Coinstar, Inc. (CSTR), Netflix, Inc. (NFLX): The Future Is…Vending Machines?

The Redbox, a DVD rental kiosk business operated by Coinstar, Inc. (NASDAQ:CSTR), has seen terrific growth over the past few years. With over 43,000 kiosks 68% of Americans live within 5 minutes of a Redbox. Coinstar, Inc. (NASDAQ:CSTR)’s other business, its namesake kiosks which convert spare change into cash, has an 80% share of the US automated retail coin market. The company has grown revenue at an annualized rate of nearly 25% since 2008 as Redbox’s popularity has exploded, and EPS has grown from $0.50 in 2008 to $4.67 in 2012.

Coinstar, Inc. (NASDAQ:CSTR)But there’s a problem…

Redbox accounts for about $2 billion of the $2.2 billion of total revenue, around 90%. The Coinstar, Inc. (NASDAQ:CSTR)r business is tiny in comparison, and near-term growth is mainly tied to the expansion of Redbox. But Redbox is destined to eventually become obsolete. As more and more content is streamed or downloaded directly onto various devices the era of physical media will eventually end. Although Redbox is convenient, it can’t match the convenience of a few button presses or mouse clicks.

Digital distribution

Netflix, Inc. (NASDAQ:NFLX) started out as a DVD-by-mail service before branching out into the streaming business. Netflix, Inc. (NASDAQ:NFLX) is largely responsible for killing the traditional video rental business, creating a void which Redbox filled. But Netflix, Inc. (NASDAQ:NFLX) has shifted its focus to streaming, and the DVD-by-mail service has been in a slow decline. One year ago there were 10 million mail subscribers; now there are 8 million. At the same time the number of domestic streaming subscribers has increased by 26%, and international streaming subscribers have more than doubled.

These numbers tell a story of the decline of the DVD and a shift in how consumers view content. Redbox, ultimately, is doomed. It may take a few years before that becomes obvious, but it is inevitable.

Future ventures

Coinstar, Inc. (NASDAQ:CSTR) has a series of new automated retail concepts which it’s currently testing as the company looks to move into other markets. Rubi is a coffee vending machine which brews Seattle’s Best Coffee, and the company has installed about 80 kiosks so far. The average revenue per machine per year in 2012 was $12,000, and the company plans to greatly increase the number of locations in 2013. The company believes that 65k-70k kiosks could eventually be installed, which would translate into about $800 million in revenue at the current run rate.

Seattle’s Best Coffee is actually owned by coffee giant Starbucks Corporation (NASDAQ:SBUX), so the partnership suggests that Starbucks Corporation (NASDAQ:SBUX) is confident in the success of these kiosks. It’s certainly much less capital intensive to build and maintain a kiosk than a Starbucks Corporation (NASDAQ:SBUX) store, and the lower prices are sure to draw in customers who wouldn’t normally go to Starbucks. This seems like a good idea, although it won’t even come close to matching the size of Redbox.