A lot of people are asking that question today after the company behind the DVD rental kiosks reported disappointing results for Q2. Shares of Outerwall (formerly Coinstar) closed down 13.2% after it said that Redbox revenues increased just 4% compared with the same period last year — even though the total number of kiosks was up 13%. Redbox came up short as bargain-hunters took advantage of promotions and only kept discs out for one night, resulting in a 9.9% decline in average revenue per kiosk. (DVDs go for $1.20 a night with Blu-ray discs $1.50.) The company also cut its forecast for the number of kiosks it will add this year while the experiment to sell sports and entertainment tickets at the kiosks “did not meet expectations”, CEO J. Scott Di Valerio told analysts. These developments will “accentuate concerns that the DVD rental market is quickly approaching saturation, and we believe that this is probably true”, says Wedbush Securities’ Michael Pachter. He also has soured on the Redbox Instant By Verizon streaming joint venture, saying the rollout “is moving at a very slow pace” and “revenues and profitability remain elusive.”

But optimists say Redbox’s prospects are brighter than they might seem now. It accounts for 50.6% of physical home video rentals, and that should grow as Blockbuster closes stores and Netflix‘s DVD business atrophies. In Q3, studios will release DVDs for eight films that generated at least $100M at domestic box offices, up from three in the period last year, when studios didn’t want to compete with the London Olympics. Di Valerio says that his company’s getting better at figuring out how to jolt sales by sending discount offers via email and text messages to key customers. Blu-ray rentals are up, and Redbox’s relationships with studios “have never been better, with Universal extending in Q1 and Fox agreement continuing on till April 2015″. Due to these and other trends, B. Riley’s Eric Wold says that his optimism remains “unabated.”

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