CSTR - Coinstar

[fwallstreet]

http://www.boothlaird.com/wp-content/uploads/2014/08/Booth-Laird-Investment-Partnership-Outerwall-long-thesis.pdf

 

Thanks for sharing!

[thefatbaboon]

Anyone know what Larry Sarbit sold out last year?

 

He seemed so bullish on it before, discussed it widely, was his biggest position, then bang, he sells the whole stake in Q2 last year.

[Guest wc]

I love the Redbox and Coinstar businesses, but can someone help me understand how ecoATM is not doomed? I went to one today and checked out prices for two of my devices:

 

1. iPhone 5 64gb Verizon black - $160 for perfect condition. Browsing eBay it looks like I'd easily get $300, maybe more.

 

2. iPod Classic 6th Generation 160gb - $27 for perfect condition. eBay looks like $125 minimum.

 

If the price differences were, say, 20% I'd think it's a great deal for the convenience factor, but they're basically trying to steal people's devices. I just can't imagine this business model working out long term. I know the results have been good so far I just don't see it  :-\

[siddharth18]

I love the Redbox and Coinstar businesses, but can someone help me understand how ecoATM is not doomed? I went to one today and checked out prices for two of my devices:

 

1. iPhone 5 64gb Verizon black - $160 for perfect condition. Browsing eBay it looks like I'd easily get $300, maybe more.

 

2. iPod Classic 6th Generation 160gb - $27 for perfect condition. eBay looks like $125 minimum.

 

If the price differences were, say, 20% I'd think it's a great deal for the convenience factor, but they're basically trying to steal people's devices. I just can't imagine this business model working out long term. I know the results have been good so far I just don't see it  :-\

 

Without arguing with you on price (because you do have a point) - I'm guessing it's about catching the impulsive customer and probably not the savvy person who checks the buyback price at various stores and online. More like a person who sees a machine and realizes he/she has an old phone lying around and can easily convert it into cash. They said they do 6 figures in revenue with a pretty good 20-25% margin on each kiosk. I doubt they're making numbers up...but I don't think I have a good grasp on who actually is the idea/target consumer for ecoATM.

[siddharth18]

Redbox has started to test price increases movies in certain areas. For instance, prices for kiosk in zip code 81003 are as follows:

 

DVDs - $1.35 (prev $1.2), increase of 15 cents, 12.5%

BluRay - $1.75 (prev $1.5) increase of 25 cents, 16%

 

Let's see how many get turned off by 15c-25c price increase!

[jeremykgold]

I love the Redbox and Coinstar businesses, but can someone help me understand how ecoATM is not doomed? I went to one today and checked out prices for two of my devices:

 

1. iPhone 5 64gb Verizon black - $160 for perfect condition. Browsing eBay it looks like I'd easily get $300, maybe more.

 

2. iPod Classic 6th Generation 160gb - $27 for perfect condition. eBay looks like $125 minimum.

 

If the price differences were, say, 20% I'd think it's a great deal for the convenience factor, but they're basically trying to steal people's devices. I just can't imagine this business model working out long term. I know the results have been good so far I just don't see it  :-\

 

http://www.ebay.com/sch/i.html?_from=R40&_trksid=p2050601.m570.l1313.TR0.TRC0.H0.X&_nkw=iPod+Classic+6th+Generation+160gb&_sacat=0

 

From what I've read (I've never tried out a machine) it does look like ecoATM offers less money. But when I look on Ebay I see buy it now prices in the 100 + range but most of the devices that are being bid on appear to be in the $70 range, one in the $50 range, with one new in the box at a bid of $100. I agree with Siddharth that it is either for a more impulsive customer or someone that doesn't want to go through the process of listing their item on ebay, waiting for it to be bid on or bought, then shipping it and making sure they are paid. For someone who is willing to accept instant cash but less than they could get if they put in more effort.

 

Also, 100k to 120k per kiosk with 20-25% margins is what they have guided to, not what the machines are currently doing.

 

Thanks for the price increase data, interesting to see!

[jeremykgold]

I love the Redbox and Coinstar businesses, but can someone help me understand how ecoATM is not doomed? I went to one today and checked out prices for two of my devices:

 

1. iPhone 5 64gb Verizon black - $160 for perfect condition. Browsing eBay it looks like I'd easily get $300, maybe more.

 

2. iPod Classic 6th Generation 160gb - $27 for perfect condition. eBay looks like $125 minimum.

 

If the price differences were, say, 20% I'd think it's a great deal for the convenience factor, but they're basically trying to steal people's devices. I just can't imagine this business model working out long term. I know the results have been good so far I just don't see it  :-\

 

http://www.ebay.com/sch/i.html?_from=R40&_trksid=p2050601.m570.l1313.TR0.TRC0.H0.X&_nkw=iPod+Classic+6th+Generation+160gb&_sacat=0

 

From what I've read (I've never tried out a machine) it does look like ecoATM offers less money. But when I look on Ebay I see buy it now prices in the 100 + range but most of the devices that are being bid on appear to be in the $70 range, one in the $50 range, with one new in the box at a bid of $100. I agree with Siddharth that it is either for a more impulsive customer or someone that doesn't want to go through the process of listing their item on ebay, waiting for it to be bid on or bought, then shipping it and making sure they are paid. For someone who is willing to accept instant cash but less than they could get if they put in more effort.

 

Also, 100k to 120k per kiosk with 20-25% margins is what they have guided to, not what the machines are currently doing.

 

Thanks for the price increase data, interesting to see!

 

The only iPhone 5 64gb I see that is not sealed is bid at $223 currently but there are still 17 hours left. We'll have to wait to see what it ends up going for!

 

I'm not disagreeing that they offer substantially less but it doesn't seem like the difference is as egregious as you made it appear. Given the effort and time it takes to put an item on ebay or send it in to Amazon or gazelle, I can see there being a market and customer for ecoatm.

[Guest wc]

jeremy,

 

I only looked at auctions with Buy It Nows. Standard auctions that are currently running aren't a good judge of what the final price will be. Out of curiosity, I just went and looked what I sold my iPhone 4S 64gb for on eBay ~2 years ago--$330. I also forgot I sold a 7th Generation iPod Classic ~3 years ago for $148.28 (both used but in very good condition). So I doubt my prices are that far off.

 

Anyhow, I hope I'm wrong on ecoATM. Management has said it's progressing just as they planned so I'm trusting them. OUTR is a pretty decent position of mine by the way, I just can't shake my dislike for ecoATM. I think one of the biggest risk in OUTR is management squandering their cash flow in something like ecoATM.

[jeremykgold]

Ok, I don't use ebay and don't know what the best indicator of final price is.

 

On Gazelle, a flawless iphone 5 verizon 64gb goes for 205.

 

Your iPod goes for 40.

 

The differences aren't huge. Obviously you receive less than if you spent time selling it yourself but some people want instant cash. That's my point. You receive instant cash and because of that you receive a bit less. It seems reasonable. I don't see a reason to dislike the business.

 

I think management's capital allocation used to be a bigger concern pre Jana

[yadayada]

I love the Redbox and Coinstar businesses, but can someone help me understand how ecoATM is not doomed? I went to one today and checked out prices for two of my devices:

 

1. iPhone 5 64gb Verizon black - $160 for perfect condition. Browsing eBay it looks like I'd easily get $300, maybe more.

 

2. iPod Classic 6th Generation 160gb - $27 for perfect condition. eBay looks like $125 minimum.

 

If the price differences were, say, 20% I'd think it's a great deal for the convenience factor, but they're basically trying to steal people's devices. I just can't imagine this business model working out long term. I know the results have been good so far I just don't see it  :-\

 

Without arguing with you on price (because you do have a point) - I'm guessing it's about catching the impulsive customer and probably not the savvy person who checks the buyback price at various stores and online. More like a person who sees a machine and realizes he/she has an old phone lying around and can easily convert it into cash. They said they do 6 figures in revenue with a pretty good 20-25% margin on each kiosk. I doubt they're making numbers up...but I don't think I have a good grasp on who actually is the idea/target consumer for ecoATM.

yeah and I think they are after the least price sensitive customer first. If that group turns out to be too small they will probably come up in price. Seems like a smart strategy.

 

And I think they tested this locally for a few years and figured out it worked. So now they scale it up and actually start to make money of it. Why would it not work on the east coast if it works on the west coast? Seems like a good way to do this. Test it small for a few years, and if it works buy up the rest of the thing like they did with EcoATM, and scale it up.

[beerbaron]

I'm scratching my head a little bit on the Redbox side of the business. Sony has said they expect BlueRay sales to decrease 38% in the next 4 years, management hints that DVD sales in the US would go from 2.4 to 2.0B$. I'm trying to model that but it just does not add up, BluRay is the new entrant here so it should be slowing down less than DVDs, even with lower price.

 

So I'm up thinking I should do two models.

 

Model 1: $ Video rentals go down 40% within 4 years. CapEx+Expenses stays flat.

Model 2: $ Video rentals go down 20% within 4 years. CapEx+Expenses stays flat.

 

What did you guys use to model, and why?

 

BeerBaron

[yadayada]

Im curious how much of a threat this is:

http://www.amazon.com/Digital-Copy-DVD/b?ie=UTF8&node=721726011

 

Can anyone find the numbers for bluray sales this year? It seems in the past years they forecasted declines, but it grew around 10% each year.

[elevensecsrt4]

Just noticed OUTR coinstar in Allan Mecham's Arlington Fund a 6% position

 

http://www.sec.gov/Archives/edgar/data/1568820/000160658714000197/xslForm13F_X01/form13InfoTable.xml

 

still researching the company myself but I have been a netflix user for 4 years and have used redbox for at least the last 2 years..we love renting kids movies for trips and returning them on the road or in another town.

 

 

[ArminvanBuyout]

Do you guys think that this company might be a value trap? The company seems very cheap, and rightly so, because it's in an industry that's in terminal decline. Outerwall reminds me of an article I read recently http://www.oddballstocks.com/2014/09/portfolio-strategies-value-traps.html

 

It would be interesting to hear some thoughts on this.

[Fat Pitch]

Do you guys think that this company might be a value trap? The company seems very cheap, and rightly so, because it's in an industry that's in terminal decline. Outerwall reminds me of an article I read recently http://www.oddballstocks.com/2014/09/portfolio-strategies-value-traps.html

 

It would be interesting to hear some thoughts on this.

 

Guys if Blue Chip Stamp was still a public company today, how would you value it? I'm sure we'll argue it's a terminal declining business and will become technologically obsolete.  We can probably make the case that it's a value trap as well.

 

I think the main focus is what is management doing with the cash flow? If they can reinvest it and earn great ROIC then who cares if the main business withers away and dies. Munger/Buffett showed us that with Blue Chip.

 

[KCLarkin]

Shutting down redbox instant:

http://www.businessweek.com/news/2014-10-05/verizon-s-redbox-instant-streaming-venture-to-end-oct-dot-7

[usdtor05]

@fatpitch, that is the best way I have heard to think about this stock. Well done.

[yadayada]

fact that you need faster internet is also a hidden cost in streaming. With the cheapest cable internet your probably going to get a lot of low res pictures? So I guess this is also kind of a bet on comcast being terrible.

 

Also if redbox has been popular with alternatives around for 5-10 years, why would it start falling of a cliff? They fill a demand. Unless that demand is fullfilled somewhere else for nearly the same price, why would that demand suddenly disapear? Since they can lose so much revenue before losing money, I doubt that redbox will not be around in some form  10 years from now. So it seems highly unlikely you will lose here.

 

And coinstar is really stable.. First it was stores taking over the coin business. That did not happen. Then it was cash disapearing, that is not happening. And it was banks taking this inhouse, now they are actually expanding coinstar into banks lol. So that basicly carries the debt and maybe some equity. So Coinstar pretty much carries the debt and some of the equity. So for about a billion$ you can bet that in 10 years redbox will still be around in some form, and you get ecoatm as a nice free option.

 

I think the mistake people make is the same in the dot com bubble. You get toys R us I think, being valued 10x earnings at 4 billion$ I think. And the online equivalent with barely any revenue was valued at 5 billion$. People overestimate how new tech will replace old. The sentiment back then was that online would replace almost anything. And yet 14 years later retail is still the largest service sector out there.. It still provides for more then 10% of the jobs in the US. And Best buy is still priced at 10x earnings. As long as there is a release cycle and the new tech is not yet hyper efficient, there will always be demand for old tech in corners of the market. So that is why I think in 10 years time redbox will be around in some form still making money. And it is somewhat likely you could even value redbox at more then 2 billion$.

[shhughes1116]

I've been in and out of Outerwall for the last couple of years.  I am thinking about getting back in given the negativity coupled with their roll-out of ecoATM.

 

As simple as this company is, I think it is misunderstood by most investors.  Simply put, companies will continue to produce movies that consumers will want to watch.  Some years there will be more good movies, and some years there will be fewer good movies.  The number of good movies in a particular year will ultimately drive the overall demand to see these movies.  In order to see these movies, a consumer has five general options for a new release movie: (1) Go to the movie theater (~$11/person); (2) Buy the DVD, watch it once and let it sit on the shelf for 10 years (~$10/DVD); (3) Go to Redbox and rent it ($1.50/night); (4) Stream is via the Internet ($$$); or (5) On-Demand ($$$) 

 

The movie theater is generally too expensive for most families with children, so that option is becoming less and less frequent.  Anecdotally, I can say that I buy far fewer DVD's now (1 in the last 12 months), and I know that to be the case with my friends also.     

 

So that leaves three options if you want to see a new release.  Rent from Redbox, stream via the internet, or buy via On-Demand.   

 

In my area, these are the following costs for streaming via the internet:

1.  Adequate internet connection to avoid choppy video ($70/month)

2. Subscription to streaming service ($8/month). 

So about $78 a month to stream unlimited videos with a pretty poor picture quality.  And most of the stream services do not carry new releases (i.e. Netflix).  On top of that, if there aren't good movies available, you continue to pay for internet and the streaming service.   

 

In my area, these are the following costs for On-Demand:

1.  Basic cable package ($50). 

2.  Cost per movie to watch via On-Demand (variable).  I took the 5 movies listed at the top of the Redbox page (not exactly a random sample) for my local Redbox.  At Redbox, each of these would have cost me ~$1.50/night.  Using On-Demand, each of these movies would have cost me $8/day.  Like noted above, if there aren't good movies via On-Demand, you continue to pay for cable. 

 

 

But let's make this an apples-to-apples comparison.  I would purchase internet anyways because I telework.  And I would purchase cable anyways because I watch soccer.  So let's remove these costs from the equation. 

 

Streaming costs $8/month, and streaming services do not seem to carry new movie releases (disclosure: I have not tried Amazon Prime...my experience is based on Netflix, so I may be mistaken). 

And based on my quick review of On-Demand prices, it would cost me about $8/movie/night to watch any of the five movie titles listed at the top of my local Redbox kiosk.  This is compared to $1.50/night @ Redbox.   

 

So while the results may move around from year to year, I have trouble seeing this as a declining business simply because I do not see alternative options that provide a similar level of selection at a similar price.  As long as people want to see new release movies, they will have to pay someone for the content.  And based on the current business model, it appears that Redbox has the lowest-cost-of-business (and thus the lowest prices) for providing this content to the consumer. 

 

The primary risk I see are content costs, but I think these are overstated.  if the studios raise the cost of content, this will impact all providers.  If the studios attempt to raise the cost of content only for Redbox, then Redbox will go purchase the DVD's and Blu-Rays from retailers.  And if the studios try to raise the cost of DVD's and Blu-Rays to prevent Redbox from doing this, they will negatively impact their sales of DVD's and Blu-Rays via the retail channel.  Thus, in the realm of content costs, I see Redbox as being in the driver's seat. 

 

[Guest wc]

Comparing Redbox to Netflix is indeed a mistake for the reasons you stated (Netflix gets very few new releases). It's much better to compare Redbox to Amazon and iTunes which shows a similar cost savings. I rented a couple moves off Amazon this past weekend and they were $3-$4 each for standard definition.

 

Good analysis otherwise. I do think Redbox is a declining business--I just think it will be a much slower decline than the majority seems to believe.

[DanielGMask]

If you invest in CSTR as a special situation in which you have the conviction of buying cheap, then do it, but don't invest believing Redbox is a business for the long term; I think it's not.

 

To compare Redbox to any other option you'll have to analyze the theatrical windows available for each platform, which by the way is how this industry works. If those windows change in the near future, then it won't matter how convenient the kiosk, since nothing will be more convenient than watching at home via streaming from a provider like Amazon, Netflix, DirecTV or any other. The only reason that hasn't happened yet is because some DVD's still have a window advantage to streaming or video on demand (approx 1 month) and that makes them more appealing (availability), but if that changes -and Redbox has no say on that- then there will be no business!

[Carvel46]

Anyone know what percentage movie producer's revenues are DVD sales? Chart or data.

Anyone have any good sellside industry reports?

Thx.

[shhughes1116]

I would agree that the theatrical window poses a risk to Redbox.  However I think this is minimal given the current cost differential between Redbox and the other options (Video-on-Demand, Subscription-Video-on-Demand, purchasing discs, going to the movie theaters).  And the theatrical window is most likely to be impacted by studios' electronic sell-through efforts.  I will point out that this has already occurred for a number of new releases. 

 

With that said, Redbox is not intended to cater to the folks that buy DVD's and digital files immediately when they are released.  Folks who are going to Redbox are generally going there because there is a reasonable selection at a reasonable price, or they are going because they lack the appropriate internet connection or cable package in order to watch a movie at a reasonable resolution/quality.  Delaying the DVD release of a particular movie (and thus possibly delaying the release to Redbox in the absence of a specific content deal) by 1-4 weeks is unlikely to change someone's behavior and cause them to pay $8 for a movie (On-Demand) or $5 for a movie (Amazon Prime).  If convenience was the only factor in someone's decision to use Redbox, I don't think Redbox would have been successful in the first place, and I think we would be seeing far more substantial declines in the Redbox business given the long-standing availability of movies for purchase via VOD and SVOD and the presence of rentals through Amazon.

 

[yadayada]

Another concern is that they will waste lot's of cash on Ecoatm. Roll out will cost at least about 270 million$ (30k$ per machine).  Personally I think it has a somewhat high chance of succeeding. I think the upside of this business is that they function as a free billboard as well. I read a book a while ago on starbucks, and that was also their strategy. Spam these things all over the place and you can spend less on commercials. I think success with Ecoatm banks on the fact that most people don't trade in old phones (not even with online services). Not sure how that will work out.

 

 

[mateo999]

I've done quite a bit of homework on OUTR over the years, have spoken to the CFO and the company a few times, and own shares.  The biggest risks as I see them are:

 

1) Poor capital allocation among a management team that doesn't own shares of significance and thus would probably swing for the fences (ecoatm??) before running this solely for cash flow.  Here's what I recently wrote on the topic:

 

I think OUTR is being run by “B” management, but admittedly that’s a grade that may be unfairly biased to the downside.  True, the company has a failed history of incubating new ventures (Rubi, Orango, Crisp Market) and funding DoA ideas (RIBV).  Looking back even further, one can see the company spent $400mm acquiring 2 kiosk amusement businesses (skill-crane games and kiddie rides) in 2004 and 2005, only to sell the segment in 2009 for $2 (two dollars).  Also from 2004 through 2007 it acquired e-payments kiosk businesses for $100mm in aggregate, which it then sold in 2010 for $40mm.  Many shorts say management of Coinstar (as it was known then) simply got lucky when it acquired Redbox.  I don’t necessarily disagree, but nor do I see how that’s relevant.  At the end of the day, current management likely had little to do with OUTR’s rich history of bad decision making. It was not until January 2013, when the then-CEO unexpectedly retired at 55, that Scott Di Valerio was named CEO and Galen Smith was named CFO (Mr. Di Valerio was promoted from CFO, a title held since 2010, while Mr. Smith was promoted from Redbox’s SVP of Finance, a title held since 2011).  Prior to OUTR, Mr. Di Valerio was a partner as PwC, and held various roles at Lenovo, Microsoft, and Disney.  Prior to joining OUTR, Mr. Smith was an investment banker in Morgan Stanley’s “Consumer and Retail” group (where he helped lead the Mead Johnson IPO and represented PG in its sale of Folgers Coffee to Smuckers).

 

2) there comes a tipping point where CSTR doesn't really perform for the retailer (has it already been reached??), and this puts negotiating leverage with the WMTs and Krogers of the world.  I estimate that on average a CSTR kiosk is bringing in just ~$10 in rev share per day for the retailer but obviously the value is in the share of the $420/day that's being spent within the store.

 

3) DanielGMask's comment seems misguided to me, and as others have mentioned, it comes down to the cost advantage of Redbox vs. a $3.99-5.99 TVOD stream.  Keep in mind the average rental period of a redbox rental is two nights.  the economics of 1.20 or 1.50 vs. $5 or 6, suddenly becomes 2.40 or 3 vs. 10 or 12.  Some MSOs are allowing 48 hour windows though.  shhughes- no idea where you're getting $8 from, but maybe that's just one high-priced MSO, i don't think that's the norm (Apple iTunes is a good indication of average pricing per title).  The risk i see in redbox is that studios just stop pressing dvds (not BR, just dvd).  crazier things have happened, though i know Redbox buys $1B of high-margin content per year, so this seems unlikely to me.