Coinstar - Still a Short

Our call on shorting Coinstar CSTR was both timely and untimely. It was timely that the day of shorting it at $44/share, it promptly dropped to $42/share, although it then bounced back to close at $43.30/share. It was untimely that the next day it had a strong opening and shot up to over $47/share and closed at $46.54. The upshot was mostly because it was reported that Coinstar was near its streaming deal, although the partner was not identified, and that this was much anticipated already. Since then, Coinstar had drifted lower, partly due to the current market correction, and partly due to the announcement by Amazon.com AMZN on providing free movie streaming service to its Prime Service members. While the Amazon news affected Netflix's stock price NFLX directly, it in fact affected Coinstar's perceived growth a lot more, since movie streaming was supposed to boost growth and profit for Coinstar's Redbox division. While Netflix had shown that video streaming could be a powerful driver for its growth, we believe that movie streaming is still in its infancy, and it will ultimately disappoint investors who think this is the holy grail for profits. Some of the reasons we are not so sanguine on movie streaming for Coinstar are:

• As Amazon.com had shown, movie streaming can be just a hook to entice customers/consumers for its other services, thus depressing pricing for all competitors in the field.
• Pricing of movie streaming will always be depending on the mercy of the lack of bandwidth metering. Projecting the absence of internet metering into infinity will be a dangerous assumption.
• Netflix and Amazon.com have both the brands and trusts for consumers, and any late comers will be competing with these two fantastically run companies.
• Studios will likely demand higher pricing from streaming services now that DVD sales revenue are rapidly declining, squeezing the margins for streaming providers.

We remain shorted Coinstar, and still maintain that Coinstar's stock will see $38/share, our initial target soon.