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As DVD Future Wanes, Coinstar Ventures Into New Kiosks

By Joan E. Solsman Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Coinstar Inc. (CSTR), with its growth engine Redbox facing a waning future for physical DVD rentals, is rolling out new types of kiosks, broadening the range of consumers it targets. Chief Financial Officer Scott di Valerio said in a recent interview that some of the ventures, which put a high-tech spin on dusty formats like the coffee-vending machine and photo booth, are also finding wider appeal than the presumed target user. Coinstar's most advanced new venture is a coffee kiosk, which brews and dispenses a cup of Seattle's Best-branded coffee for $1 and can make fancier drinks for $1.50. Seattle's Best is part of Starbucks Corp. (SBUX). Di Valerio said the 53 coffee kiosks currently ensconced in grocery stores generate traffic not only from the shopper coming in to grab a doughnut and deciding to buy a cup of coffee but also from employees of the store itself. He said workers are attracted to the machines as a higher-quality but low-price alternative to the break-room coffee pot. Star Studio, a new photo booth with green-screen backgrounds that can upload images to Facebook or email, has its sights set on young people, specifically tween girls. But Coinstar has seen whole families utilizing the booths, Di Valerio said Thursday, building on comments made earlier. Not all the new kiosks have hit the right notes with consumers, however. Coinstar abandoned one called Chirp, which sold fashion accessories like handbags at a discount, because performance metrics fell short of targets designed to mimic the return on investment of Redbox and the coin machines. Chirp was devised as a way to tap impulse buys from the female majority of grocery shoppers, but Coinstar found that after a jump in purchases at the kiosks, subsequent sales peaks wouldn't reach the same magnitude, Di Valerio said. The new kiosk ventures, which the company calls "seeds," are designed to take advantage of its existing retailer relationships for coin and Redbox machines. Wal-Mart Stores Inc. (WMT), Walgreen Co. (WAG) and Kroger Co. (KR) stores currently have the greatest number of Coinstar's machines. In some cases, the seeds will be located right next to Redbox and coin kiosks. "There's a high likelihood you could see three or four Coinstar kiosks in the front of a particular store," Di Valerio said at a conference last month, noting the possibility of as many as five concepts at the front end of a store depending on space and demographics. In addition to coffee and photo-booth machines, Coinstar is also developing Gizmo, a machine to sell refurbished consumer electronics; Alula, where consumers can trade in gift cards for cash; a kiosk vending samples of beauty products; and an automated station selling fresh food. It has minority investments in ecoATM, where consumers can trade in used cell phones for cash, and SoloHealth, which provides health-risk assessments like blood-pressure measurement and basic eye exam. Of the seed portfolio, the closest to wider rollout are coffee, Gizmo, Star Studio and ecoATM. The company believes its coffee kiosks have the potential for about 15,000 locations nationwide, with 500 locations the target for this year. Its forecasts Star Studio at more than 4,000 locations from the nine it has in Los Angeles malls today, Gizmo at more than 2,000 locations after ramping up to 100 this year, and ecoATM at thousands nationally in 2013 to 2014. Wedbush Securities Inc. analyst Michael Pachter says that of those seeds closest to launch, coffee is the only one with signficant promise. "That's because we are all already trained to buy coffee away from the home," he said. The away-from-home coffee market is estimated at about $28.5 billion, and Pachter thinks Coinstar can capture its cost-conscious coffee drinker. But he calls the other ventures small, niche businesses. Even if all four of those seeds reach their forecast footprints, they're still a far cry from Redbox's 30,000 locations and 37,000 total kiosks. Redbox represents 85% of Coinstar's top line and is the driver of its growth, the coin business having matured to single-digit-revenue gains in four of the last five years, save for a decline in 2009. Coinstar's stock has followed the ascent of Redbox. Shares hit their highest level ever in April at $69.74. Friday, the stock traded 4% lower at $59, joining in a wide market swoon. However, Redbox's market for physical DVD rentals is expected to wane as viewers migrate to online content. Di Valerio has conceded that streaming revenue could overtake physical revenue in the next four to five years. Douglas Greiner, an analyst for Compass Point, said it's important the company has acknowledged the threat of that inflection point. "Over the long haul, the physical DVD likely will follow trends of VHS or CDs," he said. He predicted the the market will start to see a major shift to streaming video's price point moves below that of Redbox's. As long as Coinstar is the low-cost provider, they're going to have the advantage of being the last company standing in the physical rental space, Greiner said. Blockbuster--taken over by Dish Network Corp. (DISH) out of bankrupcty protection last year--continues to shut locations, Netflix Inc. (NFLX) is actively transitioning away from physical, and Coinstar is poised take over the assets of NCR Corp.'s (NCR) Blockbuster Express DVD kiosks. But Charlie Wolf, an analyst at Needham & Co., said the headwind from streaming options is potentially insurmountable for Redbox once the inflection point occurs, according to a note after Coinstar's first-quarter results in late April. Though Redbox revenue should continue to grow at double-digit rates in the short run, that growth is likely to hit a wall as the DVD market shrinks, Wolf said, adding that the company may be too optimistic in its assumptions about Redbox being able to expand its installed base. Coinstar is working to diversify Redbox itself into other realms than physical DVD. It will move into streaming video itself later this year, when a joint venture with Verizon Communications Inc. (VZ) will launch a subscription service that combines Redbox physical DVD rentals with streaming content from Verizon. The company has also said it would be testing one or two new products for Redbox later this year that could extend the life of the Redbox brand. -By Joan E. Solsman, Dow Jones Newswires; 212-416-2291; joan.solsman@dowjones.com

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