McDonald's hopes DVD rentals boost profits

While sales are growing fast, Redbox doesn't appear to be profitable yet, according to comments made by minority investor Coinstar Inc., a vending company based in Bellevue, Wash.

Coinstar spent $20 million in December to buy a little less than half of Redbox, while McDonald's retained a majority stake. Coinstar also loaned $4.5 million to another DVD vending operator, DVDXpress, and sales at those two businesses combined grew more than 85 percent between the third and fourth quarters of last year, Coinstar CEO David Cole told analysts in February.

But Coinstar also predicted Redbox would lose money this year — $4 million to $5 million for Coinstar's share of the company. That works out to $8.5 million to $10.5 million. Waring declined to comment on Redbox's losses, other than to say the machines themselves are profitable. Coinstar declined to comment on Redbox's profitability.

Movie Gallery, the rental chain that bought Hollywood Entertainment Corp. in April 2005, is also experimenting with DVD rental machines. Chief Financial Officer Tim Price told analysts on Nov. 10 that its machines will hold at least 1,000 disks, and some hold as many as 5,000, and can be used 24 hours a day.

"We're very early in the results, but still very, very encouraged," Price said. Movie Gallery declined to comment for this story.

Wedbush Morgan Securities analyst Michael Pachter said he believes Movie Gallery is aiming to see if it can cut store hours, leaving the machine to rent movies even when the store's doors are locked. Movie Gallery hasn't offered any clues about how well the experiment is going, or how many stores have rental machines, he said.

DVD kiosks can probably grab spur-of-the-moment customers, but Pachter questioned whether they can dent the business of stores like Blockbuster Inc. and Netflix. Most customers rent new releases, but they still like the idea of a wide selection at a store or from Netflix's 55,000 titles, he said.

If Redbox gets into every McDonald's in the country, he said, "maybe they'll get up to 5 percent market share. Maybe."

Blockbuster Inc., the nation's largest movie-rental chain, has operated vending machines in some international markets but has no plans to do more, spokesman Randy Hargrove said.

"They don't generate significant rental volume or significant revenue," Hargrove said. "They just don't have the capacity to do that."

Jeff Smith, a McDonald's franchisee who owns seven restaurants and runs a cooperative that buys advertising for Twin Cities McDonald's, said he doesn't know whether the DVD machines are bringing in more customers because so many other variables, like the weather and promotions, affect whether people eat out.

But he says his customers love the machines.

"The only thing I invest is my space," Smith said. "We don't get paid anything, and it doesn't cost us anything to have it."

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