Redbox

Forget the futurists ... Coinstar is a cash machine

With the wild dogs chewing on the bones of Blockbuster Inc. in U.S. bankruptcy court this week, much of the credit for the fall of the once-dominant video giant has gone, rightly, to Netflix (NFLX-Q234.860.900.38%).

There is another company responsible for much of Blockbuster’s woes, however: Coinstar Inc., (CSTR-Q48.420.230.48%) operator of the expanding RedBox chain of video rental kiosks. It is Coinstar, more than Netflix, that will benefit as Blockbuster continues to crater. And the good news: A recent earnings miss that shaved a third of its recent highs makes the company’s stock a much more reasonable buy.

The company is named for its profitable legacy business: The Coinstar machines that offer consumers a payment, less a fee, after they dump a bucket of loose change into a sorter. It is RedBox, however, that has come to dominate the company, with 80 per cent of the company’s revenue.

It has also provided a compelling growth story, as RedBox kiosks, found outside retail partners such as McDonald’s, have grown from fewer than 8,000 three years ago to roughly 36,000 today, according to Piper Jaffray & Co. analyst Michael Olson. Consumers who considered Blockbuster’s significant late-return fees to be usurious flocked to RedBox’s flat $1-a-day model.

A steady increase in revenue per kiosk – Mr. Olson estimates the figure will top $40,000 (U.S.) this fiscal year – combined with roughly 1,500 new kiosks each quarter, has provided impressive top-line growth. Revenue has doubled to $1.44-billion in 2010 from $650-million in 2008.

Still, the stock has become a favourite of the short-seller set, with more than a third of the shares outstanding sold short. RedBox “dominates an industry that is fast becoming obsolete – physical content delivery,” blogger Viking Capital writes on the Seeking Alpha website in an article called “Why Coinstar is a Better Short than Netflix.” He continues: “As movies-on-demand and Internet streaming of media become more and more prevalent, the DVD industry will accelerate its secular decline.”

In the long run, that is likely true, but as they say, in the long run, we’ll all be dead. The high-speed Internet connections necessary for streaming – plus, of course, the monthly subscription fees for content – are beyond the economic reach of millions of U.S. households, and will remain so for a number of years.

Sadly, Coinstar management has been suckered into pandering to the techno-futurists. For months, management has been promising shareholders it will find a “partner” to deliver a RedBox movie-streaming option.

The absence of news on that front, couple with a disastrous fourth quarter in which the company mismanaged its inventory and missed guidance, has taken a chunk out of the company’s stock. It dropped from a 52-week high of an unreasonable $67 to the high $30s; it has rebounded moderately, closing on Friday at $48.42.

That’s around 23 times trailing earnings, when a loss from discontinued operations is disregarded. Company guidance for 2011 is earnings per share of $2.60 to $3.10, suggesting a current year multiple of 15 at the high end of the range.

Happily, all of the company’s machines, from RedBox to Coinstar, are, well, cash machines: The analysts at Pacific Crest Securities note that over the past 12 months, Coinstar has generated $4.24 in free cash flow per share, a cash flow yield that tops 9 per cent at current prices. The Pacific Crest analysts expect slowing kiosk rollouts – and, therefore, lower capital expenditures – to produce $5.61 in free cash flow in 2012.

That points to what may be the best strategy for Coinstar: Abandon the pretensions of competing with Netflix, Amazon, and who knows what other tech giants in the business of streaming, and concentrate on its core business of serving walk-up customers. (Indeed, Coinstar has a number of kiosk pilot projects in the works for future growth, including consumer electronics, coffee, digital photos and women’s fashion accessories.)

The company is best served as being one of the fastest-growing cash flow stories, rather than a second-tier growth company struggling to keep up. Coinstar has made its fortune in the physical world, not in the cloud, and there are still plenty of riches to be found on the sidewalk.

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/vox/forget-the-futurists-coinstar-is-a-cash-machine/article1977565/


Stanford Lawyer Joins Fight Over Online Movies

Here’s an interesting development in a copyright lawsuit filed this week by the Motion Picture Association of America against Zediva.com: Zediva, a California-based start-up that streams movies for customers before Netflix or Redbox, has hired heavyweight Stanford University lawyer Mark Lemley and his San Francisco-based law firm Durie Tangri to fight the might of the movie studios.

It’s an important lawsuit to watch for consumers, companies like Netflix and the movie industry. Here’s why: Zediva operates as an online DVD store and doesn’t pay licensing fees. If Zediva wins this case, it doesn’t only mean that you could theoretically watch videos before Netflix and Redbox on Zediva, it would likely lead to an influx of similar start-ups eager to take advantage of the apparent loophole in copyright law.

Lemley is a good catch for Zediva: he is William H. Neukom Professor of Law at Stanford Law School and teaches intellectual property, computer and Internet law, patent law, and antitrust. He is also the author of six books and more than 100 articles on these and related subjects. Lemley tells Pay Dirt he will represent Zediva, but declined to comment further.

Zediva has an unusual business model: it streams movies as soon as they’re out on DVD because, when you rent a movie on Zediva according to its website, you are renting both a DVD and DVD Player in its data center. According to Zediva’s website: “Using Zediva, you can rent and instantly watch new movies much earlier, often several weeks or months, than either Netflix or Redbox.”

Many online streaming companies that don’t pay licensing fees are registered overseas, making these kinds of lawsuits difficult, but Zediva is registered with GoDaddy.com and hosted at a data center in Santa Clara, California. A Zediva spokesman declined to comment on the lawsuit.

As Pay Dirt reported this week, the MPAA alleged in a copyright infringement lawsuit: “Zediva claims it is like a brick-and-mortar DVD rental store and therefore not obligated to pay licensing fees to copyright holders. But the DVD rental label is a sham. In reality, Zediva is a video-on-demand service that transmits movies over the Internet using streaming technologies in violation of the studios’ copyrights.”

Mike Robinson, executive vice-president and chief of operations for content protection at the MPAA, says companies that don’t pay licensing fees are hurting thousands of jobs in the movie industry.

What do you think of this novel online DVD service?

http://blogs.smartmoney.com/paydirt/2011/04/08/stanford-lawyer-fights-hollywood-over-online-movies/?mod=SMBlog

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