The DVD Isn't Dead, Folks

In a week that has seen a Japanese consumer electronics giant announce 10,000 layoffs, the country's largest consumer electronics superstore chain boot its CEO, and an analyst slash the revenue-generating potential of the top stand-alone video game retailer, it's easy to get down on the optical disc.

 Whether its movies, music, software, or video games, the media that we are consuming as a pressed disc is being gradually replaced by digital delivery.

The direction is as inevitable as it is unquestionable, but who says that the road to extinction doesn't have a few curves along the way?

Redbox parent Coinstar (Nasdaq: CSTR  ) is one of today's biggest winners after announcing preliminary quarterly results last night.

Just two months ago, the company behind the namesake coin-collecting machines and the more popular Redbox kiosks that crank out daily rentals of DVDs, Blu-ray discs, and video games wasn't expecting much.

It was expecting 17% revenue growth for all of 2012 at the midpoint of its guidance range, which seemed awfully conservative considering that it had instituted a 20% price hike for Redbox DVD rentals a few months earlier. It had also announced both the acquisition of NCR's (NYSE: NCR  ) Blockbuster Express kiosks and a digital rentals partnership with Verizon (NYSE: VZ  ) earlier in the week.

Its outlook for this year's first quarter for core earnings of no more than $0.91 a share and revenue growth of 25% to 31% was better, but Coinstar seemed to be either underselling its potential or bracing investors for a slowdown.

Thankfully for investors, it was the former and not the latter.

Fueled by strong rentals over the past two months, Coinstar now sees first-quarter revenue climbing 34% to at least $567 million. Core earnings from continuing operations will check in within $1.36 a share and $1.40 a share. And don't be alarmed by the "core" nature of the bottom-line projection. Redbox is simply backing out what consists largely of money coming in on the grant of a license for its streaming partnership with Verizon to use some Redbox trademarks. On a reported basis, Coinstar's profitability may be as much as $1.66 a share when it makes it official in two weeks.

Coinstar's strong update doesn't mean that the DVD isn't going to die. It's merely a stay of execution. DISH Network's (Nasdaq: DISH  ) Blockbuster continues to close stores and ramp up the satellite dish angle of its existing locations. Netflix (Nasdaq: NFLX  ) lost more than 2 million DVD-based subscribers during the holiday quarter, and it sees that base shrinking with every passing quarter.

Coinstar's Redbox will be the last bastion of DVD activity. As well-to-do and middle-class movie buffs go digital, there will still be a large segment of the population that need movies on DVD. As the manned rental shops continue to close down, their loss will give Redbox a longer tail in this otherwise diminishing space.

It's easy to question where Redbox will be in five to 10 years, but business should continue to grow for now as it gobbles up market share of a shrinking pie.

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Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On April 13, 2012, at 11:15 AM, ecajoe wrote:

    The DVD is not dead yet? The NCR kiosk that Redbox will now handle has the ability to download digital movies onto say a flash drive. That will be the future of portable content going forward not DVDs. Of course digital content streaming will most definately be the norm. Stores like Blockbuster, GameStop and Barnes & Nobles are in serious trouble. The DVD IS dead the patient just doesn't know it.

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