Redbox Sees Renewed Life for Physical Discs in Warner Deal
After announcing a multi-year deal with Warner Home Video to offer Warner video titles through its Redbox kiosks 28 days after release, Coinstar on its Q3 2012 earnings call last week proclaimed the physical disc alive and kicking. Redbox and Warner had parted ways in January after Warner said it would require Redbox to adopt a 56-day rental window to renew the company’s distribution agreement, leaving Redbox to patch together a workaround solution to secure Warner titles for its rental kiosks.
Quoting figures from the Entertainment Merchants Association, Coinstar CEO Paul Davis touted the $18 billion home entertainment market where “physical media is dominant, with $4 of every $5 spent on physical content.” Davis reiterated Coinstar’s position that it believes in the long tail of the physical disc market, but the support for the shelf-life of physical discs was noticeably more optimistic on this latest call than in recent webcasts.
Davis said at the Canaccord Genuity Annual Growth Conference in August that Coinstar foresees the $6 billion annual physical entertainment rental business declining by 5 percent annually, but he revised that forecast somewhat last week. Davis sees a “strong future for physical rental revenue” that will experience a “temporary trough in 2012 and then a rebound with expected growth and revenue of $6 billion by 2016,” he said. Redbox’s 40,000-plus kiosks puts the company in “a great position” to meet consumer demand and “support our studio partners” whose physical disc business “is still a significant source of revenue,” Davis said.
On the digital front, Coinstar executives again provided few details about the Redbox Instant by Verizon joint venture that’s due to launch this quarter. Trials have moved from alpha to internal beta testing, Davis said, but he wasn’t clear on the breadth of the rollout that has been promised before the end of the year. “We plan to expand that beta to the public,” he said, but he wouldn’t specify the week when that would occur, saying only, “we're committed that it will be out before the end of the year.” The joint venture is “gaining great insights that will lead to a strong product offering,” Davis said, saying the “smart and efficient” acquisition strategy to buy content on a per-subscriber basis avoids a large capital outlay for content.
Content deals are negotiated separately with studios for the physical and digital distribution deals, Coinstar executives said, but the deal announced with Warner includes streaming through Redbox Instant by Verizon. The agreement will make Warner titles available in video-on-demand and electronic sellthrough formats, allows Redbox Instant by Verizon to support and distribute Warner UltraViolet-enabled movies and covers a multi-year subscription video-on-demand agreement supporting feature-length content, the companies said. As part of that agreement, Redbox also plans to join the Digital Entertainment Content Ecosystem (DECE) and to promote its UltraViolet digital locker service, Coinstar said.
Coinstar attributed its “challenging results” for Q3 to competition from the Olympics that “negatively impacted” all entertainment channels “with the exception of NBC,” including theaters, TV networks, video-on-demand services and physical disc sellthrough. In addition, the quarter included nine weeks with two or fewer titles in a time period “that historically is one of our highest rental periods.” A drop in rental frequency for the quarter was driven by “the low level of content over an extended period of time,” Davis said.
Although Coinstar has begun to see “the beginnings of a return” of rental frequency in Q4, executives referred to a “U-shaped” return curve versus a “V-shaped” pattern due to a lull in content availability in the second half of Q3. They expect content to build in November and continue through December and are predicting a “lift in revenue in Q4,” Davis said.
Coinstar Q3 revenue grew 15.5 percent to $537.6 million over Q3 2011, the company said. Redbox revenue grew 17.9 percent to $459.5 million, attributable to the 20-cent price increase implemented at the end of October 2011, same-store sales growth and new kiosk installations. The outlook for 2012 revenue is $2.19 billion-$2.24 billion, the company said, with Q4 revenue coming in between $552 million and $602 million. The company is seeing 11 percent growth since the introduction of its price increase, it said.