It's a small victory in a wider war. Coinstar's (Nasdaq: CSTR ) popular Redbox DVD lending service has agreed with entertainment megalith Sony (NYSE: SNE ) to extend the two companies' same-day rental arrangement. This allows Redbox to fill its kiosks with Sony movies at the same time those DVDs hit the sales market. It's undoubtedly a victory, but this is a hard fight across numerous fronts.
A market that's hard to impress
The deal was good news for Coinstar. Same-day agreements are powerful inducements bringing customer to kiosk for movies that are fresh to DVD. Although this isn't a new arrangement for Coinstar and Sony, it's a win because the latter had had the option to back out of it this coming September. That it didn't indicates either confidence in Redbox or desperation for the struggling conglomerate. Either way, Coinstar benefits.
It needs such wins because many investors are skeptical about its future. Last week, the company reported 2Q results that would be the envy of most publicly traded firms. Its net profit surged by 38% over 2Q 2011's figure, while revenues advanced 26% in the same time frame.
Better results often mean raised guidance, and that was no different for Coinstar -- the company now expects full-year revenues of $2.21 billion-$2.31 billion and a bottom line of $4.60-$4.90 per share. Previously it anticipated taking in $2.16 billion-$2.28 billion and netting $4.40-$4.80 a share. This despite the $0.40-$0.50 per-share hit the company will take for its $100 million acquisition of the Blockbuster Express kiosks formerly owned by NCR.
But the market wasn't impressed by any of this. The company's shares promptly plunged, trading down the next day by a little over $8, or around 15% lower. The pessimism didn't stop there; in the following days, the stock dipped below $50, where it remains.
Outside the stream
The big reason for the skepticism and the decline in the face of such good news comes in a little red envelope. In other words, the company's bogeyman is Netflix (Nasdaq: NFLX ) , still far and away the top name in the home entertainment rental market.
Netflix isn't the enemy per se, rather it's streaming video as a category that's the monster hovering over the company, threatening it with ultimate defeat. As everybody and their grandmother knows by now, with the proliferation of ever-wider delivery pipes and media (cable, satellite, Internet), DVD as a medium is probably doomed.
Streaming is the present and future of home entertainment, so a company like Coinstar that's so heavily invested in DVDs needs to post spectacular results in order to move its stock. It's no longer enough for it to have a better-than-average quarter that adds a few cents to full-year EPS guidance.
There's always coffee
To its credit, Coinstar is making concentrated attempts to diversify away from hard-copy entertainment renting. Proficient at anything that involves machine, money, and merchandise, it's teaming with Starbucks (Nasdaq: SBUX ) to build a network of coffee dispensers strategically located in high-volume retail stores. On an overall basis the venture will start out relatively small, with around 500 machines selling various offerings from Starbucks' Seattle's Best coffee line. Unlike movies and TV, it's doubtful that someone will soon find out a more efficient way of delivering hot beverages than pouring them fresh into a cup.
And the company isn't entirely blind to the potential of streaming. It's working with mobile and TV provider Verizon (NYSE: VZ ) to build a video-on-demand service. This will be titled Redbox Instant, and it will stream to subscribers of Verizon's FiOS (a bundle of Internet, phone, and TV service, beamed over the company's fiber optic network). On FiOS, it's sure to be a conveniently tempting option for TV and movie fans.
Winning the victory but...
Coinstar appears to be a well-managed company moving in sensible directions that have a good chance of paying off in the future. But it's hobbled by its deep involvement and investment in a fading technology.
Besides, outside of the Sony deal, it still struggles with supply. The more successful and profitable movie/TV content providers like Disney (NYSE: DIS ) and Time Warner's Warner Bros. refuse to play ball. They insist on a "window" of 28 days (in the case of The Mouse) and 56 days (Warner) after their films are released for sale on DVD before Redbox offers them for rent in its kiosks.
This has been the subject of several lawsuits between the principals, and the issue's never been conclusively resolved. Redbox gets around the restriction by purchasing those companies' DVDs on the open market, however this is probably not the cheapest way to go, and it certainly isn't the best in terms of operational efficiency.
Considering the hurdles it faces in its business, it's admirable that Coinstar is racking up wins like the Sony deal and going into business with firms like Starbucks. It just needs to move further away from those shiny silver discs in order to start impressing the market again.
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