Redbox Halts Kiosk Expansion to Drive Incremental Rentals Per Location

Coinstar is in the process of “collapsing” customer credit and debit card accounts and analyzing more than 10 years of usage data to learn Redbox customers’ full rental histories, with a goal of customizing marketing and promotion efforts to individual customers, Chief Financial Officer Galen Smith said at an investor conference this week.

In the past, the company has been “giving away free money” by offering discount promotions “pretty broadly” on any given day, Smith said. The company is now working to ensure that the customers who “need a promotion get it, and those that don’t won’t.” The strategy will help Coinstar generate more revenue “and be more profitable in the long term,” Smith said. Coinstar has been building the system during the first two quarters and it will come on line during Q3 and Q4, he said. Currently, Coinstar blankets its customer list with 25 million emails and five million SMS messages twice a week to tell members which movies are in kiosks, he said.

Coinstar “continues to be bullish” on Redbox disc rentals, Smith said. The company is still seeing positive trends and, while disc-by-mail and brick-and-mortar rentals had been in decline, “you're starting to see that stabilize now,” he said. “We're that last entity standing that can provide new releases at a great value,” he said. Smith expects consumer interest in rentals for “a long time” and at a current 48 percent market share, Redbox has “a lot of market share for us to continue to take,” he said. While industry watchers continue to predict the demise of the physical disc business, Smith said there’s been a slowing of the decline in discs in the past couple of quarters. Some 40 million unique debit and credit cards were used by Redbox customers in Q1, up 6 percent year over year, he said.

While Redbox sees growth opportunity, it won’t expand its base of roughly 43,000 kiosks, Smith said. “We have the footprint we need to touch most of the people in America,” he said. “Now it’s about how to drive incremental rents to those kiosks,” he said. The average rental at Redbox kiosks is $2.56, Smith said, saying that’s about half of a typical VOD rental. Redbox customers have less disposable income and care about value, he said. He said movies rented at kiosks are typically nine to 12 months newer than what’s available with streaming services.

Summer blockbusters should play to Coinstar’s favor in the back half of the year after a slow 2012 impacted by the Summer Olympics, Smith said. Coinstar expects 22 major titles from summer to hit kiosks in the second half compared with 15 during the same frame in 2012. A few could roll over to Q1 2014, he said.

On the joint streaming venture with Verizon, Smith said it’s still in beta as the venture works to expand the number of devices offering the service. He noted Sony’s recent announcement that Redbox Instant by Verizon will be on the PS3, PS4 and Vita and soon on Roku boxes as well. The subscriber base has been growing incrementally and Smith predicted “significant subscriber growth” once there are more devices that offer the service.

The video window structure has “changed dramatically” over the past couple of years, Smith said. Movies from Sony, Paramount and Lionsgate are available the same day they're available for sale or VOD, he said. Coinstar has negotiated lower prices and fewer titles with Universal, Fox and Warner Bros. in exchange for a 28-day delay window, he said. Coinstar is the “second or third largest customer” for studios on the home entertainment side “so we matter,” Smith said. “A lot of our consumers depend on us to tell them when a new movie is out,” he said.

In an SEC filing this week, Coinstar said it had agreed to sell certain Blockbuster Express kiosks, along with software and patents, acquired from NCR in June 2012 to third parties. The transactions are expected to close in Q2 and Q3, delivering profit of $17.9 million that will be recognized over the next few years, Smith said. A resulting tax benefit is expected to generate a one-time earnings per share benefit of $0.62 to $0.69 for Coinstar in Q3, according to the filing. Coinstar removed its last NCR-built/Blockbuster Express-branded kiosk in April, he said. The ones Coinstar replaced are “doing well” and will be accretive this quarter, Smith said.

In its new venture business, Coinstar is testing a “sampler” concept in drugstore and other locations where a consumer buys an inexpensive beauty product sample at “low to no product cost for us” and the consumer gets a coupon for a full-size version, Smith said. That allows a higher margin product to be sold in retail locations that typically don’t sell consumer packaged goods, he said. Another concept that has moved from the new venture side to the Coinstar business is a gift card exchange business for consumers to swap gift cards they don’t want for cash instead. A $100 gift card may exchange for $80 in cash under the program, he said. Coinstar has a partnership with Safeway’s Blackhawk Network for payment processing, he said.