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Coinstar Shouldn't Follow in Netflix's Footsteps

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Newsflash for anyone in the DVD-rental business: Customers don't like it when you jack up prices. Just ask Netflix (Nasdaq: NFLX  ) .

With as much negative press Netflix has gotten in recent months over the silly Qwikster episode and 60% price increases, Coinstar's (Nasdaq: CSTR  ) announcement yesterday that it would similarly be ratcheting up prices overshadowed the better-than-expected quarterly earnings results. With as much as Coinstar has aspired to be like Netflix, maybe the price increase is just another way to follow in its footsteps.

The increase isn't as large, but it's enough to rattle investors, who sent the shares down in extended trading after the announcement. DVDs from the company's recognizable Red Box kiosks will see the daily rental rate jump from $1 per day to $1.20 per day, starting Monday. The math whizzes in the room will tell you that equates to a 20% increase.

The company attributed the increase to rising operating expenses like debit-card interchange fees. Interestingly, the prices for Blu-ray and video game rentals remains unchanged at $1.50 and $2 per day, respectively. What's next? Will DISH Network (Nasdaq: DISH  ) bump up the prices at the remaining brick-and-mortar Blockbuster locations?

In separate news, Bloomberg reported that movie studios are considering extending the delay before DVDs are available for rental. The current delay is 28 days, and movie executives allegedly want to make it a 60-day wait.

Coinstar's third-quarter revenue jumped 22% to $465.6 million, with the increase driven almost entirely by strength in the Redbox segment, as the lackluster namesake Coinstar division was practically flat year-over-year. Earnings per share came in at $1.18, decimating the consensus estimate of $0.88. Fourth-quarter revenue is expected to be in the range of $485 million to $510 million, also topping the expected $482.3 million.

Based on the initial reaction from Coinstar shareholders, there's skepticism after factoring in how Netflix customers responded to those price increases: 800,000 of them called it quits.

This is absolutely the worst possible climate for Coinstar to try a rate change like this. The company is just giving already-peeved DVD-rental customers another reason to walk away, and the Redbox segment is the best thing the company has going for it. It would have been better off quietly eating those debit-card fees and absorbing disgruntled ex-Netflix subscribers.

There's a time and a place for price increases, and this is neither the time nor the place.

  • Add Coinstar to your Watchlist to see if it starts losing customers.

Fool contributor Evan Niu holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Netflix and Coinstar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 28, 2011, at 6:27 PM, cfrdog wrote:

    I do kind of agree with you, perhaps wait a few more months - start it in 2012 and give people time to adjust. Still at $1.20 per rental its very cheap. Red box also offers new releases for the same price. Perhaps they should try different price levels for newer movies. Block Buster does this but of course I don't go to their machines very often b/c of this.... but the point is Block Buster already charges top dollar for newer movies at their machines. Their machines are also not as user friendly. Netflix no longer holds value so i think more people will go to Redbox where there is still value and NEW movies which Netflix doesnt offer. The Debit card fees are real; Netlflix is plain greedy. I can forgive a 20 cent increase.... putting this in terms of 20% increase vs. 60% increase is meaningless. Its the total $ increaes that counts.... better value at Redbox IMHO.

  • Report this Comment On October 28, 2011, at 6:46 PM, ribbiedog wrote:

    The other fact that few people are pointing out is that there are very few places left to get a DVD rental. I do think DVD remains a better experience at this point for most people than streaming....with Netflix troubles and Blockbuster's troubles and closures, where do folks rent a DVD? People may not love a price increase but when you are the only real rental option left for most people, the public will take a .20 hike.

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