Redbox parent Coinstar announced its second quarter financials today, and the results were a mixed bag. On the one hand, the company posted earnings of $13.4 million, nearly double Coinstar’s Q2 2009 earnings.
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Revenue from the company’s “DVD Services” segment, which includes Redbox, was up 44%.
Less encouraging were the numbers for same-store sales from Redbox kiosks, which rose a paltry 3.5%, a steep drop from the 21% increase in the first quarter of this year. Investors punished the company’s stock in after-hours trading, with Coinstar shares dropping nearly 7%.
Coinstar also lowered its revenue view for 2010 to $1.425 billion to $1.505 billion, down from from a May projection of .
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505 billion to $1.595 billion.
Redbox’s 28-day delay agreements with the Hollywood Three seemed to be a contributing factor to the company’s lower-than-expected performance. According to the Wall Street Journal, Coinstar CFO J. Scott Di Valerio “acknowledged the transition to the new arrangements pinched DVD rentals as kiosks for a few weeks didn’t have new releases and older titles didn’t make up the slack.”
Di Valerio believes this to be a temporary issue, saying:
“Having worked through the one-time transition to the [28-day] window, we expect our comps to move back to double-digit growth during the second half of the year,”
Is Di Valerio correct, and will the Redbox ship soon be completely righted again? Or, as some have predicted, is the company’s comeuppance for its industry-disrupting low price point finally arriving? Debate away in the comments.
(via the Wall Street Journal)
Tough quarter as FLON said it would be.
The real test will be the 3rd and 4th quarter though.
Increasing the pace of price increases would go a long way towards rectifying the situation.
With NCR considering a pull back it will be interesting to see how much growth is actually left in the kiosk business.
Coinstar is a big sell if you own it. Get out while you can.
And with that, I’m off to the summer home for a week.
My name is John Small. I am a millionaire. I own a mansion and a yacht.
LOL, I haven’t been on this site for months, good to see that the universe is still in balance.
The $1.50 Blu-Ray might help. Games too, variety breeds profit as it has already shown. Maybe it will grow to advance their shares as well.
‘Increasing the pace of price increases would go a long way towards rectifying the situation.’
Nice pretzel logic. It’s the pace of the price increases JS doesn’t like. Has there been a price increase no one knows about?
It would appear that Redbox is approaching saturation. Higher price points for Blu-Ray discs should help the revenue picture somewhat, as will (eventually) incremental business from the Movie Gallery/Hollywood Video diaspora. Redbox will need an online solution if it really wants to position itself for the future. But does Netflix already have that market locked up?
between what ncr just got done saying about scaling back on kiosk growth along with what cstr said yesterday about only adding six hundred kiosk over the next two quarters with four convience store franchises leaves the impression of market saturation along with minimal if any at all same store sales. it paints a bleak picture for kiosk companies in general moving forward especially since they admitted yesterday that they expect to further feel the effects of the windows imposed over the next two quaters. obviously these windows are having bigger effects then they were planning on
I rarely rent from redbox anymore at all. The reason being their selection. Even if they get a movie, it’s still hard to find any available copies a lot of the time. The 28 day window is really taking a toll. They should have stood their ground. I would have more respect and loyalty to a company if they would do that rather than selling out for higher profit at the loss of customers. If they raise the price at all from a dollar I will flat out NOT rent their anymore. I will get an in-store subscription to Blockbuster. Exactly what they want, good job redbox. I don’t understand their business moves, it’s like whoever is making these decisions is secretly rooting for blockbuster. Theyre doing everything they can to drive customers back to the traditional rental chains.
Funny JS goes on vacation when all the vindicating articles come out. It’s been said here for quite some time now with the normal bashing. The margins are so low that once the growth stops and numbers are realized they will either go up in price or they simply will not be profitable. It’s been said a million times, when you factor in damages to dvd’s, free promo movies, credit card fees, rainy days, freezing cold weather, poor movie releases(for a week or two), they do not make even close to $1 per day, probably closer to .75 – .80 (not to mention they still have to cover the $12 to $15 they bought the movie for). They did a wonderful job of drawing in the flock at $1 price point, but as it’s been argued time and time again pricing will need to go up, how much, only they will know. Think about whatever it is you do for a living, there has to be a profit or you would not have a job. Don’t be so quick to bash redbox after all they have provided entertainment to most who could not afford to rent from blockbuster stores. That being said some of the local Video stores that are still in business (not blockbuster) are now offering very competitive pricing, and before they are put out of business you may want to give them some support so that the kisoks are not the only option you have for immediate dvd rentals.
I think what you just said was very well put. Regardless of the future, Redbox has changed the movie rental industry forever, and that is a measure of success that can never be taken away.
What’s been vindicated?
Redbox has low margins but that doesn’t mean pricing is going up. Kiosks are either profitable or not. Growth has nothing to do with it. Fact of the matter is that the kiosks are profitable on an operating basis after depreciation expense. In a few years Redbox will start having fully depreciated kiosks further boosting profits. This concept you have that Redbox will be forced to raise prices is misguided. Redbox clearly understands the tension between usage and pricing. Low pricing keeps ad spending at zero, trial usage high and encourages movie experimentation. Redbox management knows this. For the competitors that you and JS look to support I can see how you want Redbox to charge higher prices. Consumers on the other hand don’t care about this debate and I can assure you pricing at a $1 remains paramount to the company’s success. I believe $1 will be with us for a while.
Flon, I do respect your opinions and I certainly do not know how things will end up, so please understand I am simply posting an opinion. That being said the reason I am stating they they “should” increase price is simply based on how much they are actually generating per rental. In my post above I listed some of the fractional subtractions from their $1 rental, given what they actually retain per transaction after all “variables” it just does not appear to be sustainable at the $1 price point. I would also like to point out that they are with no question testing higher prices in certain areas of the country. It is my opinion they are doing this so they can in the short term measure what is acceptable for the consumer to still be happy and so they can maintain profitability going forward. I do not profess to clearly understand their stock value and do not care to debate or even comment on it as there is way to much to take into consideration.
Finally I have always been very up front with the fact that I do own a Video Store, and I do not compete with RB as they are not in the town that I do business. If they can continue at $1 and be profitable, my hat’s off to them on doing a great service to consumers during these rough economic times. Time will expose what the final price points will end up being. My store rents movies for $2, 1 night for the first month and 5 nights after they are 30 days old.
Most of what redbox takes in it pays to others with studios and retailers getting most of those dollars. The margins are low yes but so are the fixed costs. This is strength in my mind not a weakness.
The $1 a night pricing is most assuredly sustainable. The kiosks are getting a payback for the capial outlay of somewhere between 2 and 3 years. A 5 year payback wouldn’t be bad but 2 to 3 years tells you that the current pricing strategy is working well. JS is always focused on profits but you also need to consider cash flow. The depreciation expense is a non cash expense so redbox is generating far more cash than profits right now. That cash is going into new kiosks now but if they stopped growing redbox would generate a ton of cash. I’m betting the kiosks last about 7 years. I actually hope they make it to 7 to 10 years but 7 would be fine. This payback and a likely life of greater than 5 years is the epitome of sustainable prices.
Even if redbox does raise prices they are likely to keep most of the DVDs in the unit priced at $1. No need to raise all prices and punt 100 percent of the pricing advantage/franchise. Consumers will likely identify $1 pricing with redbox for years.
Sometimes everyone here is overly focused on pricing. It’s no secret that the grab your attention pricing has drawbacks – the 28 day delay, low copy depth, narrow selection etc etc. The price exists as it does because of all these other factors. There is too much demand at $1 and redbox cannot satisfy it all. Those focused on only pricing miss the point.
Good explanation FLON!
Flon, it would be so much easier to sit down and have a conversation with regard to these discussions as I do honestly feel that I am participating in “hijacking” these threads. You do provide very good points, but it would simply take way to much time and space to convey my personal knowledge from my experience in this industry.
First on the depreciation issue, the variable is ongoing maintenance and actual longevity of the machine, ie. updating exterior, card readers, mechanics to retrieve and disburse disc’s, communications, logic boards, weathering, and finally actual replacement of machine. As you stated this is an unknown.
When margins are as low as they are this certainly becomes micro management at it’s best. This is why I have viewed each individual movie and how much they actually profit from them. Rentrak the biggest revenue sharing company in the industry put the average turns per movie at roughly 13. Given even 15 turns when you factor in free codes, damages, over limit cards etc. (above mentioned) assuming .80 per flip is only $12. That is also assuming a movie flips that often (poor quality movies may only flip 8-10 times). I again am not privy to redbox information with regard to these figures. Let me also state I do not know how much they pay for the movies or how much they pay the locations to place their box there.
The biggest point I was trying to point out in my last post was that Redbox is undeniably testing higher pricing around the country, there is a reason for that and I don’t think they would risk the bad press if it was not necessary.
On the demand issue, there has always been tremendously high demand on the “brand new releases”. The demand cannot be supplied initially by any brick & mortar, Netflix or kiosk. What I was commenting on about JS is that there is validity in what he has been saying about the 28 day window. Stores like mine are supplying a large quantity of people in that first 28 days and regardless of the price, the kiosks will loose a substantial amount of their rentals to the retailers that have them for that first month. Heck, even if 2 out of 10 of the kiosk renters get those new releases at a video store 20% is a very scary loss given these low margins we all agree that they are working with.
Just my 2 cents,…”if 2 out of 10 kiosk renters get those new releases at a video store…”. This is the thing Tee, there are virtually no video stores left–closest one to me is around 20+ miles away. Therefore, I don’t think the fact that the very few and far away video stores that have new releases on day and date can be that big a factor against Redbox–especially when/if it’s Blockbuster charging $4 or $5 a rental. Even if a BB store is located close by in your community, the high rental price is enough to deter many/most renters. We’ll wait the 28 days! Maybe if there’s a Family Video in your community with a more reasonable new release rental fee might make for real competition against Redbox…BUT again, the closest Family Video to me is a state away in Ohio. I think convenient locations and low price is a stability Redbox built it’s success on…so it should keep that foundation.
Coinstar said on their Q2 2010 report that their average revenue per copy was $2.17 (i think.) So if you do your math and each flip is $1.73 which is $25.95 per unit. This works out closer to their gross margin of 56.4%. And if you do the Blu-ray math at the exact same cost, you get $2.61 per unit so to get a 56.4% margin you need 15 turns which is a lot for Blu-ray.
I agree with your 20% take during the first 28 days. Coinstar’s same store sales were only up 3.5% over last year. The reduced cost of the dvd’s on the 28 day titles is helping.
I think you will see a few more test markets at $1.25. I also think games will never work for Coinstar at these margins and price point.
Finally, watch out this month for the new federal regulations for banks on overdraft charges and opting-in. This will have a much greater effect on Coinstar than anyone will expect.
RB, Consumer, points well put. In the Chicago land area where I do business there are still plenty of video stores and yes Family Video has a huge presence here. Consumer, if they are generating as stated 1.73 per flip that means the average customer is keeping a movie for almost 2 day’s. Interesting fact considering all the debates here are with regard to how much people are saving at $1. I guess it’s all about perception. However I appreciate the clarification that they are making $25 per movie, on that basis and assuming that is what they are actually collecting I stand corrected and any future argument with regard to their profitability would be futile.
I think they are getting a lot more than 13 turns and the 28 day deal lowers the costs for content significantly. If rentrak’s numbers were correct there would be no operating profit for redbox – yet there is. Sure redbox is testing higher prices so it knows what to expect if they ever do raise prices. There is no desperation in price discovery/experimentation. I would imagine they are looking at options for a faster payback in an uncertain world. Higher prices invite competition though so I don’t think they will break a $1 for some time except on blu-ray. As I said already an across the board raise probably wouldn’t be the way to go for the company anyway.
Redbox’s share of rentals continues to increase. If you are getting a bounce from the 28 day advantage it’s probably coming from several areas – not just kiosks. Store closures – there are more and more of them shutting their doors – are making the convenience of redbox relatively more attractive. Stores closing with rentals going to Netflix, redbox and cable companies is the real trend.
The rentrak figure is within the first 60 days so given the fact that video stores generally consider them a “new release” for a year before they go into the old section has to be taken into consideration. However it is relevant to redbox because due to the cycling of movies every week they do not continue to rent them out for a whole year. Also keep in mind in reality when you rent a movie you take it out of circulation for 2 days given the amount of people that do not go to the box to rent after 9 pm (ie. rent it at 10am on tue/return at 9pm on wed).
I will quote you – “if rentrak’s numbers are correct there would be no operating profit for redbox”. This is precisely what is being debated, rentrak’s numbers I am privy to, and I am stating fact, not merely what I think. I believe this is why some are so passionate about the discussions on this subject.
“Sure redbox is testing higher prices so it knows what to expect if they ever do raise prices. There is no desperation in price discovery/experimentation.” This is not an innocent grade school science experiment or a focus group. They are demanding these prices in some areas, I cannot state what their intentions are exactly but I don’t think is an arbitrary experiment.
As far as me getting a bounce from store closures 15 + miles away I seriously doubt it, people will not rent and have to return movies more than 5 miles away, it’s simply to inconvenient. Netflix and cable are not really that attractive either, first cables pricing is out of hand so no real worries there. Netfix is another debate all together (I will concede to the streaming), otherwise I believe Netflix has hit their saturation and on the DVD side will only start to deteriorate.
Redbox/BB Express I agree – $1 is a phenomenal price.
I am trying to converse as respectively as I can and am not trying to be in any way sarcastic.
why are you even bothering trying to have a discussion with these guys? they have no interest other then spreading fud. don’t waste your time!
’cause he’s not a dip-sh*t.
Your above comments to consumer supercede your response to me correct? You can see how Redbox makes money correct?
The bounce I was referrring to was back to your store from the kiosks which is against the current of the larger trends.
Testing prices is testing prices. With over 2 nights out per disc you can see how any increase will feel to the consumers. They may raise prices but as I’ve said it really is a massive decision for them. Not be taken lightly. I for one don’t think it’s in the cards for some time.
Netflix is attractive to 20mm consumers and counting. All the different services have their strengths and weaknesses. In this environment redbox just has that combination of attributes that consumers want. Cheap and convenient goes a long way in this economy.
Yes, flon given the the numbers Redbox is reporting, and assuming they are actually collecting $25+ per title than absolutely, they can be profitable. Let me be as clear as possible, they are making a gross profit no doubt about it. The gray area is the expenses and the volume going forward, and honestly that part of the discussion becomes a wormhole and open for ongoing debate.
I do not know precisely what they will net down after they hit their saturation point, but if they are running at 2-3% or even 5% margin (net) man that’s aweful damn tight. If they succeed in putting the small independents out of business it just seems obvious to me (I certainly could be wrong), that they would raise the prices, because at that point there will really be no other viable option for the consumer. Really who’s gonna compete with 25,000 to 30,000 location’s. Not cable at $5 a throw, and Netflix sure if you have day’s to wait and you “might” get what you actually wanted.
Gray area? Unless Coinstar is lying in their quarterly financial reports (you can go to jail for this) then you can see what Redbox’s overhead and depreciation expense is.
Wal-Mart has low margins as does amazon. A low margin in of itself does not mean a whole lot. Redbox has a fairly stable business model that is unlikely to be under-priced. This helps keep demand fairly resilient. It beats the hell out of Blockbuster and movie gallery’s high margin, high overhead business model.
There are several trends working against physical stores. Kiosks are just one of them. Plenty of other players will insure that Redbox doesn’t get much pricing power regardless of what happens to stores.
Btw Netflix is an unbelievably good service. ‘Might’ could easily apply to a store visit.
i dont understand how profits fell from coinstar espescially since they upped the frikken fee the coinstar charges