Article

Despite challenges, Coinstar CEO sees rosy future for redbox

After the surprise departure of redbox's president, parent company Coinstar reassures investors.

August 8, 2011

by Suzanne Cluckey

Contributing Writer

In a second quarter earnings call on July 28, Coinstar faced mounting questions about future of its DVD-rental kiosks, with doubts now compounded by the pending departure of redbox President Mitch Lowe. Lowe shepherded the DVD-rental concept from a tiny venture with a handful units into a market dominator with 27,800 U.S. locations. In 2009, redbox was wholly acquired by the self-service coin-counting kiosk concern Coinstar Inc.

Despite doubling redbox profits over the first quarter of 2011 and exceeding dividend expectations, the company failed to meet Wall Street earnings estimates and was punished with a 10 percent after-hours drop in stock value after the company pre-announced its earning expectations on July 21. By August 1, the decline had deepened to 15 percent, though this was almost certainly driven in part by an overall drop in the market during the U.S. debt ceiling crisis.

Coinstar CEO Paul Davis defended the company's current position and prospects during the earnings call, pointing out that market share for the rental kiosks had actually increased by 9.4 since the first quarter, while share for online/by-mail rental providers (namely, Netflix) had dropped slightly in that period.

"The brand's well positioned," Davis said. "It's a pay-as-you-go model; it's easy to understand; consumers get the value proposition of simplicity and convenience."

Davis also said that following the July 12 Netflix price restructuring announcement, the Redbox marketing team "went into overdrive to roll out the welcome mat" for Netflix customers who were unhappy about the 60 percent hike in fees.

"On the social media front, we have a team that's literally on 16 hours a day, seven days a week, that's interacting on a real-time basis with Facebook and Twitter and through redbox.com," Davis said. "And we've got a lot of marketing that we're doing out there to take advantage of the opportunity ... [When] the price increase goes into effect we'll know a lot more. Right now we're just heads-down doing everything we can to try to earn their business."

Davis seized every opportunity to reassure shareholders that the departure of Lowe would not disrupt the business. Davis said the search for Lowe's replacement could take from three to six months, but he expected that the redbox name would draw top-tier prospects. He also repeatedly extolled the team that Lowe had assembled to run redbox and assured shareholders that "we won't miss a beat" through the transition to a new president.

Still, analysts and investors have expressed concern about long-term growth opportunities for kiosk-based rentals amid the increased popularity of digital content streaming. A study commissioned by redbox indicated that the demand for DVD-rental kiosks would remain strong for the next decade. And, as has been the case so far with e-readers, there will still be a large portion of the consumer market that prefers physical media to digital downloads.

But for redbox, the stakes are high. Thirty percent of the company's current customers are also Netflix users, and given the online rental service's stated commitment to a digital future, redbox can be sure that Netflix will be aggressively encouraging consumers to migrate to its digital download service. In response, redbox is currently developing its own streaming download option. Davis continued to promise that the service will be brought to market by the end of the year, but remained tight-lipped about any details of its strategy.

As the digital/physical media tug-of-war plays out, Coinstar is continuing to develop new kiosk initiatives, including a coffee kiosk partnership with Starbucks launched in 2007. Hardly the coffee machines from automats in decades past, the new machines dispense Starbucks' Seattle's Best brand from a sleek self-service kiosk designed to suit a wide range of coffee-drinkers' preferences.

"We like the results of coffee," Davis said. "We're in the process of expanding to make it a big, broader test, and then we'll make the call on what to do next. But thus far we think it's a terrific business, and we like what we're seeing."