December 11, 2009

NCR's DVD Play Could Be a Flop

WSJ article warns that NCR's DVD Play could be a flop. Not like Hollywood is going to behave like an ATM customer.

HEARD ON THE STREET: NCR's DVD Play Could Be a Flop -

ny time a company in a staid and unexciting business jumps into Hollywood, investors should be wary. NCR shareholders, that means you.

As NCR highlighted Thursday with the acquisition of DVDPlay, a DVD-kiosk chain, the maker of bank cash machines sees the DVD-dispensing business as a growth opportunity. Including 1,300 kiosks acquired in the deal, NCR will finish the year with 3,800, with plans to get to 10,000 by the end of 2010. Its main rival, Redbox parent Coinstar, in comparison, has 22,210 in place now.

NCR's competitive advantage is its partnership with Blockbuster, which allows NCR's machines to carry the Blockbuster Express name in exchange for a revenue share. That holds risks for Blockbuster. Offering DVD rentals for $1 a night, the kiosks could cannibalize its store business. But Redbox, charging the same, is already having an impact.

Indeed, cash-strapped Blockbuster arguably got the better end of the deal. Not only is NCR financing the business, putting up $60 million this year and likely more next year, it is also handling most other aspects, including procuring most of the DVDs. It isn't using Blockbuster's supply arrangements for most new-release DVDs, the hottest items at the kiosks.

That's a departure for NCR, whose role has traditionally been to sell and service its vending machines. NCR believes that by fully operating the DVD kiosk operations, it can open up a new source of business. Indeed, Adams Media Research projects kiosk rentals to rise 42% to $1.3 billion in 2010 from this year. That puts kiosks at 15.6% of the stagnant rental market, from 11% this year.

Investors appear to be warming to the plan. NCR stock is up 16% since Thursday. J.P. Morgan upgraded the stock Friday, estimating the DVD business could drive 5% revenue growth at NCR in 2010.

But investors may be overexcited. NCR has to master not only a different business model but also an industry in the midst of turmoil. Continued growth of the kiosk business is uncertain. Several Hollywood studios have been holding back new-release movies from discount kiosk operators, including NCR, upset about their low pricing. While operators can find alternative supplies, they can't necessarily offer a new DVD immediately.

What's more, partly because of price deflation wrought by Redbox and others, Hollywood is putting more emphasis on alternatives to DVDs, like video-on-demand offered by cable services or Web-based digital offerings.

It is likely to be many years before the physical disk fades completely. And NCR says its kiosks will let people download a movie onto a portable memory card. But consumers will likely have a similar capability at home, limiting the appeal of doing it at a kiosk.

Operating a DVD dispenser shouldn't be more complex than making machines that spit out cash from a hole in the wall. But NCR is about to find Hollywood is a world unto itself.

Write to Martin Peers at [email protected]

Posted by staff at December 11, 2009 10:12 AM