagine if they do come out and say they got a deal done, possibly eighty to a hundred dollars per share. More than 60% from currnet position. Lots of upside.

  • Report this Comment On February 18, 2011, at 9:51 AM, carlady1220 wrote:

    I think coinstar has much potential you will see the plan competition is healthy, the stock will go to one hundred a great buy now I think..

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