Netflix Crushes Redbox

Coinstar (NASDAQ: CSTR) said that sales results from its Redbox kiosks were below expectations. That caused the company to revise downward Q4 and 2011 expectations.

“Nevertheless, redbox revenue grew 38% year-over-year in the fourth quarter,” the company said. “Consumer demand for redbox DVD rentals continues to be robust, and consumers and retailers appreciate the value and convenience offered by redbox. Consumers rented over 144 million movies during the quarter and same store sales increased 12.5% year over year in the fourth quarter.”

What Coinstar did not mention is that its results were almost certainly hurt by the rise of both Netflix’s home rental and streaming video products. Redbox is likely to have already begun to go the way of the Blockbuster rental store. Blockbuster eventually went bankrupt largely because of competition from Netflix. People do not want to rent premium content in stores or kiosks any more. And, they do not want to get DVDs in the mail either, it seems. Movies and TV shows streamed over the Internet to people’s homes has supplanted each of these older methods. Netflix even offers a subscriber plan that covers streaming but not the DVD-through-the-mail option.

Coinstar has 30,000 Redbox kiosks. The early success of these drove the firm’s stock from $19 two years ago to $66 recently. The share price dropped by a third when Coinstar revised down its earnings. Wall St. believes that the demise of the kiosk model will occur has quickly as its success did.

Five years ago, the idea that premium content could be delivered over the Internet was unacceptable to major studios. They believed that their expensive movies and TV shows would be stolen via file sharing sites. These sites were already taking their content and passing it around the Internet. The new tactic became using the legal system to shut pirate sites and was combined with legitimate distribution through premium video distributors like Netflix, Apple TV and Hulu. Encryption software cut down on piracy. The movie and TV industries had a new conduit. It is one that neither stores nor kiosks can fight.

The day of the kiosk is over. Coinstar’s growth story has ended with it.

Douglas A. McIntyre