The Statement Investors Didn’t Want To Hear: Verizon Communications (VZ), Coinstar Inc. (CSTR)

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I’m constantly on the lookout for companies that are undervalued or under appreciated. I’ve written in the past about the company behind Redbox. I said that investors were crazy for shorting Coinstar, Inc. (NASDAQ:CSTR). The popular argument that the DVD business was disappearing didn’t hold up in light of Coinstar’s same-store sales. I thought the company’s kiosk expertise could be leveraged to help multiple industries. Starbucks Corporation (NASDAQ:SBUX) was on board to roll out a coffee kiosk called Rubi, and Verizon Communications Inc. (NYSE:VZ) was a strong partner to get their streaming service off the ground. This was a great company that the market didn’t understand, at least until their last earnings report.

Verizon Communications Inc. (NYSE:VZ)The Good
The company’s Redbox machines are a terrific value proposition. The company stocks the machines with current movies in DVD and Blu-ray formats, adds in same games, and customers rent them a night at a time. Coinstar was able to pass through a 20% price increase not long ago with no appreciable customer backlash. While the company’s Coinstar machines aren’t exactly exciting, they produce decent results.

The company’s partnership with Starbucks to roll out the Rubi coffee kiosk is a great idea. The kiosk will sell Starbuck’s Seattle’s Best coffee at very competitive prices. Coinstar says they expect “a few thousand” of these to be installed. Investors have been anxiously waiting for Redbox Instant, the company’s streaming service in partnership with Verizon. The service is competitively priced at $8 a month for unlimited streaming with 4 Redbox rentals included. Since those rentals alone would normally cost $1.20 each, this makes the streaming option a very cheap add-on. If customers just want the streaming option alone, the cost is just $6, which is even cheaper than, Inc. (NASDAQ:AMZN)’s Prime service.

The Bad
Here is the problem, Coinstar is trying to make this streaming offering work in an increasingly crowded field. The bigger issue is, the company’s competition is already beginning to lock up certain content. It’s one thing to have an even playing field where Redbox Instant can carry the same titles as Amazon Instant or Netflix, Inc. (NASDAQ:NFLX). Some movies are carried by multiple services, like the Thor and Captain America movies. However, Netflix and Amazon are getting smarter at playing this game.

Netflix is getting into original content in a big way with shows like Lilyhammer, House of Cards, and others. Both Amazon and Netflix also understand that exclusive content is important. We already know that Amazon will have the exclusive rights to the popular show Downton Abbey, as well as CBS’s new show Under the Dome. Netflix has deals with Warner Bros. for multiple current television shows that will be exclusive to the service. In addition, while this agreement is still a few years away, The Walt Disney Company (NYSE:DIS) agreed to give exclusive distribution rights to Netflix for its movies beginning in 2016.

With all of this content being locked away to different services, and Hulu holding exclusivity on many current television shows, the streaming market is becoming more difficult to crack into. The challenge for Redbox Instant will be to woo users away from other services. If the company can’t offer similar exclusive deals, the value proposition falls apart pretty quickly.

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