M+E Daily

Rental Kiosks’ Role in 2011? Analysts Have Different Answers

Redbox parent Coinstar may have expected higher demand for Blu-ray discs and windowed new releases from its Redbox rental kiosks during the holidays. Nevertheless, kiosks gained in market prominence last year, with consumers reportedly beginning to frequent automated machines more often than they visit stores such as Blockbuster.

During the third quarter of 2010, the rental market share of Redbox and other standalone kiosks overtook the share of retail stores for the first time, according to newly-released findings by the NPD Group. Netflix and other subscription services comprised 41% of consumer video rentals during the quarter, NPD says, followed by kiosks at 31% and store outlets at 27%. Kiosks’ share represents an increase of 10 percentage points from the third quarter of 2009; subscription services’ share rose by two points year-over-year, while retail stores’ share declined by 13 points.

NPD relies on weekly self-reporting by U.S. consumers age 13 and older on their home entertainment rentals and purchases for its VideoWatch data. Kiosk companies such as Coinstar, in contrast, derive usage data from actual transactions at rental machines.

That said, NPD’s findings are consistent with what Coinstar called an “exceptional” third quarter for Redbox (ended Sept. 30). But the NPD survey sets in relief Coinstar’s announcement of a disappointing fourth quarter for Redbox — as well as lowered 2011 guidance for the kiosk network —ahead of its release of full Q4 earnings on Feb. 3.

Analyst Richard Greenfield of BTIG Research expresses surprise at Redbox’s misjudgment of rental-business variables during the holidays. “What is remarkable about the pre-announcement is that Coinstar reported Q3 results [on Oct. 28] and notably raised guidance,” Greenfield writes in a blog post (registration required). “Given that Redbox gets daily results from every kiosk in its chain, it made its guidance increase announcement with an entire month’s worth of Q4 data in hand. We presume the October data was very encouraging for Redbox to have the confidence to raise guidance. Yet, the company ends up missing by a wide margin and the impact is not a one-time event, as they reduced 2011 full-year guidance as well.”

Coinstar said last week that its fourth quarter revenue will likely be $391 million, compared with previous fourth quarter 2010 guidance in the range of $415 million to $440 million. The company also Coinstar has revised its initial outlook for full year 2011 and now expects revenue between $1.70 billion and $1.85 billion, compared to previous guidance of revenue between $1.80 billion and $1.95 billion.

Greenfield dismisses as an “excuse” Coinstar’s faulting 28-day windows on key Q4 releases for Redbox’s holiday revenue shortfall. “Redbox had already lived through the impact of delayed content in Q2,” he notes, “and indicated at the time that the problem was that virtually all the content in April was from the three studios that were delaying DVDs for the first time.” While the fourth quarter saw 28-day delays on titles including Universal’s “Despicable Me” and Warner’s “Inception,” Greenfield writes, “there were plenty of fresh DVDs in each month of the quarter” for Redbox kiosks — including day-and-date availability of Disney’s “Toy Story 3” in November.

Of course, for home entertainment marketers, demand forecasting is hardly straightforward; in fact, there are more variables and unknowns than ever. Some consumers are still just getting used to renting movies from a kiosk, not to mention the concept of delayed availability of some titles (a policy several studios began pursuing less than one year ago).

Among the unknowns in the home entertainment market is the number of households that stream movies from Netflix or other on-demand services, via Internet-connected TVs or Blu-ray players. This presumptive trend may have impacted Redbox’s Blu-ray rental business in the fourth quarter. BTIG’s Greenfield points out that Blu-ray players are more likely to be connected to the Internet than standard DVD players, yet the analyst cites to no data to support his assertion that “most Blu-ray players [are] IP-connected.”

Where does all of this leave Redbox and kiosks in general in 2011?

Windowing policies notwithstanding, NPD Group’s Russ Crupnick expects kiosks to become even more ubiquitous. “Traditional video retailers will no doubt experience even more competition in the coming year,” he says, “as kiosks appear more frequently in grocery store chains, mass merchandisers, and quick-serve restaurants, and as competition intensifies from an assortment of on-demand rental offerings.”

Analyst Greenfield, who views Redbox’s $1-a-night DVD pricing as a destructive force on the movie industry, sees opportunity for studios to gain leverage over the kiosk company. He publicly appeals to Disney chief Robert Iger to adopt a windowing policy with Redbox.

“If more studios window Redbox and the 28-day window expands to 45-60 days at the same time that VOD/iVOD is becoming more accessible,” he writes, “we suspect the revenues per Redbox kiosk will decline materially.”