As Redbox business fades, Outerwall (OUTR) CEO takes a hike

As Redbox business fades, Outerwall (OUTR) CEO takes a hike

Failed Redbox streaming co-venture with Verizon may have sealed J. Scott Di Valero’s fate as streaming media continues to push older formats into oblivion.

Redbox kiosk/logo.
Redbox kiosk/logo.

WASHINGTON, January 23, 2015 – With its outsized ambitions and bigger-than-life personalities, the media and entertainment business has frequently proved to be a warren of revolving doors when it comes to upper management.

This week’s casualty was Outerwall Inc.’s CEO J. Scott Di Valero. Under pressure from a dissatisfied board of directors, Di Valero, formerly the company’s CFO, stepped down from his position and also resigned his seat on the board barely two years after he was promoted to the top job.

In conjunction with Di Valero’s departure, Outerwall announced that Nora M. Denzel, a member of Outerwall’s Board of Directors since 2013, was appointed as interim chief executive officer.

Formerly known as Coinstar, the company’s main business until fairly recently involved the location and operation of its self-service kiosks where, according to company literature, “consumers can convert their coin to cash or stored value products at self-service coin counting kiosks.”

Branching out, the company decided to extend its reach into video and entertainment, first by acquiring Redbox. That company’s ubiquitous self-service DVD machines, along with streaming video services like Netflix, have essentially driven remaining brick-and-mortar video stores ranging from Blockbuster to tiny mom-and-pop operations out of business.

Through Redbox, Outerwall also required a related DVD kiosk business from NCR (NCR), further enhancing its position.

However, the handwriting was already on the video wall as convenient and cheap streaming video services began to offer customers greater variety, better service, and more significant entertainment media cost savings over the once-dominant DVD universe.

In an attempt to catch the wave, Redbox and Di Valero inked a deal with Verizon to market a co-branded streaming video product dubbed “Redbox Instant By Verizon.” But this past October, di Valero and the company abruptly pulled the plug on the joint venture this past October. According to reports in “Deadline,” the company blamed the mover on “a weak release schedule… and the unfavorable timing and mix of content released’ in Q3,” both of which “weighed on Redbox’s results. Sales at kiosks open at least a year fell 11.8% vs the period in 2013.”

Adding to the October chaos, Redbox jacked up its kiosk DVD rental prices some 25 percent, further irritating confused customers.

The complete failure of Outerwall’s critical digital foray apparently sealed Di Valero’s doom—and, at least for the shorter term, the price of Outerwall’s stock price as well. As a result, when Di Valero’s departure was announced earlier this week, nervous investors dumped the stock en masse.

With the already wobbly stock market battered by ever weaker oil prices and Switzerland’s removal of its Swiss franc peg to the Euro, the combination of negative macro- and micro-economic news sent OUTR shares plummeting over 22 percent at one point, dropping from a high of nearly $78 per share to a low of $61.11. (It is recovering somewhat this Friday morning and is currently trading hands for $63.50.

For stock analyst Steven Frankel, according to “Deadline,” Outerwall’s “recent management changes signals discontent related to the company’s strategic direction and desire to bring in new blood. The resignation of Mr. Di Valero clears the decks for the company to appoint an outsider as CEO, as opposed to in 2013 when the BOD chose Mr. Di Valero, who was then the company’s CFO.”

“In conjunction with the CEO announcement,” he continued, “the company provided a positive Q4 update … However, the preliminary outlook for 2015 is likely to disappoint. Management talked about low single digit revenue growth and flat Adj. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).”

Frankel concluded that “While in the short run, strong cash generation from Redbox can drive continued share repurchases, we remain concerned that the inherent volatility of the box office combined with the rise of digital distribution and the shift toward episodic television pose serious challenges. The failure of the Verizon JV (joint venture) leaves Redbox without a digital strategy and we are hard pressed to see the company developing a meaningful digital product without spending serious money on content acquisition, something the prior management was loathe to do. Even if the company decides to spend the money, the OTT (over-the-top content) landscape is getting more crowded by the day, making it tough for Redbox to successfully transition to the digital world.”

While Outerwall’s remaining businesses apparently remain healthy, it may take the stock some time to recover from this hit. More problematic in the long run, is that lack of strategic direction for its Redbox business.

The failure of the company’s joint venture with Verizon once again points to the obvious and seemingly inexorable move from DVD and Blu-Ray formatted disks to à la carte streaming content via broadband in the entertainment world—something that’s already an increasing concern for Hollywood studios, movie palaces, traditional network TV and cable outlets.

Entertainment, news and sports appear to be on a slow but likely unstoppable flight path that could conceivably break long-standing monopolies—monopolies that have kept media and entertainment egregiously over-priced for the average consumer for far too long. We can expect further developments along these lines to happen sooner rather than later.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17