350 Million New Reasons to Avoid Netflix?

Coinstar (NASDAQ: OUTR  ) made waves last week after announcing it would take on $350 million in new debt. Many investors jumped to a quick conclusion: Coinstar is padding its coffers in order to mount a bigger challenge against Netflix (NASDAQ: NFLX  ) .

Sure, the automated retailer's new streaming venture with Verizon (NYSE: VZ  ) , called Redbox Instant, is just getting off the ground. It barely registers on Netflix's radar at the moment. But that could be set to change.

And it's already feeling crowded in this market. Amazon (NASDAQ: AMZN  ) is busy snapping up content for its Prime streaming service, to the tune of more than $1 billion a year. We know that Netflix spends upwards of $2 billion for content each year. Now we can add one more heavy bidder to the group that's sending prices skyward, as the worry goes.

But I think Netflix doesn't need to fret that Coinstar's new wad of cash will usher in a more competitive marketplace. Here are three reasons why.

Stock buybacks
First, Coinstar may just be looking to buy more of its own shares. The company didn't get specific in its debt announcement, saying only that it plans to use the cash for "general corporate purposes" like repaying debt or making other investments.

Netflix said about the same thing when it priced $500 million in new debt earlier this year. The streamer told investors that it would use about $200 million to pay off more expensive debt, with the remainder going toward general corporate purposes . At a $2.1 billion annual run rate in content costs, we have a good idea what those purposes are.

But as Netflix has been ramping up content spending, Coinstar has been busy buying itself. Here's a look at how much the company spent on share repurchases over the past three years:

Year

Total Purchase Price 

2010

$49 million

2011

$63 million

2012

$140 million

Source: Coinstar financial filing.

That strong pace of spending is continuing into 2013. Coinstar spent $45 million more on buybacks just in the first five weeks of this year. That's an expensive habit, and one that could easily be a major reason for taking on some new debt at low rates.

New retail expansion 
But Coinstar has plenty of business investments to direct that cash toward, too. After all, the company isn't just about Redbox entertainment kiosks. Its popular DVD stations account for the lion's share of revenue. Yet it has loads of non-Redbox-related expansion in the works right now.

We're talking everything from vending food and beverages to electronics. Altogether, Coinstar sees a long runway toward the $16 billion total market potential for automated retailing. Heading up the list of Coinstar's expansion markets is its Rubi coffee kiosk, which will begin rolling out in Q2. Management is excited about the growth potential there, and called the coffee vending machines a "major area of focus" in 2013. Coinstar sees room for as many as 70,000 coffee kiosks, as compared to the 44,000 Redbox machines it maintains now.

Redbox Instant starts slowly
And finally, Coinstar's Redbox Instant service doesn't soak up spending the way Netflix's and Amazon's streaming plans do. In contrast to those two services, Coinstar's joint venture buys content on a per-subscriber basis, which makes for dramatically different economics.

That structure will help the company keep streaming costs low while it works to gain a good base of customers. But it also takes large original content gambles off the table for now. So the type of big, flashy content buys that Netflix and Amazon have been announcing aren't going to be a regular part of Coinstar's service. Coinstar could become a major bidder for streaming video content but not anytime soon.

Looking ahead
That leaves Netflix as the real pure play for the online streaming market. Amazon is clearly committed to competing on a large scale here. Still, its media revenue is tiny compared to the $61 billion in sales it booked last year.

Coinstar is slowly wading into the market now, but has to fund other projects that are much closer to the retailer's core strengths. Netflix, on the other hand, has hitched its wagon directly on streaming. That brings a lot of risk, but it also sets up a level of corporate focus that will be handy as it competes in this growing market.

Stream on

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