The Red Envelope Strikes Back


Coinstar might have a Netflix problem on its hands. The automated retail company just reported its first-ever same-store sales decline at Redbox DVD rental kiosks. But that disappointment is just the start. Coinstar also gave a weak forecast for Redbox growth over the first half of this year.

Management pointed to a couple of reasons for the shortfall, with the main culprit being a drop in rental length for its most active users. That segment ended up returning DVDs faster than usual in the quarter. Instead of holding the disks at home for a few days -- and letting those nightly charges rack up -- these renters studiously returned their disks on time. Still, as those users come back to their "normal renting patterns," management is confident that it can engineer a 10% rise in rentals over the full year.

But I think Redbox has bigger problems than just a more return-happy customer base. How about the fact that Netflix isn't tossing millions of disgruntled DVD customers into the market anymore?

To see what I mean, take a look at Coinstar's last five quarters of sales growth for Redbox kiosks:

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012






Source: Coinstar financial filings.

Now compare that with the quarterly subscriber loss figures for Netflix's DVD rental business over that same time (in millions):

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012






Source: Netflix financial filings.

Looking at these two tables, it's hard not to get the impression that Coinstar has been benefiting from Netflix's massive DVD subscriber exodus. And as Netflix recovers from its pricing and PR fiascos and those losses moderate, that tailwind for Coinstar's DVD business is disappearing.

In fact, Netflix may be aiming to defend the DVD market more aggressively. While its focus is on streaming growth, the company's DVD business is still an important source of profits. Netflix even ran some DVD-only subscriber promotions over the holiday quarter. CFO David Wells recently told investors that the promo helped DVD subscriptions, and that "I think you'll see us use it sporadically."

It sounds like there's at least some fight left in the DVD rental business.

While Netflix's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

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Fool contributor Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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