Redbox expands to video games as DVD business stabilizes

Redbox is expanding into video game rentals as its parent company reported improved financial performance for the first quarter.

The kiosk DVD rental company said that after testing video game rentals for nearly two years, it will on June 17 begin offering titles such as Call of Duty and Super Mario Galaxy in more than 21,000 of its 31,800 locations around the country.

Games will cost $2 per night, compared to $1 for DVDs and $1.50 for Blu-ray discs.

In a conference call Thursday with analysts, Paul David, chief executive of Redbox parent company Coinstar Inc., said tests have indicated that the company can increase revenue by replacing 10% to 15% of the DVD slots in its kiosks with games.

The news comes as Redbox is recovering from a weak fourth quarter during which it overestimated demand for DVDs. Much of the problem resulted from certain studios' decision to block Redbox from offering their DVDs until 28 days after they go on sale.

As a result, although business at kiosks continued to grow at a healthy clip, bottom line results were more muted. Redbox revenue increased 38% from the first quarter of 2010 to $362.3 million. Even excluding new locations added in the last year, "same stores sales" jumped 15.3%.

But Redbox's operating margin — the amount of operating income it earned on each dollar in revenue — dropped to 14% from 17.6% as the holiday season inventory problems continued early in the first quarter. Total Redbox operating income was $23.7 million in the quarter, down 2% from the previous year.

Coinstar stock was up 8% in after-hours trading Thursday on the news, along with slightly improved guidance for the full year. Before financial results were released, Coinstar stock closed up 2% at $51.41.

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