Redbox Plots Web Strategy in Challenge to Netflix

Redbox, which became the fastest- growing U.S. video retailer with DVD kiosks and a $1-a-day rental price stores couldn’t match, is developing an online strategy to stay competitive with larger rival Netflix Inc.

The company, the biggest division of Coinstar Inc., may use a Web service to expand its library beyond the 200 or so titles crammed into each of its 24,000 or so DVD dispensers, President Mitch Lowe said in an interview from Redbox’s headquarters in Oakbrook Terrace, Illinois.

“The way we look at it is, How can it help us deliver to our customers things we can’t do in our kiosks?” Lowe said. “What role might it play in expanding our selection?”

The approach Redbox outlines in October will be designed to narrow the gap with Netflix, which offers more than 100,000 titles by mail and 20,000 older films online. It may also help the company take more business from Blockbuster Inc., which is closing stores and recently skipped a debt payment.

“It’s absolutely imperative for them to have a digital story,” said Ralph Schackart, a New York-based analyst with Wiliam Blair & Co. “The question is, what will it look like?”

The transition won’t be easy. Redbox may look to a technology company such as Sonic Solutions Inc. to obtain know- how, said Schackart, who expects shares of Bellevue, Washington- based Coinstar to perform in line with the broader market over the next 12 months.

Online Imperative

Convenience and a low price have created a winning formula for Redbox, which lets shoppers rent discs by swiping a credit or debit card. Sales from dispensers located in and outside of grocery and convenience stores surged 70 percent in the first quarter. Technicians in Redbox’s offices monitor the machines, which hold multiple copies of films and up to 630 DVDs, for jams and other troubles, making sure people don’t leave angry.

At the same time, rivals led by Netflix are attracting millions of Web customers with larger selections and cutting out the need for stores.

Redbox is losing some business as renters use kiosks to get new releases and go to Netflix for older, harder-to-find titles, said Lowe, who left Netflix in 2002. His former employer, based in Los Gatos, California, increased first-quarter sales by 25 percent with its $8.99-a-month subscription for mail-order rentals and unlimited Web viewing.

Steve Swasey, a Netflix spokesman, declined to comment on Redbox’s plans. More than half of the company’s 14 million customers used the Web to watch films on TVs or other devices.

“Long before we had streaming we had a loved brand and we turned it into an even more loved brand with streaming with no additional cost,” Swasey said.

Save Time, Money

Redbox also faces competition from Apple Inc. and Best Buy Co., which sell movie downloads. Wal-Mart Stores Inc., the world’s largest retailer, bought the Vudu Inc. online entertainment service in February and Sears Holdings Corp., the largest department store owner, said on June 22 it plans to sell and rent movies online through an agreement with Sonic.

An accord with Novato, California-based Sonic would spare Redbox the time and cost of negotiating Web rights with studios, Schackart said. Sonic technology is already in DVD players and TVs, and the company has rights to thousands of movies.

“Sonic gives Redbox a digital olive branch with the studios,” Schackart said.

Sonic provides technology and a library of about 20,000 movie titles to clients including Best Buy and Sears, Chris Taylor, a company spokesman, said in an interview. He declined to say whether Sonic is in talks with Coinstar, which also won’t comment on the matter.

Legal Battles Ended

Redbox ended legal battles this year with three studios, News Corp.’s Fox, General Electric Co.’s NBC Universal and Time Warner Inc.’s Warner Bros., over access to DVDs. The studios agreed to sell discs to Redbox for rental after the movies had been in stores for 28 days.

Walt Disney Co., Viacom Inc.’s Paramount Pictures, Sony Pictures Entertainment and Lions Gate Entertainment Corp. let Redbox offer DVDs when they become available for sale in stores.

While North American DVD purchases tumbled the past three years, rentals are expanding and are projected to rise at an average rate of 2.7 percent to $9.97 billion by 2014, helped by higher-priced Blu-ray discs, Matthew Lieberman, an analyst with PricewaterhouseCoopers, said in an interview.

The growth means Redbox will continue to attract consumers, Lowe said.

Redbox, and its $1-a-night price, began in 2002 as a test by McDonald’s Corp. to lure diners into restaurants, according to the Redbox website. Coinstar invested three years later and bought out McDonald’s in 2009.

Profit Outlook

Before the affiliation with Coinstar, which also operates coin-counting machines and a money-transfer service, Redbox had trouble convincing retailers to accept the machines, Lowe said. The parent leveraged relationships from the placement of its coin-counting machines to win acceptance of the DVD kiosks.

Coinstar is scheduled to report second-quarter earnings on July 29. Analysts project profit of 36 cents a share excluding some items, the average of six estimates compiled by Bloomberg, an increase from 23 cents a year earlier. Sales probably expanded 21 percent to $381.3 million, they estimate.

Coinstar fell $2.44, or 5.2 percent, to $44.56 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has gained 60 percent this year. Netflix, which today announced plans to start a streaming service in Canada this year, advanced 51 cents to $118.90.

With first-quarter sales of $263 million, Redbox is Coinstar’s largest division. On average, renters keep DVDs for two nights and spend $2 per movie, Lowe said. The company is testing video games and prices of as much as $1.75 a day for Blu-ray in some markets, Lowe said.

Redbox expects demand for physical rentals to remain high.

“The disc business has a great future,” Lowe said. “Especially with Blu-ray coming out. It extends the life.”

To contact the reporter on this story: Michael White in Los Angeles at mwhite8@bloomberg.net.

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