CSTR - Coinstar

[yadayada]

I dont think the delay is more then one month at most? And redbox still buys a lot of dvds and blurays through retail?

[merkhet]

How is ecoATM going to compete with Amazon's trade-in program? On a lark, I looked up what my iPhone 5 32GB Verizon phone would be worth on each site:

 

ecoATM: $193 (cash)

Amazon: $310 (gift card)

 

That's a pretty big difference...

[yadayada]

I think it is the instant gratification and ease of use of it. Just like Redbox. You don't really plan to do it, but then you see a EcoATM near your house, and you think screw it, let's do it. Instant free money! Because otherwhise you werent planning to do it anyway it feels like free money so most people don't care as much about getting max value.

 

Also can you trade in broken electronics at amazon? And what about old mp3 players? I still have a few of those laying around.

 

What about new releases tho? Blu ray retail sales for top 100 titles were 1.7 billion$ and 2 billion$ for DVD. hmm so it is 600 disks. So much higher. That is about 1$ billion.

[merkhet]

Yea, but -- you're probably not just walking around with your spare phone. If you have a spare phone, it is probably at home -- unless you're recycling your current phone, which I don't see happening.

 

You can't trade in broken electronics, but you'll also not get $193 for a broken iPhone 5. So there's a market here, but I'm just trying to figure out how much this could grow given that Amazon is willing to overpay for non-broken stuff by about 50%.

[yadayada]

No I think it goes like this:

'oh I saw a Ecoatm on the way to school/work/groceries, let's bring my old mp3 player next time to see how much I will get for it.'

 

And then they also get insta cash. Especially for cheap electronics, people might not care as much and prefer 20$ now vs 25-30$ later with the hassle of sending it away.

 

And a lot of people are probably not aware of the amazon trade in.

 

And also, you don't know how much higher in price Ecoatm can go. Maybe they are banking on these principles to get high margins, and if it doesn't work out as well, they can come up in price? If they can do 250$ vs amazon's 310$, then a lot more people just want it now.

 

FWIW, they banked on 10k machines, with 100k$ annual revenue each. With 20% ebitda margins (they said 25-30% I think). that is 200 million$ in ebitda, and maintenance capex is probably 50 million$ at most. So at least 100 million$ in FCF.

 

Currently they do like 69k$ per machine, and it is still pretty early (less then a year running).. Im not sure what kind of multiple to put on that tho.

[siddharth18]

But there have been long term changes to their access to top content in a timely manner - and that was a key competitive advantage previously.

 

What has changed?

 

Redbox used to get the DVDs on the day they came out at retail - before the rental and streaming competition.  Redbox could just buy the DVDs at Walmart, etc, to have them right away if they needed to.  Over time - starting a few years ago - they made deals with the studios like everyone else that delay the release of new titles.  My understanding is that now when redbox gets a dvd, it has already been available for sale at retail, watched on airplanes, cable/satellite on-demand, and possibly streaming.  That isn't a huge deal, as the usual redbox customer is not very affluent - but access to new releases does matter.  There is still a good value proposition for the average walmart shopper in getting their movie from the redbox kiosk as long as they return it promptly.

 

Happy to see more discussion on this name!

 

So you are right (somewhat). The Content license agreements with the studios is fairly straightforward as explained in the 10-K. It shows the dollar amount of commitment and the delay:

 

http://i.imgur.com/Q8uQgpZ.jpg

 

 

Only 3 out of 8 studios are on a delay. And they certainly don't have to be. It's most likely because Redbox determined there's more to be gained in accepting the delay (on better terms of course - like better pricing) because the studios cannot force Redbox to do anything. Redbox would be fine if all studios became hostile to Redbox.

 

If there's anyone calling the shots here, it's Redbox due to first-sale doctrine. Also, Redbox hired a Hollywood exec who will be key in securing favorable contract renewals coming this year. Redbox is the only game in town.

 

The KEY to this thesis is that Redbox's business will be more like HDD manufacturers (STX & WDC circa 2011, 2012) rather than yellow page publishers (DXM). Remember how SSDs were going to phase out HDDs? Of course they didn't because SSDs are prohibitively expensive to be used en masse. Seagate + Western Digital formed a duopoly while SSD makers went bust.

While the talk of Netflix, Amazon, iTunes is sexy, the truth is that studios are calling the shots here. They want high margins, which are located in DVDs not streaming. At the same time, there is no cheaper alternative than Redbox for latest movies. If you don't understand or believe this, then this idea won't appeal to you. 

The day Redbox will be in trouble is when iTunes/Amazon carry movies for $2/movie or when Netflix can afford carries fresh titles at $8/month. I think this is unlikely because studios want to milk DVDs as much as they can, rather than be forced to accept lower margins/profitability that exists on streaming. So I really can't wrap my head around the talk of Redbox being on their deathbed.

 

Would appreciate any disproving evidence/thoughts. TIA.

[yadayada]

I do think DVD is on their death bed, but Blu-ray will slowly take over. Sales grew every year for retail since 2009. And for OUTR as well. They offer better quality and sound then streaming. I personally download movies, but sometimes if I really like one, I buy it on bluray. I am curious how 4k TV will play into this though. But for that to be a threat, big things need to happen with cable providers in the US which I don't see happening anytime soon. within 5 years at the very earliest.

[siddharth18]

I meant Redbox, not DVDs, sorry! (I fixed it). BTW $1.5/day BluRay is pretty good value when HD rentals on iTunes/Amazon are $5.99 for 24 hours.

 

At the end of the day, everything has an expiration date. It's just that Redbox will be around longer than the street estimates due to considerably favorable pricing obtainable by consumers and a higher return by studios.

[valueyoda]

Coinstar's Redbox currently has sufficient value proposition for both the studios as for customers to be relevant, but its value proposition will crater down fast, once DVDs and Bluerays will become inevitably obsolete. I think virtually everyone agrees to that on this forum, but nobody knows whether this tipping point will come in 3, 7 or 11 quarters. The company's free cash flow continues to look very strong as competitors are winding down and Redbox continues to gain market share. Similar phenomena occured at Best Buy, Blockbuster, Borders, Barnes and Noble, Gamestop etc, but decline will set it. So everyone who thinks that the big share buyback is the greatest thing ever, a true no-brainer, should realize that the company is leveraging up to increase every non-selling shareholder's stake in a declining business. Sure, things will look great for another few quarters, and sure the company is increasing its non-related Redbox businesses, but at the end of the day, don't be suprised if the stock trades at a fraction of the current price, even though it might go higher first.

[siddharth18]

 

once DVDs and Bluerays will become inevitably obsolete. I think virtually everyone agrees to that on this forum, but nobody knows whether this tipping point will come in 3, 7 or 11 quarters

 

Appreciate the insight.

 

IMO, you should have a much easier time answering WHEN it will become obsolete if you understand WHY it will become obsolete.

 

For all the B&M places you mentioned, it was big fixed (space) costs and ultra-thin margins that forced a lack of profits. One-upping against Amazon (who will postpone profits, build economics of scale, carry more inventory, turn over products quicker) on margins is an uphill battle to which all of the aforementioned companies have succumbed/are succumbing. I get that. All retail B&M stores that you mention offer little value to an average (price sensitive) shopper who has zero brand loyalty for any retailer.

 

In the world of streaming, I'd place NFLX, AMZN and Itunes in the category of big fixed-costs ( servers, bandwidth, bribing ISPs), ultra-thin margins and heavy competition, NOT Redbox.

 

 

Redbox's niche is conveniently located, low-cost, high quality movie rentals to middle and lower middle class which makes it more resilient than BBY, GME, etc. What magical solution is going to come a year or two from now that will provide a better value than $1.2 per day for a new movie? If you say streaming, then I disagree. The only advantage streaming has is that you don't have to go to a kiosk to get that movie. The affluent, price-insensitive consumer is already aware of this and continues to embrace it, and most have.

 

However, the price-sensitive shopper continue to avoid it due to older selection, higher cost, worse video quality and broadband requirement.

 

Not going to deny the fact that DVDs one day will disappear, just that it will go away slower than anticipated.

 

The market of movie rentals will continue to remain bifurcated - with one group choosing convenience over price, and another choosing price over convenience, UNTIL Amazon/netflix/iTunes matches Redbox on price and quality.

 

At the end of the day, the price, availability and access of online content will be determined by the content owners (studios), not (middlemen like) Amazon, Netflix, iTunes. And the studios will continue to squeeze the margins of middlemen who retain no bargaining power, pushing costs upwards.

 

There's no such thing as a sure-bet but all I'm looking for is a bet with odds highly stacked in my favor and OUTR continues to appear as one.

[moody202]

I agree that the $1.2/dvd Redbox model has a price moat against online streaming. This may not be a huge for one rental but if a family is planning to watch 3-4 movies over a weekend, it adds up.

 

My concern is the use of fcf, the investments management is making to create new business models...how do we know its a wise use of money, will it every pay off. Would the best option for the management be to just return cash to shareholders?

[yadayada]

I think you have to have a few things in mind here.

 

They could lose half their revenue  before breaking even (without removing kiosks). This is huge imo. So even if you think they will go in decline, this thing will very likely generate at least like 50-100 million in 10 years I think in some niche areas. They can easily scale down and milk this for a long time to come. Fast internet has been around for 10 years now, and yet this guys are still alive and kicking. 20 years from now? Maybe not.

 

People who have netflix actually also use this, as Netflix will never have new releases. Never. The only thing that can happen is that on demand movies available for 24 hours will go down in price a bit.

 

Netflix has 1.5 billion$ in cost over thousands of titles a year. And for them to take new releases in their library, price would have to come down so much that movie studio's would be hurt by this. Movie studio's make billions on a few titles alone in those early release cycles, they would kill that if they made it available to netflix for cheap. So this is a self sustaining circle. As long as they are not willing to kill it, demand for these early release cycles will keep existing.  And netflix will not get them.

 

Plus I also think that bluray and DVD will not die for a long time to come. People like having a physical copy of their favorite movies. It is like a collecting thing. Market research shows that a lot of people who pirate movies actually spend more money on DVD and Bluray then average movie consumers.

 

Plus with fewer people owning laptops or desktops, pirating movies is a bigger hassle. No subtitles, it can be a hassle to play it on your tv. And if a very cheap convenient alternative exists, why not do that?

[hyten1]

folks i just can't seem to get:

 

why doesn't the studios just cut out the middleman and embrace streaming entirely (or at least as the main focus)?

when/if will this happen?

 

i guess i don't get is people mention studio want to milk the dvd/blueray (i get that as a purchase, consumer purchase dvd/blueray) but would the studio somehow make more money by lowering the streaming price a little and focus on that, cut out the middleman and ditch dvd/blueray rental? this is not true is it because streaming adobtion is still a minor portion of population? (what is it 20%, 10%..?). i understand quality is still an issue (blueray is better than streaming).

 

why does streaming rental cost so much more? is it because the cost of supporting the streaming infrastructure is high and consumer adoption has  not reach a critical point for cost leverage to occur?

 

i guess for me it just seem like streaming should cost less not more than physical dvd/blueray, than again that is completely an assumption of mine.

 

thanks

 

 

 

hy

[yadayada]

stuidio's can't do this, there are many studio's with all different movie's, it would need to be concentrated by a third party.

 

I think another problem is that the internet high way in the US cannot handle so much traffic. But this will change ofcourse.

 

And finally studio's don't like redbox very much, but they cannot legally stop them. They want to charge higher prices if the demand is there (and there is because they control when and where there is supply).  If you read this thread, you see we discussed where retail dvd and blu-ray sales would go. If retail sales would disapear, redbox would not have leverage on the movie studio's and they would have to charge higher prices.  So that is a risk. But I am not worried about that for reasons given already.

[krazeenyc]

Sid,

 

Redbox does have a pricing advantage. But I think you are exaggerating how great it is. It's not really the difference between $5 and $1.50.  The average Blu ray rental runs the renter $2.93 I believe -- so for every person that is dedicated to returning disc after 1 night, most return it after 2 or 3 (Paying $3 - $4.50).  Those customers are of course more coveted and valuable and they would be the first to move to streaming upon a streaming price drop to say $4.  Based on this I believe that if the price of streaming an HD movie dropped to $4 from $5-$6 (Not saying that it will) it would damage the Redbox business significantly.

 

It's a fallacy that due to the first sale doctrine RedBox does not need the cooperation of the studios for their business to work. If they say "screw the studios" the advantage to RedBox is that they will have any title they want the day a bluray/dvd is released and there is definitely some increased revenue for doing so. However there are a ton of drawbacks going this route including:

 

1) Business is no longer asset light. Major cash outlays to purchase new release movies weekly.

2) Managing demand becomes much trickier.

3) Broken DVDs/BluRays become a much bigger issue.

 

There is a reason they strike deals with the studios. I don't believe they would survive without studio support.

 

All this being said you are correct that Netflix will never be able to offer blockbuster new releases at $8 per month (they probably can't even have a great library at $20 per month).  I think you are probably right that it will be a while before streaming prices drop, but I have no good way to handicap this.  I like the lumpiness in the business (due to rental release schedule) as it may give me a great entry point if I come to the conclusion that the business is sustainable. For what it's worth I like the coinstar business but don't like EcoAtm.

[siddharth18]

Redbox does have a pricing advantage. But I think you are exaggerating how great it is. It's not really the difference between $5 and $1.50.  The average Blu ray rental runs the renter $2.93 I believe -- so for every person that is dedicated to returning disc after 1 night, most return it after 2 or 3 (Paying $3 - $4.50).  Those customers are of course more coveted and valuable and they would be the first to move to streaming upon a streaming price drop to say $4.  Based on this I believe that if the price of streaming an HD movie dropped to $4 from $5-$6 (Not saying that it will) it would damage the Redbox business significantly.

 

I think it's the perception of $1.2/day or $1.5/day that's driving demand, not the actual final amount that ends up being charged on the consumer's credit card. If the customer himself chooses to hold the disk for over a day, then the higher final bill is the cost of the added convenience of holding the disk for more than a day. If most consumers return it after 2-3 days, then we should note that online movie rental prices are also only for 24 hours worth of playback rights, so the $5-$6 does not carry with it, the advantage of being able to view the movie across 2-3 days.

 

In any case, $1.2-$1.5 a day is much more palatable selling point than $5 (for Standard Definition) or $6 for (for HD).

 

According to Michael Pachter at Wedbush: "the analyst contends Redbox’s ongoing $1.20 nightly DVD rental price trumps transactional VOD’s $4.99 to $5.99 price point. An insurmountable price gap given that transactional VOD has not lowered prices since its inception in the 1990s."

 

Why would online HD rentals drop to $4 per rental? Are studios willing to accept lower margins? Are content costs going down? Are pipe owners going to continue to allow data hogs like Netflix to continue using their pipes without exhorting paid peering deals?

 

 

http://www.nytimes.com/2014/02/24/business/media/comcast-and-netflix-reach-a-streaming-agreement.html

http://time.com/80192/netflix-verizon-paid-peering-agreement/

 

With ISP mergers on the horizon, are bandwidth costs for consumers going to go up or down?

 

http://money.cnn.com/2014/05/15/technology/comcast-data-limits/

http://www.pcworld.com/article/2155286/comcast-exec-says-bandwidth-caps-for-all-to-return-within-five-years.html

 

On a 350GB monthly data allocation, how many high-def movies can a consumer stream?

[yadayada]

I think they use it more to get leverage on studio's. Studio's realize that they benefit more by conceding. So if retail would go away, redbox would lose leverage to get good deals.

 

So for example the next release cycle may be 4 months from now or maybe even a year. Studio's make a deal to postpone redbox by a few weeks or a month to get more dvd sales. And in return redbox saves some costs and still gets them earlier then the next release cycle.

 

http://articles.latimes.com/2012/oct/25/entertainment/la-et-ct-warner-redbox-20121026

 

So that is why it is important to watch dvd retail sales on this one, if they go down too much they will lose their leverage.

 

And I don't think consumers actually plan to bring back the disc too late. So I don't think they will use an average price to compare prices. And even if that is the case, there are always people with slow or not internet. Now it generates 200 million, but i can see this being a niche thing still generating 50 million a year 10 years from now in poorer area's.

[siddharth18]

I noticed that the blogger "Red" initiated a position in Outerwall - http://quinzedix.blogspot.com/p/tracking-portfolio.html (scroll to the very bottom).

 

I've liked his way of thinking and his track record...I'm wondering if his thesis is similar to one discussed in this thread. Anyone know ? Haven't seen a post from him...is he on this board?

[yadayada]

lol i actually emailed him about it. wanted his feedback.

[jeremykgold]

Trying out using VoD and theaters in conjunction with each other:

http://www.latimes.com/entertainment/movies/moviesnow/la-et-mn-snowpiercer-vod-and-the-future-of-film-distribution-20140710-story.html

[yadayada]

Anyone looking at 2016 options on this one?

 

with the 50$ ones you break even at a share price of 62$. That will probably be around a 1 billion $ market cap. That is almost completely discounting redbox, and fully discounting success at their new ventures. I could only see a share price lower then that if redbox falls of a cliff, and new ventures is not a success.

 

And if basicly no bad things happen, yet the market is still slightly too pessimistic then there is 4-500% upside with those options at the veyr least.

 

edit:

basicly the debt load is only a problem if new ventures don't take off AND redbox falls of a cliff. So to me it seems the market isn't really counting in Ecoatm as a possible success and doesn't realize how much cash that venture could produce. And the market is also under the impression that redbox could fall of a cliff anytime now. So yeah with those assumptions, current price does not seem that crazy. But if the market realizes new ventures could add a decent chunk of cash flow, and redbox is still chugging along like it is now, then I think you should see a large rerate of the shares.

[Libs]

http://finance.yahoo.com/news/outerwall-inc-announces-2014-second-200100457.html

 

Earnings out.

 

revenue down slightly

FCF 37MM; YTD: 104 MM

Bought back 712K shares for $50MM

June was worst realease date in a long time

Sticking with 200-240MM FCF guidance for year.

 

Stock is down $4 to $51 after-hours.

 

GFP, good call on the market not forgiving the Redbox declines ( 7% rev decline, 9% rental volume decline).

 

 

 

[yadayada]

was the world cup though. I think it will pick up again. This happened in the past.

 

New ventures revenue per machine picked up a lot to 94k$. Now all they gotta do is scale up. And they can do that fast. Then within 2 years that could be spitting out 150-250 million in FCF.

 

Curious how the market reacts tommorow.

[TwoCitiesCapital]

Definitely interesting. I'm willing to give the management the benefit of the doubt at this point. Show release schedule and world cup makes sense.

 

Loved the 4.5% buy back but hated how it was all done prior to the 30% decline. Hope they use another 50M from next quarter to keep this up and cannibalize at a great price.

[gfp]

In the month since quarter end they have only purchased 8,645 shares - less than half a million dollars worth.  They seem to like repurchasing the stock at 70 and hate repurchasing at 55...

 

Share count 7/25/14: 19,856,628

Share count 6/30/14: 19,865,273