Here’s Your Movie Rental Sector Update for Investors

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between December 3 and December 16, including notable rental releases, box office figures, and recent company-specific news

Movie Rental Industry

Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):

o 12/04: Men in Black 3 ($179), Hope Springs ($64), Sparkle ($24), The Apparition ($5).

o 12/11: The Odd Life of Timothy Green ($51), Savages ($47), The Watch ($35).

Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):

o 12/02: The Smurfs ($140), Friends with Benefits ($56)

o 12/06: Harry Potter and the Deathly Hallows Part 2 ($381), The Help ($165), The Change-Up ($37).

o 12/13: Kung Fu Panda 2 ($165), Larry Crowne ($36), Fright Night ($18).

*estimated release date

Over the next two weeks, there are three notable rental releases compared to one last year (notable releases are those that grossed over $50 million in domestic box office). We expect DVD rentals for the upcoming two-week period to outperform the comparable period last year, as the three notable releases this year, including The Dark Knight Rises, totaled over $550 million in domestic box office, compared to ≈ $50 million for last year’s notable release. We note, however, that last year the earlier twoweek period had five notable releases that likely carried into the current period, including the Harry Potter finale.

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Redbox Instant by Verizon will launch a public beta this month. At our California Dreamin’ conference held last week in New York, Coinstar (NASDAQ:CSTR) provided commentary about Redbox Instant by Verizon (NYSE:VZ), after a morning press release finally providing additional details regarding the service. We think the most important takeaway from the presentation was management’s explicit statement that Coinstar will not be required to fund minimum payments to the content providers, with Verizon absorbing the downside risk should the service prove to be unpopular. Coinstar is risking only its capital contributions up to a maximum of ≈ $158 million if the service does not succeed, and we expect total Coinstar capital contributions to be no more than 20 – 30% of this figure.

Few catalysts remain for continued domestic streaming growth at Netflix (NASDAQ:NFLX). We continue to believe there are few catalysts for continued domestic streaming growth, as Netflix has already converted the vast majority of potential streaming subs on mobile devices, consoles, and smart TVs into paying subs. We also view consensus estimates for domestic earnings power as overly skewed in favor of domestic streaming, which we think generates  ≈$1.00/share, and we believe that Netflix’s DVD business (≈$3.00/share) will decline as international expansion (a loss of  ≈$4.00/share) continues, making profitability in 2013 unlikely. Despite recent commentary from Carl Icahn, we see few potential strategic acquirers of NFLX, and think the stock is overvalued.

Exhibitor Industry…