Profit from Those $1 Per Day (to Rent) Red DVD Kiosks?

Have you ever seen those Red DVD Kiosks at your local supermarket? For $1 a day, you can automatically select any movie and rent the DVD. There are no late fees, and if you keep the movie after a certain number of days, the movie is yours to keep.

In this economy, and in general, this is a very appealing option. Blockbuster (BBI), for example, offers rental of a DVD for around $4 per day. Other options include Netflix (NFLX), which mails DVDs through the mail.

The Company that profits from those Red DVD Kiosks is Coinstar (CSTR). Yes, this is the same company that makes those machines that convert loose coins to cash for a fee.

Movie studios are not happy with the underpricing of these DVDs.

Coinstar is a $1 Billion company, with a forward PE of 22, and 5 Year Estimated Growth Rate of 28%, for PEG of 0.79, a very good value. (Anything PEG under 1 is a good value).

It is said that Redbox has a 13.8% market share of the DVD rental market, up from 9% last year, and just 2.3% in 2007.

Today's Stock Chart of CSTR

Compare Performance of CSTR, BBI, NFLX

Home Entertainment Content Overload Will Keep You at Home

How can we leave the living room?

We can see that the Analog to Digital Living Room Long Term Trend is in place as people are upgrading to High Definition Digital Television, [Corning Glassware (GLW) is a play on this.] and installing Home Theater Systems [Dolby (DLB) is a play on this]. Content providers such as Comcast (CMCSA), DirectTV (DTV), and the Dish Network (DISH), also help keep people in their seats.

Now there are even more ways to keep people in their living rooms.

DVRs, or Digital Video Recorders, allow users to record and watch their favorite shows, even in high definition. These devices are very user friendly, and users of products such as Tivo (TIVO) have a cult following. The NDS Group (NNDS) is also another play on this.

Tivo has recently teamed up with Amazon.com (AMZN) to provide a service called Amazon Unbox, that allows movies and shows to be directly downloaded from Amazon to the Tivo DVR.

Netflix (NFLX) and BlockBuster (BBI) offer another alternative to home entertainment. These companies ship DVDs by postal mail and provide another source of home entertainment.

Netflix (NFLX) recently teamed up with Roku. Roku provides a special set-top box that allows subscribers of Netflix to stream a selection of movies directly to their television (which could be a widescreen High Definition Television). [I recently tried out the Roku system, and it is easy to setup and convenient and there are no extra service fees from Netflix. Quality at this time is close to the VHS level, but streaming is very good using broadband.]

Apple (AAPL) has attempted a similar type of Set Top Box with AppleTV but that product has not taken off.

Gaming consoles, from makers such as Nintendo (NTDOY.pk), Microsoft (MSFT), and Sony (SNE) also provide even more reasons for people to stay in their living room.

With all these forms of entertainment in the living room, how will people leave their living room?

Netflix (NFLX) Wants to Dominate the Digital Living Room with Roku Partnership

We all know Netflix (NFLX) as the company that provides DVDs by postal mail. Some time ago, they added a feature where you can logon to their Netflix.com site, and watch selected movies through the internet browser without affecting the normal DVD by mail schedule.

However, watching a full two hour movie in front of one's Computer will not be a good experience. People have invested much money in their couches, high definition TVs and home entertainment sound systems. The next step is delivering content, such as DVD content from the home computer and internet to the comfort of the Digital Living room.

Apple (AAPL) attempted to market a similar solution using AppleTV but this product has not taken off.

Tivo (TIVO) is offering another option. Aside from providing Digital Video Recorder Functionality (DVR), Tivo is also working together with Amazon Unbox program where users of Tivo can download movies purchased or rented from Amazon.com (AMZN).

Netflix's Solution to the Digital Living Room

Now, Netflix is part of the competition for the Digital Living Room, Netflix is also now taking this route with its partnership with Roku. For $99, Roku is providing a special set top box where special on-demand movies from Netflix can be streamed directly to your living room television.

This service will not affect the normal DVD by postal mail service of Netflix.

Will this product work? I have recently ordered a Roku box and will try it out.

More details on the Roku Netflix Player here.

The battle for the Digital Living Room continues, and let us keep track of the trends in this area.

The Clear Winner is Blu-Ray, not HD-DVD. The Industry has spoken.

For sometime now, there have been two competing High Definition DVD formats:

1. HD-DVD (backed by companies such as Toshiba and Microsoft (MSFT))
   
2. Blu-Ray (backed by companies such as Sony (SNE))
   

Studios, electronic manufacturers and other companies put their weight behind each format. Consumers were slow to adopt either format because of the format wars.

However, right now, we are starting to see a clear winner.

1. Best Buy is backing Blu-Ray as the High Definition DVD format
   
2. Blockbuster (BBI) has chosen Blu-Ray.
   
3. Netflix (NFLX) will stop supporting HD-DVD in favor of Blu-Ray.
   

Here's part of an email Netflix sent me:

You're receiving this email because you have asked to receive high-definition movies in the HD DVD format. As you may have heard, most of the major movie studios have recently decided to release their high-definition movies exclusively in the Blu-ray format. In order to provide the best selection of high-definition titles for our members, we have decided to go exclusively with Blu-ray as well.

While we will continue to make our current selection of HD DVD titles available to you for the next several months, we will not be adding additional HD DVD titles or reordering replacements.

Toward the end of February, HD DVDs in your Saved Queue will automatically be changed to standard definition DVDs. Then toward the end of this year, all HD DVDs in your Queue will be changed to standard definition DVDs. Don't worry, we will contact you before this happens.

...

We're sorry for any inconvenience. If you have any questions or need further assistance, please call us at 1 (888) 638-3549.

-The Netflix Team

With the winner of the High Definition DVD wars all but chosen, now consumers can move forward and adopt Blu-Ray DVD as the standard. Those consumers who have bought High Definition Televisions can now purchase Blu-Ray DVD players (and Sony's Playstation 3). Consumers who have held back purchasing camcorders waiting for the next generation of High Definition DVDs can now start purchasing Blu-Ray based Camcorders. Consumers can start purchasing Blu-Ray DVDs in larger numbers.

Congratulations to Sony (SNE) who has finally won a major format war, many decades after losing out on the Sony Betamax vs. VHS format war.

Current HDTV Cycle

Before we look far into the future, let us not forget the current HDTV cycle. People have been adopting HDTV High Definition sets for sometime now.

Current beneficiaries include:
1. GLW -- Corning Glassware
They are involved in Display Technologies.
2. BBY -- Best Buy
Popular Retailer of Electronic equipment including HDTV sets.
3. SNE -- Sony, producer of BluRay products (BluRay is a High Definition DVD)
4. TOSBF -- Toshiba is a maker of more affordable HD-DVD DVD players.
5. NFLX -- Netflix. DVDs by mail company suppotrs BluRay and HD-DVD dvds.

Near term HDTV upgrade cycle:

For those who have experienced HDTV for the first time, you know it is hard to go back to standard definition TV. More and more content will be in High Definition and customers will start to demand it. Those with DVRs will want to be able to play HDTV content (TIVO and Cable and Satellite DVRs have models which support HDTV recordings). People will demand internet video be in high definition video. Consumers will start retiring their old standard definition camcorders for High Definition Camcorders. Consumers will want the Blu-Ray vs. HD-DVD debate to settle down so consumers will be able to finally buy a BluRay or HD-DVD player to enjoy the movies.

There's an HDTV upgrade cycle coming, and let us pay attention to this trend.