Coinstar Sees Wal-Mart, Amazon Seen as Potential Redbox Partners

Wal-Mart’s Vudu and Amazon are likely potential partners for Coinstar’s Redbox as the movie rental kiosk operator readies a digital video download/streaming service for 2011, analysts said. Coinstar executives declined to identify possible partners during a conference call with analysts late last week. But Coinstar is conducting a “deliberate and rigorous” review of companies that could give it content and technology, CEO Paul Davis said. Coinstar chose to partner after deciding against launching its own service and based the belief that its Redbox brand and list of 21 million e-mail addresses would be attractive to other companies, Davis said. Coinstar began laying the groundwork for forging a download/streaming service alliance earlier this year (CED May 13 p3).

The company is in “detailed discussions” with several “highly interested parties,” said Davis, who declined comment on timing for reaching an agreement. Redbox and its partner will likely introduce a subscription service by mid-2011 and could build a base of one million subscribers to a hybrid streaming/physical DVD service, Wedbush analyst Michael Pachter said in a note to clients. Such a service could produce revenue of $18 million for Coinstar in the first year, provided it gets 33 percent of the expected $8.99 price for downloads, Pachter said.

Coinstar won’t make a “significant investment” in digital content since it will rely heavily on its partner for technology. The goal is to use the Redbox brand for the service, but that hasn’t been finalized, Davis said. Coinstar’s plans for digital downloads are “a prudent strategy” given that the DVD rental business will remain robust for “at least another 10 years,” Pachter said.

The two most likely partners for Redbox are Wal-Mart and Amazon, with Netflix, Apple, Sonic Solutions and NBC Universal’s Hulu viewed as long shots, analysts said. The most likely candidate would be Amazon since it meets many of the criteria set by Coinstar, including a high-profile brand, technology and deep library of content, analysts said. Amazon is “hard at work” on a streaming strategy and Redbox’s large customer base would allow it to compete effectively with Netflix, Pachter said. While Vudu has a strong brand and technology, its content roster isn’t as deep as Amazon’s and it isn’t clear that Wal-Mart has a “keen interest” in competing with Netflix, Pachter said.

Coinstar’s decision to enter the download market is due in part to 90 percent of its customers subscribing to a broadband service, Davis said. Redbox also is adding 1.8 million e-mail addresses per quarter and, with more than 28,000 kiosks -- drug store chain CVS signed on recently -- the service delivers 250 million impressions per week, Davis said. “We see great value in being able to play whatever you download on multiple screens,” Davis said. Because the Redbox brand represents “simplicity and value we have to have something” that meets those attributes, he said.

Coinstar also expanded Blu-ray titles across all locations and expects them to be 5 to 10 percent of each kiosk’s title assortment by year-end, Davis said. The Blu-ray titles carry a $2 daily rental fee, double what’s charged for standard DVDs. Animation and action titles have been the most popular Blu-ray fare among Redbox customers, Davis said. Redbox kiosks typically have space for about 800 DVDs. Redbox originally targeted having Blu-ray account for 10 to 15 percent of a kiosk’s slots (CED May 13 p4). Blu-ray movies typically carry at 25 to 30 percent higher dealer cost than standard DVDs.

The number of Redbox kiosks renting videogames also is increasing. Coinstar recently expanded a 250-kiosk test in Reno, Nev., and Wilmington, N.C., nationally to 4,500 kiosks. In the original tests, kiosks typically carried 200 videogames with a $2 daily rental fee. Videogames typically stayed out longer on rent than Blu-ray and DVD titles. Redbox’s average transaction is $2.13, analysts said.

Meanwhile, Coinstar’s Q3 net income declined to $19.5 million from $41.3 million despite the $41 million sale of its money transfer business to Sigue Corp. Total revenue rose to $380.1 million from $267.7 million as Coinstar’s DVD rentals jumped 54 percent from a year earlier to $305.5 million. The DVD segment’s operating profit grew to $53.7 million. Redbox rented 143 million units in Q3.