A dollar for your film rental thoughts? Redbox's success has analysts asking

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NEW YORK -- Quick, what is the best-performing DVD-rental stock year-to-date? If you're thinking Netflix, think again.

Coinstar, the company behind the fast-growing Redbox DVD-rental kiosks, has flown higher than even the DVD-by-mail pioneer, and both have handily outperformed rental giant Blockbuster.

Sure, Coinstar's business includes the famous green kiosks that transform loose change into cash and a unit the firm plans to sell that includes gum-ball and toy-crane game machines. But while media and entertainment investors might not have Coinstar shares on their radar, company analysts see further upside, and at least some entertainment analysts are beginning to take note.

Pali Research analyst Richard Greenfield, for one, has spent much time and ink on Redbox of late as the DVD market -- where Hollywood has made most of its profit -- remains under pressure.

Some highlights from recent Greenfield reports:

-- "While the weak economy is without a doubt reinvigorating the rental biz at the expense of DVD sales, we are increasingly concerned that the rise of Redbox (and Netflix) is making rental "convenient" again, which could lead to a meaningful, long-term reversal in consumer behavior. While there is also a collectability aspect to DVD purchases that rental does not satisfy, we worry convenience is far more important than collectability to most consumers."

-- "Given the profitability of retail DVD sales, even a small decline in sales in favor of rental can have a meaningfully negative impact on studio profits."

-- "We also find it hard not to worry about the larger price/value relationship of the entertainment industry as Redbox grows exponentially. ... Consider the following comment on Twitter made ... by an unknown consumer: '$10 to see a movie?! You've got to be kidding me! Redbox is looking better every day.' "

Partly thanks to Greenfield's questions about its impact, Redbox was a prominent topic during most entertainment biggies' recent quarterly earnings conference calls.

News Corp. executives came out aggressively against Redbox, with president, COO and deputy chairman Chase Carey saying its $1 price point "grossly" undervalues his company's DVDs. "A dollar rental is clearly an issue for us," he told Wall Street.

Later in the day, it emerged that News Corp.'s Fox studio has followed Universal's stance by ordering wholesalers to stop supplying discs to Redbox kiosks during the first 30 days after film and TV DVDs hit the market to ensure exclusive sell-through windows.

With a federal judge expected to rule in a suit-countersuit situation between Redbox and Universal, Sony is the one big studio to have reached and talked up a direct day-and-date product-supply deal with Redbox. Under the pact, the kiosk operator agreed to keep used Sony DVDs off the resale market.

In case you missed it, Disney president and CEO Robert Iger said his company struck a similar deal years ago to supply product to "kiosk-type rentailers, Redbox and others."

Although he called that business "still relatively small," he added: "The deal that we did well before all the noise that's in the marketplace today essentially made available to the rentailers our product at a reduced price in exchange for an agreement to limit the number of copies that are put into the marketplace on a resale basis of basically previously viewed DVDs, which we had some concern about."

Meanwhile, other conglomerates and their studios appear to remain in talks with Redbox.

Time Warner chairman and CEO Jeffrey Bewkes signaled that the conglomerate could get releases to Redbox if the latter agrees to a window delay.

"There may well be a role for $1 rental kiosks or pricing in that range, just like there are $1 movie theaters," he said. "We think it's a question of the right window. So we think it can be additive. To the extent it's competitive, we're not unduly concerned about it."

Viacom president and CEO Philippe Dauman told analysts that his company is in talks with Redbox and others as it looks for potential opportunities in the DVD space, though he didn't provide more guidance.

Craig-Hallum Capital Group analyst Bob Evans, who covers Coinstar, said in a recent report that copy-depth deals with studios "should reduce investor concerns about Redbox/studio relationships."

He said Coinstar's recent second-quarter financials were better than expected thanks to a 110% revenue increase at Redbox, which boosted the firm's market share to 13.9% of all video rental activity in first-half 2009. Coinstar's stock also could grow as Redbox expands to new locations.

"Redbox will be the driving growth factor for the company for the foreseeable future," wrote Evans, who estimates that Redbox could become a $2.5 billion-$3 billion revenue business. He has a "buy" rating and $53 price target on the stock.
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