Redbox‘s revenue grew 38% to $502.9 million compared with the first quarter a year ago, giving parent company Coinstar healthy earnings to report after the closing bell today. Redbox’s kiosk DVD rental service saw growth owing to a year-over-year boost in same-store sales, new kiosk installations, strong performance of new release titles, and a rental price increase (to $1.20 from $1) that was implemented in October. Overall, Coinstar booked revenue of $568.2 million, up 34% from 2011. Operating income was $78.3 million, good for an operating margin of 13.8%, compared with $31.4 million and 7.4% a year ago. Earlier this month, Coinstar raised its 2Q and yearly outlook, saying that Q1 revenues for the first quarter could exceed $569 million vs the maximum of $555 million it projected in February. At the time it cited strong rentals for recent titles including Moneyball, Puss In Boots, 50/50, In Time, Abduction and Mr. Popper’s Penguins.
Coinstar shares are up more than 13% in after-hours trading after the owner of Redbox said that the kiosk rental business continues to thrive after the October price increase for a DVD to $1.20 a night from $1. As a result it says that Q1 revenues could exceed $569M vs the maximum of $555M it projected in February. And earnings per share now are expected to go as high as $1.66, up from the earlier forecast that topped out at 91 cents. For all of 2012, the company now forecasts that revenue could reach $2.28B vs the earlier prediction of $2.25B. EPS now is expected to go as high as $4.80 as opposed to $4.30 in the February forecast. Redbox says that rentals have been especially strong for recent titles including Moneyball, Puss And Boots, 50/50, In Time, Abduction and Mr. Popper’s Penguins. The company also took a subtle swipe at Warner Bros, which stopped selling DVDs to Redbox after January. The kiosk company refused to accept a 56-day delay on new titles — twice as long as the waiting period in the previous deal. Since then, Redbox has bought Warner discs directly from retailers. That was expected to raise Redbox’s costs. But it said today that it “realized lower than expected direct operating costs…due to increased efficiencies in obtaining select content through its workaround process.” Universal didn’t follow Warner’s lead, and signed a two-year deal that only …
Looks like Warner Bros lost an important potential ally in its effort to double the waiting period for Redbox to secure DVDs and Blu-ray discs. Universal Studios Home Entertainment and Redbox said this morning that they’ve agreed to continue their current sales arrangement — which requires Redbox to wait 28 days after Universal’s new releases go on sale elsewhere — through August 2014. As part of the agreement, Redbox’s parent, Coinstar, has guaranteed up to $10M of its revenue sharing commitment to Universal, the company said in an SEC filing. The new agreement “represents a win for consumers, Universal and Redbox,” the kiosk company’s SVP Galen Smith says. It takes some pressure off of his company: It has begun to buy Warner Bros discs from retailers, instead of directly from the studio, after the entertainment company insisted that Redbox wait 56 days to secure new releases. Redbox said it was prepared to go through the same costly and complicated process for Universal’s videos if it made the same demand. But the workaround would have become “far more difficult to manage” for multiple studios, Wedbush Securites analyst Michael Pachter said yesterday in a report. With this morning’s announcement, Coinstar’s stock price is up about 2.5% in pre-market trading. The new deal with Universal “is significantly positive news and removes a cloud over the shares,” B. Riley & Co analyst Eric Wold says. Redbox’s contract with Fox, which also includes a 28-day delay, expires …
Verizon is starting to hold “major discussions with content providers on cross-synergies” for the phone giant’s still mysterious streaming video venture with Redbox — which is due to go live in August — CFO Francis Shammo told investors today at the Deutsche Bank Media & Telecom Conference. Verizon’s hoping that the new offering, seen as a potential rival to Netflix, will give it more leverage when it negotiates programming deals for its FiOS video service which competes with cable and satellite. “We were last to market and, obviously, the content providers made us pay a premium price for that,” Shammo says. But in its new negotiations with studios, Verizon’s seeking “a content play for all of our platforms, not just for one.” He notes that FiOS is now the fifth largest video provider, Verizon Wireless has about 100M subscribers, and Redbox attracts about 30M customers to its 35,000 kiosks. There’s still no word on what the venture with Redbox will offer and how much it will cost. The companies have said that it will be a national service, involve electronic sales and rentals, and include a tie-in with Redbox’s DVD rental kiosks. Verizon’s wireline unit will own 65% of the joint venture. ”Wireless is not involved,” Shammo says.
The kiosk company already buys Warner Bros discs on the open market instead of accepting the studio’s insistence that it wait 56 days for new releases. And Paul Davis, CEO of Redbox parent Coinstar, says he’s “comfortable that we could deal with” a similar situation if Universal or Fox also try to change their current arrangement to hold new releases for 28 days before selling discs directly to Redbox. The kiosk company says it offsets the higher price it pays retailers for Warner Bros’ new DVD and Blu-ray releases by carrying fewer of the studio’s titles. “We’re not buying every single movie” from Warner Bros, he told analysts at the Pacific Crest Emerging Technology Summit. ”We’re pretty selective.” The company expects to “learn a lot more as we go through the quarter” about how many discs to buy to satisfy consumers and still make a profit. Although Redbox is prepared to do the same thing with Universal and Fox, Davis says “I don’t believe that’s where we’ll end up.”
Coinstar shares are up more than 13% in after-hours trading on a big news day for the relatively small parent of Redbox. The twist with the announcement involving Blockbuster Express is that the kiosks you see in supermarkets and drug stores aren’t owned by Dish Network, which last year bought the famous video rental chain. The kiosks are made by NCR, which had licensed the Blockbuster name. But now its chief competitor, Coinstar, says it has agreed to buy the NCR Entertainment business line for up to $100M. Coinstar also says that it will “procure from NCR hardware, software and services” that will provide NCR with $25M over five years. NCR had been looking to get out of the kiosk business, which had also become a thorn in Dish Network’s side. The deal needs to pass muster with anti-trust regulators. If it does, then the companies expect it to close in 3Q. If it doesn’t, then Redbox will have to pay NCR a $10M break-up fee. NCR sent Blockbuster Express customers an email today assuring them that until the sale closes “we will continue to run the business as we have been, focused on bringing you the latest New Release movies with most titles only $2 for the first night.”
UPDATED, 10:25 AM: The new streaming video deal between Verizon and Redbox-parent Coinstar has all of the hallmarks of an announcement that had to be made — even though the companies weren’t ready. Coinstar CEO Paul Davis promised in October to announce his streaming video plans by the end of 2011, and probably felt he had to say something before he meets with analysts later today to discuss his company’s 4Q earnings. All he has to offer, though, are puffy promises, and few details, about the subscription service to be offered in the second half of this year. We don’t know whether it’ll be competitive with Netflix because the companies won’t say what they’re offering consumers and how much they’ll pay. The proposition will be “simple, affordable, and fun,” Verizon Telecom VP of Consumer Product Management Eric Bruno tells me. We don’t even know what studios — if any — have agreed to participate. “We both spend a lot of money with studios, and they love this idea,” Redbox SVP of Finance Galen Smith tells me. Even Warner Bros? Last month the DVD kiosk company let its disc purchase contract with the studio lapse rather than accept its requirement for Redbox to wait 56 days for new releases. “I wouldn’t presume that because of how things are going on the DVD side that they won’t have their content as part of this venture,” Smith says.
Looks like Redbox has told Warner Bros to take a hike with its effort to double the waiting period for new rental DVDs to 56 days. When the contract to acquire discs directly from Warner Bros expires today Redbox will “work to provide Warner Brothers’ movies through alternative means,” says Gary Cohen, SVP for marketing and customer experience. He adds that Redbox “maintains direct working relationships with every other major studio.” Disney, Paramount, and Sony provide new DVDs to Redbox the day they’re released; Universal and Fox require the kiosk company to wait 28 days. Redbox is taking a big risk by choosing to buy Warner Bros discs from outside sources: That could be more costly. What’s more, the company may not be able to buy enough copies of hit films to satisfy its customers — especially if Warner Bros can persuade retailers to cap the number of the studio’s discs they’ll sell to a single customer. (Earlier this morning Walmart agreed to continue housing Redbox kiosks to early 2015.) But Warner Bros also is taking a gamble: There’s nothing to stop Redbox from flooding the market with used Warner Bros DVDs a few weeks after they’re released, when rental demand for the titles lets up. Still, Warner Bros wants to increase the delay before providing discs to low-cost rental companies because it believes that will help to boost sales. That’s become an important initiative for Warner: It’s also leading the pack in offering discs under the entertainment industry’s Ultraviolet campaign which makes it possible for buyers to also stream movies to digital devices. Earlier this month Netflix agreed to the 56-day delay. Studios fear that their profits will
This is important for Redbox as its disc kiosks begin to dominate the DVD rental business. Much of Redbox’s clout comes from its growing presence in Walmart stores: The retailer began housing Redbox kiosks in 2006, and now they’re in more than 3,700 stores — accounting for about 13% of Redbox’s 28,000 locations in the U.S. It boasts that more than two thirds of the population lives “within a five-minute drive of a Redbox kiosk” which rents DVDs for $1.20 a night. The companies didn’t announce financial terms of their contract renewal. Investors are still waiting for Redbox’s parent, Coinstar, to unveil its digital streaming strategy. The company also is expected to announce soon whether it will go along with Warner Bros’ effort to double the waiting period for new DVD releases to 56 days, or try to circumvent it by buying discs from retailers — possibly including Walmart.
The year-end report from market research firm The NPD Group provides yet more evidence that the disc-rental business is in trouble. That shouldn’t bother Redbox yet: The firm’s kiosks accounted for 37% of all movie DVD and Blu-ray rentals, up from 25% in 2010. Netflix remained flat for the year at 30% — although its self-inflicted wounds (remember Qwikster?) were apparent in Q4 when it had just 25% of the disc rentals, a two-year low. The big loser was Blockbuster, which shuttered hundreds of stores as it retrenched from bankruptcy. Bricks-and-mortar stores, the field Blockbuster dominates, accounted for 17% of rentals, down from 23% in 2010. The silver lining is that many consumers now are paying to rent movies from VOD services: They accounted for 31% of all paid movie rentals last year. Netflix is the leader here but can take small comfort from the NPD tally: Its VOD market share dropped from 59% in Q2 and Q3 to 55% in Q4. “The movie-rental market is clearly undergoing a sea change, as consumers become better equipped to access on-demand and streamed movies and are more comfortable with available delivery options,” says Russ Crupnick, SVP for Industry Analysis. “Even so renting physical discs from now-ubiquitous kiosks in grocery stores and other venues has taken the lead as the most popular movie-rental method in the U.S.”
The big question following this expected announcement is whether Redbox and Blockbuster will tell Warner Bros to take a hike and buy the studio’s new discs from retailers. That’s one reason why other studios have been reluctant to push for the longer window. But Warner Bros made the announcement at the 2012 International CES because it’s eager to push low-cost rental services aside in the hope that the entertainment industry’s new UltraViolet initiative will boost sales of DVDs and Blu-ray discs. UltraViolet enables buyers of some discs to stream the movies from remote servers to digital devices including smartphones and tablets. “Since we implemented a 28-day window for subscription and kiosk, we have seen very positive results with regard to our sell-through business,” Warner Home Video North America president Mark Horak says. “One of the key initiatives for Warner Bros is to improve the value of ownership for the consumer and the extension of the rental window — along with our support of UltraViolet — is an important piece of that strategy.” Netflix VP Content Anna Lee says that it is going along with the longer delay “to ensure members have continued secure access to Warner Bros DVDs and Blu-ray discs.”
UPDATE, 1:45 PM: Redbox just issued this statement about the alleged deal. “The current agreement Coinstar has with Warner Bros. is to receive movie titles 28-days after their release. No revised agreements are in place.”
PREVIOUS, 12:03 PM: Warner Bros has sealed a deal with Netflix, Redbox and Blockbuster that will expand the studio’s release window for new DVDs to 56 days, the tech blog AllThingsD is reporting. The current window is 28 days between when the discs first go on sale and when customers can rent from the retailers. Warner Bros is saying it isn’t going to comment on speculation, but it has been exploring seeking wider window in an effort to offset declining DVD sales, and it is pushing the nascent UltraViolet format that allows users to rent or buy movies that can be viewed on multiple platforms. (The company said during the Citibank conference yesterday that UltraViolet, which is available via the company’s recently acquired Flixster site, is still in the growing stages. “The product is not where we want it to be, but someone has to take a leadership position,” CFO John Martin says.) The latest report says the deal for the new window is expected to be unveiled during the Consumer Electronics Show, which begins Monday in Las Vegas. The question that remains, though, is what’s stopping retailers from buying discs on the open market and making them available day-and-date, …
The video rental company’s shares have spiked 6.8% in midday trading — an eye-popping standout on a day when the market’s down about 2%. The reason: website DealReporter says that Verizon is considering buying Netflix to get into the video streaming business. There’s just enough going on to make this plausible: Last week, Verizon CEO Lowell McAdam said that his company wants to offer video streaming, and had even looked at Hulu when it was on the block. He declined to comment on reports Verizon is preparing to team up with Coinstar’s Redbox. TechCrunch said that the companies were so far along in their plans, code-named Project Zoetrope, that they had set May 28 as the date when they’d commercially roll out their video download and rental service. Coinstar has said that it would unveil its video streaming plans by year’s end.
The trading day ended with a thud. The benchmark Standard & Poor’s 500 wound up -2.1% as word spread that Germany might balk at a proposal to help bail out debt-laden members of the European Union including Greece and Portugal. That affected media stocks; the Dow Jones U.S. Media Index fell 3%. Disney was the hardest hit among the Big Guns, with shares off 3.2%. It was followed by News Corp (-3.1%), CBS (-3%), Comcast (-2.9%), Time Warner (-2.7%), Viacom (-2.3%), and Sony (-2.1%). Newspaper companies were big losers led by McClatchy (-10%), New York Times (-7.3%), E.W. Scripps (-6.5%), and Gannett (-6.3%). But others weren’t far behind: Cablevision (-6.1%) hit a 52-week low. The losers list also included Crown Media (-6.6%), AOL (-5.9%), DirecTV (-4.7%), Live Nation (-4.4%), Barnes & Noble (-4.3%), TiVo (-4.2%), Sirius XM (-4.2%) and Dish Network (-4.2%). Today’s few gainers were led by Coinstar, up 7.8% on a report that its Redbox unit will team up with Verizon to offer an online video service. Martha Stewart Living Omnimedia was up 1.7% the day after J.C. Penney said it bought 16.6% of the company. And Madison Square Garden was up 1.7%, hitting a 52-week high, after Morgan Stanley’s Benjamin Swinburne changed his recommendation to “overweight” from “underweight” following the resolution of the NBA lockout.
Web site TechCrunch appears to have filled in a key missing piece to the reports this week about Verizon’s plan to launch a digital service for movies and TV shows: The site says that much of the content would come from a partnership with Redbox. Beginning on May 28 the companies will offer consumers opportunities to buy credits that they could use to buy or rent videos online — or rent DVDs from Redbox’s popular $1.20 a night kiosks, the site says. It adds that the companies are “still in talks with content providers” and won’t seek to beat rivals in offering the newest releases. The video service would offer standard definition and HD streams and would work on the most popular digital platforms including Apple’s iOS, Google’s Android, Xbox, and Roku boxes. Investors are impressed by the information about the planning being done under the code name Project Zoetrope: Shares of Redbox’s parent, Coinstar, are up 7.9% on a lousy day in the market. The information jibes with Coinstar CEO Paul Davis’ statement to analysts in October that his company would unveil a digital streaming plan by year’s end, which he called “a top priority for the company.” This week Verizon CEO Lowell McAdam declined to discuss his company’s streaming plans.
NCR wants to sell the Blockbuster Express DVD kiosk business, but it may have to deal with some angry customers on Tuesday when it implements its 3-2-1 pricing plan. The company will continue to charge $3 for the first night to rent a DVD that’s been out 28 days or less. (Actually new movies will cost a penny more; they’re now $2.99.) The big change involves DVDs from the 29th to the 90th day after they’ve been released: NCR is raising the first night price to $2 from $1. After 90 days the price drops to $1. In each case it costs an extra buck for each additional night. (Blu-ray discs cost $1 more than DVDs in each window.) Why is NCR making the change? It has some PR cover; Redbox just increased its price to $1.20 from $1. And last week NCR’s John Bruno told analysts that the company is exploring “profit-enhancing initiatives including premium pricing for the new releases.” NCR also wants to keep studios happy: With its higher price, Blockbuster Express isn’t subject to the 28-day delay on new releases that
There was an underlying message in Redbox parent Coinstar’s presentation to analysts yesterday following its 3Q earnings report: Warner Bros, Universal, and Fox had better not double the delay period for providing DVDs to Redbox. Despite his easy-going speaking style, CEO Paul Davis firmly indicated that such a strategy — increasing the window for those studios to as much as 60 days from the current 28 – would lead to corporate warfare and probably backfire. It would help Paramount, Sony, and Lionsgate, which recently extended their agreements to supply DVDs to Redbox the same day that they’re available elsewhere. (Disney also provides discs on opening day to Redbox.) What’s more, Redbox execs say that they can buy DVDs from other sources instead of securing them directly from the studios. “The great thing about the United States is that the first-sale doctrine gives you opportunity for workarounds, and we evaluate that … to protect the windows we enjoy today,” Davis says.
Coinstar executives say that they want a win-win solution — that studios have something to gain by helping Redbox. The company illustrated that with its new agreement to give Paramount 100,000 Coinstar shares for extending its day-and-date deal, with an option for 100,000 more if the studio takes it two years beyond 2014. They also subtly reminded studios that they’ll need Redbox if they decide to milk DVDs as long as they can while waiting for consumers to warm to cable and Internet VOD services. Coinstar noted that it recently became the leading renter of DVDs in the wake of Netflix’s blundering decision to raise subscription prices by 60% for people who want to to rent discs as well as digital streams.
UPDATE, 3 PM: CEO Paul Davis says the Redbox price increase to $1.20 a night followed “several months of testing” and was designed to keep prices “as low as possible for consumers” as operating costs rise. The company says that the “vast majority” of transactions at its kiosks involve debit cards affected by the Durbin Amendment, as opposed to credit cards. Customers will still be able to rent for $1 a night through November if they reserve a DVD online and then pick it up at a kiosk. He added that the company plans to unveil a digital streaming plan by year’s end, calling it “a top priority for the company.” Davis says Redbox has seen business increase from consumers who felt “disenfranchised” by Netflix’s 60% price hike for its combo DVD rental and streaming service, but he can’t say how many people defected.
On the studio side, Davis says Paramount just extended its agreement to provide DVDs to Redbox the same day they’re available in stores through 2014. The studio will receive 100,000 shares of restricted stock in Coinstar, and can collect an additional 100,000 shares if it exercises its two options that each would extend the agreement by a year. Redbox’s day-and-date agreement with Sony runs through September 2012, and one with Lionsgate goes through August 2014. It has similar deals with Summit and Anchor Bay.
A spokesman for DEG: The Digital Entertainment Group says the trade organization didn’t deliberately choose a Friday afternoon to release its dreary new report about consumer spending on home entertainment in the first half of 2011. But from a PR perspective it probably doesn’t hurt to bury news that shows VOD and electronic distribution still can’t make up for the collapse in sales of DVDs. The headline number is that consumer spending on all forms of home video — including DVD and Blu-ray disc sales and rentals, VOD, and online — fell 5.1% vs the first half of 2010 to $8.3B. Last year, spending fell 3.3% in the first half of 2010. DEG says this year’s drop isn’t so bad because last year included Avatar. (It seems that the blockbuster was good enough to include last year when it made sales look strong, but is supposed to be treated as an anomaly now that it makes comparisons look weak.) Still, there’s no getting around the steep decline for DVDs. Consumers bought nearly $3.9B worth of DVD and Blu-ray content, down 18.3% vs the first half of 2010. At this time last year, disc sales were off 7.1% vs. 2009. DVDs are the culprit: Although DEG only reports figures for “packaged goods,” it notes that Blu-ray sales are up more than 10%.