by Lawrence Meyers | August 28, 2013 11:14 am
First, let me state for the record that changing Coinstar’s name to Outerwall (OUTR) is dumb. Dumb dumb dumb. I didn’t even know it was Coinstar until yesterday — it sounds like a construction company!
But whatever name the company goes by, the fundamental story has not changed. In fact, it has only gotten better. Outerwall has a solid core business that provides cash flow. The first element is its coin-counting business, which has a massive installed base at this point.
It did itself a great favor by partnering with companies like Amazon (AMZN), allowing customers to convert coins into Amazon vouchers at a 100% rate, and not lose the 8.9% fee when converting to cash. And Amazon is just one of many such partners. Coinstar kiosks are now testing gift card exchanges as well, so you can convert unused cards back into money.
The second core element is Redbox movie rentals. Amazingly, the company now owns greater than 50% market share in the physical rental space, thanks to the demise of Blockbuster and other superstores.
However, the theory is that physical movie rentals will decline as streaming becomes de rigeur over the next few years. That may very well be the case, although the conversion is happening slower than I expected. Still, Redbox is a money maker, and will continue to be. It has set itself up in the streaming world via its Redbox Instant partnership with Verizon (VZ).
Some people shrug their shoulders at this venture, and I don’t blame them, because the product been marketed ineptly. Until I sat down to write this article, I had no idea that the Redbox Instant product was not only available, but already had 4,600 movie titles including recent studio releases. Nor did I realize that having Verizon service wasn’t required. Nor did I realize that you can stream directly to some Samsung (SSNLF) and LG Display (LPL) televisions.
Netflix (NFLX) has 14,000 movie titles and some 32,000 television episodes, so Redbox is still playing catch up. But Redbox has a real chance at closing that gap thanks to Verizon’s deep pockets and ability to afford much more content than Redbox has presently.
In addition, Netflix has some $6 billion in content obligations, with about $2 billion due in less than a year, and only $1 billion in cash. I doubt that deals the studios made exclusively with Netflix will hold, and that will open up more content to Redbox.
Outerwall is also rolling out its coffee product, in conjunction with Starbucks’ (SBUX) Seattle’s Best Coffee. OUTR is struggling to get a consistent quality cup brewed at its Rubi machines, and is counting on the partnership to give it a boost.
I’m not crazy about its ticket business, because the online experience is always going to trump going out to a kiosk to purchase a ticket. But Outerwall is high on a very interesting product, its ecoATM, which allows you to recycle old gadgets like phones and tablets at an ATM-style kiosk for cash.
The other intriguing play is something you may have seen in airports — a fresh food kiosk. If you recall, there are probably still crappy vending machines out there in places like hospitals and police stations that serve week-old sandwiches in those rotating bins. Yuck.
Outerwall calls its re-invention of this idea Crisp Market, and I think the idea is great. Easy-to-buy fresh food, complete with nutritional information. You can put one of these anywhere: health clubs, airports, hospitals, malls. And they’ll go very nicely next to Jamba’s (JMBA) similar concept, JambaGo.
All this suggests that Coinstar … I mean Outerwall … is going in the very direction I thought it would. There will be some growing pains, and some launches that fail, but overall, the company is well-positioned to expand its kiosk business into just about anything.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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