5 Potential Coinstar Partners: Who is the Best Fit?

Wedbush analyst Michael Pachter outlines five potential partners for Coinstar's digital strategy.
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NEW YORK (

TheStreet

) --

Coinstar

(CSTR) - Get Report

plans on launching a Redbox-branded digital strategy in 2011, as it looks to further compete with rival

Netflix

(NFLX) - Get Report

.

While Coinstar reported third-quarter earnings that easily topped expectations, as revenue from DVDs surged 54.2%, the concern among investors has been that the company is headed for extinction due to the impending demise of the DVD.

This makes Coinstar's digital strategy even more significant. The company is currently looking for a potential partner to provide digital content and the technology to deliver it. While CEO Paul Davis said during a conference call on Thursday that the company debated whether to build its own digital offering, Coinstar does not plan on making a significant investment in digital content, which Wedbush analyst Michael Pachter views as a prudent strategy.

Pachter expects Coinstar to announce its partner by mid-2011 and depending upon who the partner actually is, it's possible that it can rake in as many as 1 million or more subscribers.

Coinstar did not reveal its choice of partner, only confirming that it is in discussions with more than one party. It did, however, note the characteristics of its ideal partner -- a solid consumer base, strong brand, access to thousands of library titles that can be delivered digitally and the technology to deliver them.

With this criteria in mind, here's a look at potential Coinstar partners. Be sure vote in our poll and let us know what you think.

Netflix

Netflix has the consumer base, branding and content Coinstar is looking for, but the likelihood of the two joining forces is slim. Pachter says Coinstar offers little for Netflix.

For one, Netflix has thus far shunned the retail channel. It is also building up its content on its own. Over the past several months Netflix has reached new streaming agreements with Relativity Media, Warner, EPIX, Nu Image/Millennium Films, Universal and Sony.

It also appears

Netflix is doing just fine on its own. While in its third quarter the company missed profit expectations, it reported better-than-expected growth in new subscribers.

Netflix gained 1.9 million new customers in the third quarter, a 90% surge from a little over 1 million new users in the second quarter. This marked the fourth consecutive quarter of more than 1 million new subscribers.

At the time, Netflix also upped its forecast for subscriber growth, and is now expecting between 19 million and 19.7 million subscribers by the end of the year, compared with a prior guidance of 17.7 million to 18.5 million.

Still, competition for Netflix has been increasing, with big-name players like

Google

(GOOG) - Get Report

and

Apple

(AAPL) - Get Report

, ramping up movie offerings.

Analysts are also questioning how much longer Netflix can grow at its current pace, with several predicting expansion will slow as soon as next year.

Nonetheless, Pachter still doesn't think Netflix will be looking to gobble up its closest rival any time soon. "While we think an acquisition of Coinstar by Netflix would immediately reduce Netflix's exposure to postage, we don't see the partnership in the cards," he wrote.

Apple

Like Netflix, Apple also has all of the attributes Coinstar is looking for in a partner. But Pachter says historically, Apple has not been a good partner, "preferring to go

at it alone."

Apple also has a strong relationship with Netflix, making it unlikely to trade sides. Apple unveiled its Apple TV recently, which comes pre-installed with Netflix streaming capabilities.

"We see a partnership with Apple as being immensely beneficial to Coinstar, but see a partnership with Coinstar as in conflict with Apple's core business of selling hardware," Pachter wrote.

This hasn't stopped Coinstar, however, from forging its own relationship with Apple. There's an iPhone application that lets users reserve DVDs at their local kiosk and Coinstar's coin-counting machines offers iTunes coupons.

In an interview with

Bloomberg

in September, Coinstar CEO Paul Davis would neither confirm nor deny a deal with Apple.

Wal-Mart

Wal-Mart's

(WMT) - Get Report

purchase earlier this year of Vudu, a movie downloading service, suggests the retail giant could have some interest in a streaming business.

Coinstar and Wal-Mart also already have a substantial partnership, with kiosks in Wal-Mart stores that represent about 20% of Redbox's total revenue and 18% of its retail footprint, according to Merriman Curhan Ford analyst Eric Wold. "A partnership would not only help Redbox access digital rental/purchase opportunities through CE devices, but Walmart could further boost its stake in the kiosk market as well as traffic to kiosks within its stores," he wrote in a note earlier this week.

While Pachter isn't convinced a deal with the discounter is in the works, he doesn't think the partnership should be ruled out just yet.

"We think that Wal-Mart would gain more from a partnership than would Coinstar, as the Vudu content offering is not as deep as any of the others on the list, and we are not certain that Wal-Mart has keen interest in competing head-to-head with Netflix," he wrote.

Sonic Solutions

Sonic Solutions

(SNIC)

wouldn't offer much to Coinstar.

"

Sonic doesn't have a particularly strong brand, nor a large consumer base," Pachter wrote. "We would view a partnership with Sonic as a non-event, and do not believe it would further Coinstar's stated goals.

But while Sonic doesn't have the same brand recognition as other potential partners, the company is already working with

Sears

(SHLD)

and

Best Buy

(BBY) - Get Report

to supply their online movie services.

Amazon

Amazon

(AMZN) - Get Report

is viewed as the most likely potential partner, as the Internet retailer has been struggling to compete against Apple's iTunes in the digital space.

Sales tax issues prevent Amazon from purchasing either Netflix or Coinstar, but Pachter said based upon commentary in its most recent earnings call, it's clear Amazon is hard at work on a streaming strategy, and assured its investors that it would only do something if it could "innovate."

"We think a partnership with Coinstar would be mutually beneficial, as it would allow Amazon to leverage its large customer base and to compete head-to-head with Netflix," Pachter wrote.

Pachter estimates that over 80% of Netflix customers are also Amazon customers, and a subscription offering of Amazon catalog streaming content plus Redbox kiosk rentals of new content would be competitive with Netflix's offering.

Given all of this, which company do you think Coinstar will look to partner with for its streaming business?

--Written by Jeanine Poggi in New York.

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