Originally posted by David Goldman - CNN Money - April 26, 2010
NEW YORK (CNNMoney.com) -- Redbox and Hollywood finally made nice last week, but their arrangement may wind up hurting the movie kiosk company more than it helps it.
Coinstar's (CSTR) Redbox inked a deal last week with Universal Studios and 20th Century Fox that finally puts an end to an almost year-long dispute over the supply and rental of new DVD releases. Under the agreement, the movie studios will supply Redbox with ample DVDs to stock their kiosks. But Redbox will have to wait 28 days after the movies' initial DVD release to get them.
Movies will still be available on DVD for $1 a day, and Redbox will also start offering Blu-ray disks. However, the company will be prevented from reselling the movies after they are removed from the kiosks. Redbox had already reached a similar deal with Warner Bros. in February. Warner Bros. is a subsidiary of Time Warner (TWX, Fortune 500), CNNMoney.com's parent company.
The biggest Hollywood studios had become disgruntled with Redbox's business model. The $1-per-day price undercut Blockbuster (BBI, Fortune 500), Netflix (NFLX) and video on demand services, especially if customers return their movies to Redbox in a timely fashion. With big studios already struggling to maintain DVD revenues, Warner Bros., Universal and Fox eventually stopped supplying Redbox with new releases.
Redbox, in turn, sued the studios on antitrust grounds. In the meantime, the company pledged to continue supplying its kiosks with day-of-release DVDs, even if it meant buying them at retail. In fact, the company hired hundreds of workers to go to Walmarts (WMT, Fortune 500) around the country to buy up new releases in order to fill their kiosks.
Analysts said that something had to give. Buying movies at retail was cutting deep into Redbox's profits and presented a logistical nightmare. At the same time, movie studios could no longer ignore the surging popularity of the red kiosks, which recently topped 20,000 nationwide -- With kiosks in supermarkets, drug stores and McDonald's (MCD, Fortune 500), Redbox has rented out over 500 million DVDs to impulse buyers that have been wooed by the $1 price tag.
Will customers go for it?
The new agreement marks a complete 180 for Redbox. Will people continue to pick up movies from Redbox kiosks after they have already been available for rent or purchase from other retailers for over a month?
Some analysts say yes.
"The price and convenience of Redbox is still attractive to consumers," said Steve Frankel, analyst at Brigantine Advisors. "Netflix also has a 28-day wait, but while 70% of Netflix's demand is for older titles, 100% of Redbox's demand is for new titles. Some of the savvier Redbox customers are going to be disappointed."
Analysts were quick to note that many customers aren't aware of when DVDs are released, and 60% of Redbox's titles will still be available the same day that they are available for purchase or rent at Blockbuster.
Some movie studios, such as Sony's (SNE) home entertainment unit and Lionsgate (LGF), have signed multi-year agreements to supply Redbox with new releases of DVDs. Viacom's (VIAB, Fortune 500) Paramount extended a trial program that ends in June. Paramount has the option to extend the deal through 2014 after the trial expires.
But that still leaves at least 40% of Redbox's titles that are available at the same time as Netflix -- which consumers don't even need to leave their homes to view: In addition to Netflix's strong collection of older movies, it also offers a streaming service that makes up for its lack of day-of-release movies. Many analysts have speculated that Redbox will unveil a streaming service as well, but that may be a long way off.
Jury is out on the stock
Investors may be disappointed that shares of Redbox's parent company hasn't moved much on last week's deal. Shares of Coinstar rose a modest 3% on Friday, and were trading flat on Monday.
Despite the fact that Redbox's revenue and profit both doubled in 2009, Coinstar's stock has been on a 12-month roller coaster, with shares trading between $24 and $39 as the news developed.
Robert Evans, analyst at Craig-Hallum Capital, said he expects the deal to have a single-digit percentage impact on Redbox's revenue but a larger impact on the company's profitability and margins. But analysts say investors may need to wait a bit longer for the stock to find its ultimate direction.
"The stock will trend positive in the near term, since the lack of clarity on the supply of DVDs was a great overhang," said Evans. "But we'll need to see the impact of the 28-day delay in the next couple quarters to tell where the stock is ultimately going to go."
More than two-thirds ($774 million) of Coinstar's 2009 revenue came from Redbox. Coinstar will report its first-quarter financial results Thursday after the bell. Analysts polled by Thomson Reuters expect earnings per share to jump 78% to 12 cents on revenue of $328 million, up 21%.