Cashing In On Coinstar

Coinstar, Inc. (NASDAQ: CSTR) is a $1.91B services company that provides automated retail solutions primarily in the United States, Canada, Puerto Rico, Ireland, and the United Kingdom through such products as self-service Redbox kiosks and self-service coin-counting kiosks.

Positives
 
Coinstar's signature product is the Redbox kiosk, which enables consumers to conveniently rent or purchase movies and video games. These Redbox kiosks have become increasingly profitable for Coinstar ever since a successful price increase on Redbox standard def DVD rentals to $1.20 from $1.00. Unlike the tremendous backlash Netflix (NASDAQ: NFLX) received for its price increase, Coinstar noted "better than anticipated consumer acceptance of the price increase," later went on to announce a blowout first quarter for 2012, and then revised guidance for the second quarter upward. 
 
Moreover, Coinstar is also aggressively expanding its offerings of the Redbox kiosks. In late May, Coinstar announced that it signed a deal with Wal-Mart's (NYSE: WMT) Canadian division and a Canadian national convenience store operator to place its kiosks in their respective stores. Canada, the third largest DVD rental country in the world, has huge potential for Coinstar's Redbox kiosks, especially since various brick-and-mortar DVD retailers such as Blockbuster Canada and Roger's Video are exiting. In early June, Family Dollar (NYSE: FDO) also reached a multi-year deal with Coinstar to host Redbox kiosks in its U.S. stores. Coinstar's strategy to expand Redbox kiosk operations, combined with the successful price increase, will ensure that the Redbox kiosks continue to generate significant revenue growth for Coinstar.
 
Coinstar has also aggressively diversified its product base and is actively exploring the selling of other items out of its kiosks. Coinstar recently signed a deal with Starbucks (NASDAQ: SBUX) to sell Seattle's Best Coffee (owned by Starbucks) in thousands of kiosks across the U.S. Starbucks hopes to sell 10,000 cups of coffee per year from each Coinstar-operated kiosk in the country. The new kiosks, called Rubi coffee kiosks, will be rolled out this summer and 500 Rubi kiosks are expected to have been launched by the end of the year, with thousands more expected over the next few years. Redbox believes its Rubi kiosks have the potential for about 15,000 locations nationwide. The Rubi kiosks hold huge promise for Coinstar, as the away-from-home coffee market is estimated to be valued at $28.5B. The Rubi kiosks are expected to generate significant returns for both Coinstar and Starbucks and will positively affect Coinstar's bottom line.
 
Other products Coinstar is currently working on include Star Studio, Gizmo, and ecoATM. These three products are the closest of Coinstar's seed portfolio to wider rollout. Star Studio is a photo booth geared toward the youth demographic that Coinstar forecasts has the potential to expand to more than 4,000 locations. Gizmo is machine to sell refurbished consumer electronics that Coinstar expects will eventually expand to more than 2,000 locations. ecoATM is a kiosk where consumers can trade in used cell phones for cash and is also expected to eventually reach thousands of locations. Star Studio, Gizmo, and ecoATM are widely expected to be niche products that, although will definitely increase revenues for Coinstar, will not have as much potential as the Rubi kiosk. 
 
Coinstar is also moving into streaming video through a recently announced joint venture with Verizon Communications (NYSE: VZ). This joint venture will create a subscription service that combines Redbox physical DVD rentals with streaming download options from Verizon. This product is expected to be released in the second half of 2012 and will compete with Netflix (NASDAQ: NFLX) in terms of offering a video-streaming service. This joint venture has potential, although there are too few details about the joint venture to assess its ability to compete with Netflix.
 
Negatives
 
One of the significant negatives of Coinstar's operations is its reliance on the Redbox, which account for 85% of Coinstar's top line. As noted by Jim Chanos, the Coinstar's fundamental business strategy of selling discs through Redbox is potentially flawed as, in the long term,  people will shift toward the adoption of streaming video. However, Chanos also noted that Coinstar is likely to make a fair amount of cash in the near-term and Coinstar is actively seeking to diversify its products and lessen its reliance on revenues from Redbox.
 
Coinstar has also had constant conflicts with major movie studios in regards to selling DVDs from its Redbox kiosks. Recently, Walt Disney Studios (NYSE: DIS) decided that it won't sell DVDs to any rental outlets until 28 days after the DVDs go on sale, a development which led the L.A. Times to declare "Disney at war with Redbox." Coinstar has responded by resorting to the policy of buying DVDs from retail stores (instead of from Walt Disney Studios) and stocking up Redbox kiosks with the DVDs. Previously, Time Warner (NYSE: TWX) doubled the wait time of rental outlets for offering new DVD releases via rental services to 56 days. Coinstar responded by ending its deal with Time Warner and has started to buy Warner Bros. movies from third parties. As DVD sales continue to weaken, expect more conflict between movie studios and Coinstar.
 
The Verdict
 
Coinstar should continue to experience significant growth, at least in the short term, due to, among other things, the potential of Redbox in Canada, the rolling out of the Rubi kiosks, the joint venture with Verizon, and domestic expansion of kiosks. However, Coinstar's success in the long term hinges on mainly its ability to diversify and expand to a point where Redbox is no longer its marquee kiosk.