Coinstar (CSTR) is mulling an expansion of DVD kiosk business into video games, and has been running a trial of a game rental service from about 150 sites in the Austin, Texas market, most of those in McDonald’s, Walgreen and Valero outlets. Merriman Curhan Ford analyst Eric Wold this morning reports that the test is off to a slow start.
Wold notes that the test began a few weeks ago, following previous trials a year ago in Reno, Nevada and Wilmington, N.C. Wold says he visited 21 Austin-area kiosks, 90%, of which were offering game rentals. He was not that impressed. For starters, he says the average location has under 3 titles. He notes that the kiosks had relatively few Wii games, despite the fact that the Nintendo console has the highest U.S. market penetration.
Wold thinks the company has two questions to address:
- Do the revenue and margins generated by game rentals exceed that of a DVD or Blu-ray rentals; they take a slot in the kiosks that otherwise could be used for a movie.
- Is the company protected from theft and loss of product, since the cost of a game is higher than than for a DVD. He notes that games rent for about $2 a day, twice the dollar-a-day rental fee for DVDs.
“Given that management chose to launch another game test almost a year after doing so in two other cities demonstrates to us that they saw something positive in the initial tests,” he writes. “With the largest nationwide network of rental kiosks (more than 3x larger than their closest competitor – enhancing the ability to rent and return anywhere), an extremely strong and recognized brand name, and a robust field service operation, we continue to believe Redbox is best positioned to accomplish the addition of game rentals to its kiosks.”
Wold keeps his Buy rating on CSTR shares, and thinks they can reach the $73-$85 level.
CSTR today is down 44 cents, or 1%, to $43.41.
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