The Red Envelope Strikes Back: Coinstar, Inc. (CSTR), Netflix, Inc. (NFLX)

Coinstar, Inc. (NASDAQ:CSTR) might have a Netflix, Inc. (NASDAQ:NFLX) 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.

Coinstar, Inc. (NASDAQ:CSTR)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
27.1% 28.1% 16.5% 4.2% (4%)

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
2.76 1.08 0.85 0.63 0.38

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.

The article The Red Envelope Strikes Back originally appeared on and is written by Demitrios Kalogeropoulos.

Fool contributor Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix.

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