Tuesday, February 7, 2012, 10:44 AM ET|Posted by Will Richmond
Think the world has moved on entirely from renting DVDs to streaming? Think again. Coinstar reported strong Q4 earnings late yesterday, with its Redbox DVD kiosk unit showing 39.5% revenue growth for the quarter. Coinstar attributed Redbox's performance to new kiosks, popularity of new releases and the price increase that went into effect on Oct. 31st.
Coinstar management is also bullish for 2012, forecasting Q1 revenue of $530M-$555M, exceeding analysts' average expectations of $517M. And it's betting further on DVDs' continued strength, also announcing yesterday that it is acquiring NCR's 10,000 Blockbuster Express DVD kiosks for approximately $100M, which will help it build out its international business.
Redbox finds itself in the right place at the right time, a key beneficiary of Netflix's decision to essentially abandon its DVD-by-mail business. As I wrote recently, Netflix lost over 10M subscribers during the last 6 months, with the lion's share of those defections among its hybrid DVD/streaming subscribers whose rates were hiked by up to 60% last summer. Netflix has stated that it has no plans for either retention or acquisition marketing and that it expects to lose another 1.5M of its remaining 11.1M hybrid and DVD subscribers in Q1 alone.
Netflix's decisions have left millions of people who either still value renting DVDs for their selection or price, don't have connected devices, or all of the above, to look for alternative sources. With its growing ubiquity, Redbox is positioning itself as a prime alternative. Redbox's CFO J. Scott Di Valerio acknowledged that Redbox is gaining Netflix subscribers, but did not specify to what extent. Meanwhile, Di Valerio told Fast Company that Redbox doesn't see DVDs "going away for three, four, five, seven, 10 years."
I agree with that line of thinking, and though I'm a huge enthusiast for streaming over the long-term, it's essential to remember that consumer behavior never changes completely overnight. Rather, there will be a gradual migration, with a key driver being how quickly the content selection on streaming equals what's available on DVD. No question, Netflix's streaming content choices have expanded, but a lot of library content may never come to streaming. Another issue is that HBO, Showtime, Starz and others are refusing to offer their original programming for streaming on Netflix, although it's all available on DVD.
All of that means Redbox has a nice runway in front of it in DVD rentals. That's not to say Redbox doesn't have its own challenges (e.g. relatively small selection per kiosk, studios delaying rental windows to 56 days or longer, inconvenience of in-store exchanges vs. by mail delivery, overall growth of streaming, etc.). Redbox knows all of this, but has clearly determined there's plenty of DVD rental activity for the foreseeable future. And yesterday's JV announcement with Verizon - albeit extremely vague - gives the company a path into the streaming market as well.
It's fascinating to watch the strategies of Redbox and Netflix unfold. The former appears deeply committed to its DVD rental roots, while the latter can't seem to move past them fast enough. How each of them fares over the next 2-3 years is very much tied to consumers' evolving behaviors and content providers' preferences.