Redbox Seeks 75 Percent Share of Declining DVD Rentals, CFO Says

Coinstar will begin testing alternative uses for Redbox kiosks later this year to “leverage the brand in entertainment, value, convenience and simplicity,” Chief Financial Officer Scott Di Valerio said last week at the Goldman Sachs Communacopia Conference in New York. In response to an analyst’s question about how Coinstar will maximize the company’s capital investment in installed kiosks in the face of a projected decline in DVD rentals, Di Valerio said, “We're not sitting back on our hands around that business.” About 18 months ago, Coinstar put into place a “small team that’s focused on coming up with new products” that will “extend the brand of Redbox and extend the life of kiosks,” he said.

The product that will roll out later this year “has nothing to do with the DVD business, which is good, but it’s a product that’s going to address a consumer pain point,” Di Valerio said. The company can leverage its “existing footprint” with current Redbox kiosks with some software modifications, he said. This summer Coinstar began rolling out Rubi coffee kiosks in supermarkets, drug stores and mass market stores as part of an effort to differentiate its offerings.

Redbox saw demand decline 5-8 percent since it instituted a 20-cent rental increase last October, Di Valerio said. He attributed some of the decline to the price increase, which led to customers bringing discs back earlier than they might have due to the price increase “or renting one disc versus two,” he said.

Di Valerio predicted a “dip” in overall DVD rental revenue to $5.5 billion this year from over $6 billion in 2011, due to the closing of some brick-and-mortar DVD rental stores. Some reports indicate the rental business will start “creeping back up” to roughly $6 billion “over the next couple of years and stay relatively constant,” as customers gradually gravitate toward kiosks, he said. Other reports have DVD rentals declining to $4.5-$4.8 billion over the same period, he said. In either case, the Redbox plan is to grow its overall market share of physical disc rentals. “Whether it’s a $6 billion or $4.8 billion business, there’s no reason why we shouldn’t have 66-75 percent of the rental market,” he said.

For studios, physical discs remain a “key part of their business still,” Di Valerio said, saying 30-40 percent of studio revenue comes “from the physical space,” a “pretty big number to transition from.” While streaming and digital are “the wave of the future -- and there are neat things going on in that space -- there’s still a large set of the population that likes the physical and will continue to like the physical and don’t necessarily want to be streaming onto their TV or even have their TV connected,” he said. In addition to having a connected TV or Blu-ray player, consumers need to have broadband, and “they need to have to do the third thing, which most people aren’t doing, which is to connect the device,” he said. “It’s scary and it’s not as easy or seamless as it might be,” he said. All those factors contribute to the likelihood that “physical will be around for a long time,” he said. At the same time, he said Redbox needs to work with studios “on the transition and take ownership and control around that,” he said.

On Redbox’s joint venture with Verizon that will roll out this year, Di Valerio said the subscription program will include “a certain number of new release kiosk nights” and then “unlimited streaming.” The combination of the two will “accelerate some of the DVD rental market,” he said. The joint venture will focus primarily “on movies that matter,” he said, with new release content placed at kiosks for a limited number of nights.

Redbox customers were asking for a hybrid model combining physical new release DVDs and streaming, Di Valerio said. “We'd been hearing from consumers for quite some time that they love Redbox and getting new release content at Redbox kiosks, but they wanted access to a deeper library” without clogging kiosks with older titles, he said. Adding the streaming model through its Verizon partner gives Redbox business it had been losing to Netflix, Di Valerio said. Before Netflix split its business into separate mail and streaming services, roughly 20 percent of Redbox customers used “Netflix for streaming and us for new content,” he said. The hybrid venture with Verizon gives Redbox “an opportunity to fill a niche that isn’t being filled today,” he said. Unlike Netflix, which offers TV shows, the Redbox/Verizon venture “will be focused around movies versus other things,” he said.

Regarding whether workaround alternatives to distribution deals with Disney and Warner have taken a toll on growth, Di Valerio countered, “We have good access to content,” citing day-and-date distribution deals with Paramount, Sony, Lionsgate and Anchor Bay. The company also has a distribution contract with Universal and Fox on a 28-day delay basis. The stalemate with Warner continues, he said, with Warner wanting a delay of 56 days and Redbox looking for 28 days, he said.

In Q3, distribution hasn’t been an issue, he said, but content was because there were 23 percent fewer titles available due to the Olympics. “There were weeks where we didn’t have new release content coming in,” he said, including a 4-5 week period in July and August. Olympics viewership was “much higher than what was projected,” he said. Rentals in the beginning of September have been hampered by back-to-school and the start of the football season, he said.