Is Coinstar the Future of Video Rentals?
Has the change-counting kiosk maker come up with the perfect formula for video renting success?
For roughly two decades, when consumers wanted to rent a movie, they went to Blockbuster Video. There were other video chains in the mix as well, such as Family Video and Hollywood Video. But it was Blockbuster – which has shifted over the years between a multitude of owners, including Viacom (NYSE: VIA) and most recently Dish Network (NASDAQ: DISH) – that ruled the industry. It was easy to see why: Blockbuster had the most locations, offered competitive pricing, and typically contained more copies of the most desired films and video games.
That did not change until Netflix (NASDAQ: NFLX) and other forms of streaming and on-demand video began to arrive. Even then, the transition was not overnight. It took consumers a while to adapt to the concept of ordering movies through their cable boxes. Up until the last decade, pay-per-view movies had to be ordered over the phone. The process was anything but instant, and you couldn't pause, rewind or fast-forward through the film. But with on-demand viewing, consumers can now do just that. The same is true for streaming video, which quickly made the feature an exciting alternative to traditional at-home rentals.
Before Netflix launched its streaming video site, the company gained millions of customers by offering thousands of movies by mail at a fair price. Consumers liked the idea of having movies sent directly to their home, preventing the need to run to Blockbuster. They appreciated the concept of no late fees, an issue that many Blockbuster customers complained about. (This issue would eventually inspire Blockbuster to launch a no-late-fees campaign. Inevitably, that campaign failed.) Consumers also liked the fact that Netflix offered a larger catalogue than any one particular Blockbuster location, enabling them to acquire movies that couldn't be found anywhere else.
For heavy renters, Netflix was a dream come true. And once streaming video was added to the mix, there was no going back to brick-and-mortar rental shops. Consumers had officially made the switch to the new generation of video viewing. Netflix was here to stay; Blockbuster was not.
Then in 2011 Netflix announced a price hike, the loss of Starz (which included content deals with Sony (NYSE: SNE) and Disney (NYSE: DIS)), the separation of its DVD and streaming businesses, the reunion of its DVD and streaming businesses, and a weak content deal with DreamWorks Animation (NYSE: DWA). In 2012, Netflix admitted that DVDs – the business it is trying desperately to kill off – are much more profitable than its streaming video service.
This is one of the many reasons why Netflix may not be around in five years. The company took a great business model and ran it into the ground. It's still a strong entity with millions of customers. But on an almost continuous basis, Reed Hastings (the company's hilarious CEO) has provided consumers with additional reasons to look down on his firm. Considering the initial growth of Netflix, one would assume that Hastings is an intelligent guy. Going by his recent remarks, however, it would appear that the chief exec has lost his way.
Coinstar (NASDAQ: CSTR), on the other hand, seems to know exactly what it is doing. Instead of launching a by-mail or brick-and-mortar rental chain, the self-service kiosk company decided to invest in Redbox, a DVD kiosk company funded by none other than McDonald's (NYSE: MCD). Since that time, Redbox has gone on to become a powerhouse in DVD renting.
When critics talk about DVDs and their future at retail, they often forget about the millions of consumers who aren't yet ready for (or accepting of) an online-only world. They often ignore the fact that DVDs do not require an Internet connection, which make them faster, easier to load, and potentially less expensive than Netflix.
Bob Movie Lover and his family of five can watch two hundred DVDs a month and his broadband Internet provider won't say a thing. But if he tries to stream 200 movies with Netflix, he'll surpass the 250GB data caps employed by Comcast (NASDAQ: CMCSA), AT&T (NYSE: T) and other broadband companies.
Does this guarantee that DVD renting will still be a multi-billion-dollar business in five years? No. But should we assume that DVDs are going the way of the dinosaur? Absolutely not.
Part of the reason why consumers don't buy as many DVDs today as they did 10 years ago is because the cool factor (of being able to own nearly every movie and TV show ever made in picture-perfect form) has finally worn off. That's another thing critics don't talk about. They love to tell us that piracy is a factor, which is true. And they love to tell us that digital distribution is having an impact. But consumers have not replaced their DVD purchases with legal digital downloads. Instead, they now simply buy fewer movies, regardless of the format.
Blu-ray isn't a “flop” because people hate DVDs; it's a flop because people already own DVDs! VHS tapes were here for three decades before a superior format arrived. But less than 10 years after filling our film collections with DVDs, Hollywood wanted us to start over with Blu-ray. That wasn't going to happen.
This is why DVD and Blu-ray sales are down, and why DVD renting is still a very big business.
On the basis of profit alone, Netflix may have once had the best model for DVD rentals. But it seems as if Coinstar has uncovered a better model in providing consumers with the speed and convenience of DVD kiosks, which can allow movie watchers to rent and return new films at more than 30,000 retailers. Coinstar pulled this off without having to hire a single retail clerk, without having to lease a single store, and without having to construct a single building. (This might be why McDonald's funded Redbox in the first place – because the company envisions a future in which all of its restaurants are automated.)
Can streaming video catch up to DVD rentals? That day is coming, no question. And when it does, Coinstar has a deal with Verizon (NYSE: VZ) that could ensure that Redbox survives. And if not, who cares? Redbox isn't Coinstar's only business.
Sadly, the same cannot be said for Blockbuster, which failed to open a chain of change-counting retail shops when it had the chance.
Netflix, meanwhile, has all but ignored the potential for a site that streams change-counting online.
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