Redbox on Target to Convert 2,500-2,900 Blockbuster Express Kiosks to Redbox Models This Year

Following its announcement Monday that it had put in place a management team for the Redbox Instant by Verizon brand that’s set to launch this fall, parent company Coinstar said on the company’s Q2 earnings call late Thursday that Redbox’s market share for video disc rentals grew 8 percentage points in Q2 to 42.5 percent. Redbox now leads its “online-by-mail competitor,” Netflix, by more than 15 percentage points, said CEO Paul Davis. Netflix’s disc sales, meanwhile, have been dropping as the company has put more emphasis on streaming sales. On its April earnings call, Netflix said its number of DVD subscriptions had dropped by 1.08 million to 9.96 million, and CEO Reed Hastings said Netflix expected the number of DVD subscribers to decline “steadily every quarter forever” (CED April 25 p4).

Coinstar Chief Financial Officer Scott Di Valerio said Redbox Q2 growth was “particularly strong” given challenges of the movie release schedule in Q2 and warned that the Q3 release schedule will have 23 percent fewer titles than Q3 2011 but will be buoyed by The Hunger Games and The Lorax.

Redbox plans to swap roughly 2,500-2,900 NCR-operated Blockbuster Express slot kiosks for Redbox kiosks this year, following the closing of the $100 million deal with NCR last month. Some 500 swaps have been completed since July 9, Di Valerio said. Roughly 1,000 Blockbuster kiosks won’t be replaced by Redbox kiosks, and Di Valerio said the Blockbuster Express kiosks will be “accretive” in 2013. Redbox is running 13 pilot programs to test markets where Blockbuster Express kiosks are located, but Di Valerio wouldn’t say how many of the 6,200 operational NCR kiosks will be converted to Redbox locations.

Redbox reported revenue growth for Q2 of 26 percent to $458 million on nearly 180 million rentals from 38,500 kiosks in 31,100 locations, Davis said. Net income was $1.11 per share versus $0.83 per share a year ago, the company said. Davis credited growth to new kiosk installations, growth in same store sales and the 20-cent rental price increase Redbox implemented last October. Redbox has expanded its footprint to include Publix and Safeway stores “filling out markets where we didn’t have presence before,” and Redbox reported 38 million unique credit cards used in the quarter, up 13 percent from Q2 2011.

Information was sparse on the earnings call about the upcoming Redbox Instant by Verizon service. Davis referred to the recent appointment of Shawn Strickland, formerly a regional president at Verizon Communications, as CEO of the joint venture, and said Gregg Kaplan, Coinstar chief operating officer, and Di Valerio will serve on the board. Regarding capital expenditures associated with the venture, Davis said more detail will be available closer to the “broad national launch” and noted the service is currently in an internal alpha test. A team is working on the technology and procuring content so that at market launch, “we'll be in full stride,” he said. The service will be “compelling” and provide “content that counts,” he said, adding that the combination of a subscription model with availability of “new release content at the kiosks … great content,” will be “very interesting to consumers."

Benchmark Capital reiterated a buy rating on Coinstar Friday, maintaining a price target of $85, and boosted its fiscal year 2012 earnings-per-share estimate to $4.80 from $4.78, including a negative $0.40-0.50 hit from the Blockbuster Express kiosk acquisition. But Coinstar shares closed 13.6 percent lower Friday at $51.16.