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The DVD is fading fast and Redox's latest action may herald its demise sooner than expected. Photo: Flickr via m01229.

First, Outerwall (NASDAQ:OUTR) killed off its digital video enterprise Redbox Instant. Now it may have signaled its DVD rental business is dead, too.

Redbox recently announced it was raising prices starting in December. DVDs will cost 25% more than they do now, or $1.50 per disk, and Blu-ray discs will cost $2, a 33% increase. Starting in January, video game rentals are going up 50% to $3 per day. It's only the second time in more than 12 years that Redbox has raised its DVD prices, and the first time it's raised Blu-ray and video game prices, as the company was quick to remind us.

Investor excitement over the price hike sent Outerwall's stock jumping 11% on the news. In reality, this is an ominous development that ought to scare shareholders.

The DVD industry is dying. That's no surprise. It's been a long time coming and was part of Outerwall's rationale in copying Netflix (NASDAQ:NFLX) by developing its own video-on-demand service, Redbox Instant. Killing off the service in October, less than two years after rolling it out nationally, showed it couldn't effectively compete in the VOD space. The DVD price hike shows kiosk rentals may not be far behind.

Redbox accounts for 80% of Outerwall's revenues and movies make up almost the entire amount. Video games accounted for just 2.1% of all disc rentals this past quarter. But Redbox is seeing fewer people renting videos.

In the third quarter, only 172.2 million units were rented, down 13.7% from the year ago period. It's not only a significant drop by itself, but actually represents an acceleration of the decline.

Redbox

Few box office blockbusters and the continued rise of streaming video signal the coming end of DVD rentals. Data: Outerwall quarterly SEC filings.

We see that with Hollywood, too. Annualized industry revenues for 2014 are down 7% from last year at $10.14 billion, according to the industry website The Numbers. The number of tickets being sold is also falling.
 
After peaking in 2002 at 1.58 billion, ticket sales tumbled to an annualized 1.24 billion this year. That's off 7% from the year-ago figure. Tinseltown is propping itself up solely by raising ticket prices or inflating them for gimmicks like 3-D technology.
 
Tickets

Moviegoers aren't rolling out the red carpet anymore for theaters. No doubt a combination of higher prices and weaker plot lines are conspiring to kill sales. 2014 data annualized. Data: The Numbers.

Certainly, Redbox relies upon Hollywood to regularly produce quality movies to keep customers renting DVDs. The decline in Redbox revenues in the third quarter was attributed by the company to "soft flow-through from a weak release schedule" in the second quarter, which itself was beset by a "considerably weaker release schedule than the year ago period."
 
What we have is Outerwall propping itself up by raising Redbox's rates.
 
When the movie rental outfit announced the price hike, it also kept intact its guidance for the fourth quarter. While that's largely because of the timing of the price hikes -- it will benefit from them only for the last two weeks of the quarter -- it admits rental volumes will be hurt going forward. The price increases are an attempt to keep revenues elevated by offsetting falling rentals.
 
What we're seeing is the end game of the DVD market. Outerwall is not a "cigar stub" investment; it's not a company you're buying to get the last few puffs from it before it goes out. There's still a long time to go before that happens. What it has become is a stock with a finite future. It will need to dramatically reinvent itself if it wants to outlast the last DVD rented.
 

Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.