Will Redbox get left on the cutting-room floor? This Coinstar
Warner Home Video, 20th Century Fox, and Universal think Redbox's $1-a-night rental fee is undermining the value of their cinematic masterpieces. If you can rent a movie for next to nothing, then maybe you won't buy them -- or worse, you may not even go to the theater. The three studios want to delay shipping new DVD releases to the kiosks for several weeks after they've hit shelves at retailers and other rental outfits like Netflix
Redbox is waging a court battle to force the studios to treat its kiosks equally. In the meantime, it's had to implement a workaround plan to circumvent the bottleneck: purchasing its DVDs directly from retailers.
Maybe it's just a drama queen
According to an SEC filing, Redbox purchases newly released movies at Wal-Mart
Not every studio wants to kill off Redbox. Lions Gate Entertainment
Indeed, Coinstar has already abandoned its coin-operated skill-crane business to focus on kiosk rentals and coin counting. Once the staple of seaside boardwalks and the "fourth wall" of supermarkets, toy-dispensing crane mechanisms just don't hold the same allure -- or profit potential -- as movie rentals. Redbox's operating income jumped 35% year over year, and it's already surpassed the revenue recognized in 2008 from coin counting and entertainment combined.
The casting couch
Like recording industry executives, movie studio honchos have ignored their own role in contributing to the slide in revenue. As Redbox points out, rather than taking money from the studios, it's actually adding to their income stream.
Still, Redbox needs to bring the curtain down on the lawsuits as soon as possible. Legal fees are growing (SG&A expenses, which include litigation costs, are up 47% for the first nine months of the fiscal year), and paying retail for inventory will sharply cut into its margins. Redbox also needs to be careful that it doesn't ruin its relationship with Wal-Mart, which accounts for almost 20% of its revenue.
With shares down by more than a third from their summer highs, it looks like investor reviews of Coinstar's studio scuffle have been worse than those received by Heaven's Gate. However, if Coinstar prevails in court -- as I think it should -- Redbox could end up as one of the leading actors in movie rentals, and a profitable investment, too.
Best Buy and Netflix are Motley Fool Stock Advisor picks. Best Buy and Wal-Mart Stores are Motley Fool Inside Value picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services today, free for 30 days.
Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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