Redbox 2008 Annual Report Download - page 27

how resources should be allocated among our business segments. For example, if a segment’s revenue decreases
more than expected, our CEO may consider allocating less financial or other resources to that segment in the future.
See Note 15 in the Consolidated Financial Statements for additional information regarding business segments.
Coin and Entertainment services
We are the leader in the self-service coin-counting services market and are the leading owner and operator of
skill-crane and bulk vending machines in the United States. We own and operate the only multi-national fully
automated network of self-service coin-counting machines across the United States, Canada, Puerto Rico, Ireland
and in the United Kingdom. We estimate that at any one time, there is more than $10.5 billion worth of coin sitting
idle in households in the United States. In 2008, consumers processed more than $3.0 billion worth of coin through
our coin-counting machines.
We own and service all of our coin-counting and entertainment services machines, providing a convenient and
trouble free service to retailers. Coin-counting revenue is generated through transaction fees from our customers
and business partners. Consumers feed loose change into the machines, which count the change and then dispense
vouchers or, in some cases, issue E-payment products, at the consumer’s election. Each voucher lists the dollar
value of coins counted, less our transaction fee, which is typically 8.9% of the value of coins counted. When
consumers elect to have a stored value card or e-certificate issued, the transaction fee normally charged to the
consumer is charged instead to the card issuers for the coin-counting services.
We launched our business in North America with the installation of the first Coinstar»coin-counting machine
in the early 1990s, and in 2001 we began offering our coin services in the United Kingdom, and we expanded into
Ireland during 2008. Since inception, our coin-counting machines have counted and processed more than
393.4 billion coins worth more than $21.6 billion in more than 583.1 million self-service coin-counting trans-
actions. We own and operate more than 18,400 coin-counting machines in the United States, Canada, Puerto Rico,
Ireland and the United Kingdom (approximately 11,000 of which are E-payment enabled).
Our entertainment services machines consist primarily of skill-crane machines, bulk vending and kiddie rides,
which are installed in more than 16,000 retail locations, totaling more than 145,000 pieces of equipment. We
generate revenue from money deposited in our machines that dispense plush toys, novelties and other items.
In February 2008, we reached an agreement with Wal-Mart to remove approximately 50% of our cranes, bulk
heads, and kiddie rides from our existing Wal-Mart locations during the first two quarters of 2008. Accordingly, we
anticipate making certain resource re-allocations and will continue to evaluate any appropriate restructuring in this
area in an effort to control operating expenses. Ultimately, any resource allocations will depend on the interplay
between the net number of entertainment machines coming out of, and coin-counting and DVD machines going in
to, Wal-Mart locations.
Our Coin and Entertainment services segment revenue and segment operating income for 2008 totaled
$411.5 million and $98.9 million (24% of segment revenue). The costs relating to this segment included
$267.0 million of direct operating expenses, $7.9 million of marketing expenses, $3.5 million of research and
development expenses, and $34.2 million of general and administrative expenses. The direct operating expenses
mainly consisted of fees and commissions paid to our retailers, coin pick-up transportation and processing fees,
plush toys and products dispensed from the skill-crane and bulk-vending machines, as well as the field operation
support. This segment’s operating margin of 24% of segment revenue was mainly due to a more mature business as
compared to our other segments, and generates relatively more favorable profit margin based on the variable nature
of the expenses and our ability to control expenses as revenue fluctuates. For example, as revenue increases or
decreases due to market conditions, we have been able to control our field service team expenses to coincide with
the relative increase or decrease in revenue.
DVD services
On January 1, 2008, we exercised our option to acquire a majority ownership interest in the voting equity of
Redbox under the terms of the LLC Interest Purchase Agreement dated November 17, 2005. In conjunction with the
option exercise and payment of $5.1 million, our ownership interest increased from 47.3% to 51.0%. Since our
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