Coinstar Still Optimistic About Redbox Blu-ray, Videogame Rentals

Coinstar remained optimistic about Blu-ray and videogame rentals at its Redbox kiosks, but CEO Paul Davis said in a Thursday earnings call that Blu-ray demand was weaker than expected in Q4 ended Dec. 31. Redbox started renting Blu-ray titles in July. “As we moved into the fourth quarter, we expected both consumer demand and adoption to ramp at a quicker pace as Blu-ray penetration increased, and that did not happen,” said Davis.

"The demand curve for Blu-ray is somewhat different from that of standard definition discs,” said Chief Financial Officer Scott Di Valerio. But as the company continues “to learn more about the types of Blu-ray titles that perform well and the locations that generate the highest levels of Blu-ray demand,” Davis said, “we can better allocate our inventory to meet consumer demand and benefit the top and bottom line.” The company remains “very bullish on Blu-ray,” and is “working to drive consumer demand through consumer marketing such as our Better in Blu campaign,” he said.

The Redbox videogame rental test is continuing at 5,000 kiosks, Davis also said. “The test is progressing nicely” and it rented the 1 millionth videogame in Q4 since starting the test in Q3 2009, he said. Consumers like testing videogames before buying them, due in part to their high price, and like renting games and movies from the same kiosks, he said. “We continue to see this as a potentially significant growth opportunity, and will make a decision on rolling out nationwide in the coming quarters,” he said.

The company is also continuing a “small-scale test” of DVD rentals in the U.K., in conjunction with an unidentified third-party company, Di Valerio said. “As we look at all of our opportunities globally, still the single biggest opportunity is right here in our backyard,” he said: “If it’s successful, as we think it will be, then we will expand it to a broader footprint in the U.K. and then other opportunities."

Redbox customers “rented more than 500 million movies last year alone,” driving market share growth, Davis said. It ended Q4 with a 29.8 percent rental share in the U.S., up 8.7 points from Q4 last year, while brick-and-mortar rivals lost 14.7 points of share, he said. Redbox picked up 1.9 points of share since Q3, he said.

The company ended 2010 with more than 30,000 Redbox kiosks at more than 26,000 locations, Davis said. Its digital strategy, meanwhile, is “a top priority,” he said. “We continue to have detailed discussions with a number of potential partners and are excited about the progress we have made” in Q4, he said. But it was “still premature to talk in too much detail” about the potential partners, he said.

Redbox DVD revenue growth drove a 31 percent increase in sales for Coinstar in Q4 ended Dec. 31 versus the prior year, but Di Valerio said the company “did not finish the year as strongly as we expected” (CED Feb 4 p10). Coinstar revenue grew to $390.8 million. DVD revenue increased 38 percent to $319.6 million. Profit widened to $11.7 million from $3.4 million.

Q4 marked the first holiday quarter for Redbox with delayed arrivals of new movie releases under deals it signed with Hollywood studios in 2010, Davis said. It expected “stronger performance from the new 28-day delayed content” in Q4, he said. Redbox bought new titles based on Q3 rental patterns, and “unfortunately many of” the new titles “did not perform as we had anticipated,” he said. The company took “definitive steps to correct the issues we encountered with our Redbox business” in Q4, and it “will be tracking progress closely,” he said.