Coinstar: The Next Blockbuster

Douglas A. McIntyre

Stock analysts and investors assume that because one business model is better than another, the better business model is strong. That relies on the assumption that either business is good at all.
Coinstar (NASDAQ: CSTR), which owns the Red Box, has created a better way to sell DVDs than Blockbuster: kiosks (NYSE: BBI). Kiosks are much less expensive to run than stores. However, distributing movies though physical locations is still a bad business. The premium video content business has and will continue to move to DVD distribution by mail, Internet streaming and downloading.
Shareholders of Coinstar are so impressed by the company’s business that they have driven the stock to a 52-week high of $57.93 from a period low of $23.49. That gives Coinstar a market cap of $1.1 billion.
Supporters of Coinstar’s Red Box kiosk model thought they found some support for the theory that the company is on the right path when Blockbuster announced earnings recently. The rental chain’s net loss for the first quarter of 2010 was $65.4 million, or $0.33 per share, compared to net income of $27.7 million, or $0.12 per share, in the first quarter of 2009. Revenue for the period was $939.4 million, compared to $1.09 billion for the period a year ago. Worldwide same-store sales for the first quarter of 2010 declined 7.1%. The news pushed Blockbuster’s shares down 20% to $.40.
Coinstar is growing quickly, but it is still a very small company. Sales in the latest quarter were $350 million, up from $239 million in the same period a year ago. Net income was $6.4 million, up from $2 million last year. Coinstar had 19,100 coin counting kiosks, 24,800 DVD kiosks, 52,000 money transfer locations, and 25,000 e-payment point-of-sales terminals at the end of the period. The DVD business, which is the largest product-line at the company, is growing. The other three businesses are not. Without the DVD kiosk business, Coinstar is a very ordinary firm.
One of the risk factors the company discloses in its filings is that movie studios can change their release schedules. When this happens, it takes longer to stock the kiosks with the delayed-release DVDs.  This fact could in turn give firms like Netflix and streaming media operations a competitive advantage.
The market’s positive view of the Netflix business compared to Coinstar’s is evident in both market cap and revenue. Netflix has a market cap of $5.4 billion. The company had almost 14 million subscribers at the end of the first quarter. That figure was up 35% from the same quarter a year ago. Revenue for the quarter was $494 million. Operating margins were 11%. Coinstar’s was 5.7% for the same period.
And Coinstar says it has a lot of other competition. Beyond Netflix and Blockbuster, it must contend with satellite and cable products, some of which are video-on-demand, Internet streaming and downloading, along with the growing presence of premium video on products like the Apple (NSADAQ:  AAPL) iPhone and iPad. Cable and satellite are extremely large businesses, and video streaming is being marketed by firms as diverse as Wal-Mart (NYSE: WMT), Inc. (NASDAQ: AMZN), and Best Buy (NASDAQ: BBY).
The prevalence of broadband and proliferation of smartphones, which run on wireless broadband, are the greatest competition for the Coinstar model.  As 4G connections come to portable devices, the ease of loading movies will become easier than it is today. The video-on-demand model to the home market is already crowded with a number of the largest retail and cable companies in the US.
The Coinstar model may be better than Blockbuster’s, but the company will find that it is the next Blockbuster. The most successful technology for delivering premium content has already passed it by.