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Originally published Monday, February 20, 2012 at 8:00 PM

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Coinstar thinks outside Redbox to fresh-coffee vending machines

The machine grinds a batch of beans and dribbles out a $1 cup of fresh coffee that tastes pretty close to a cup from any upscale coffee bar. Coinstar expects to have 500 installed by the end of the year.

The New York Times

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To many people, the coffee dispensed by vending machines is a sour brew, forever associated with jury-duty waiting rooms and bowling alleys.

But Bellevue-based Coinstar, a force in self-service retailing through the swift rise of Redbox, its movie-rental subsidiary, hopes to change that.

When a visitor to its headquarters dips a credit card into a coffee machine in Coinstar's cafeteria, the machine grinds a batch of beans and dribbles out a $1 cup of fresh coffee that tastes pretty close to a cup from any upscale coffee bar.

The machine is the latest bet by Coinstar, best known for its Redbox kiosks that have become nearly inescapable in some parts of the country. More than 35,000 of the bright-red machines are tucked into corners of Wal-Marts, McDonald's outlets and drugstores.

Its $1.20-a-night DVD rentals made it into the biggest renter of home videos in the United States and helped drive many Blockbuster stores out of business.

Those cheap rentals also turned Redbox into one of Hollywood's boogeymen that, along with Netflix, were blamed for accelerating the decline of home-video sales.

Faced with the prospect that online movie watching will eventually replace physical discs, Redbox last week banded together with Verizon Communications to form a service that combines DVD and streaming movie options.

Redbox's profile has largely overshadowed its parent company's broader ambitions to reinvent vending machines by applying them to new categories of retailing, as well as to old ones like coffee.

In an interview, Coinstar CEO Paul Davis said there was great convenience in self-service kiosks because of how widely they can be placed in grocery stores and other locations.

"Consumers love it because they don't have a lot of time on their hands," Davis said over coffee dispensed by the new vending machine. "We try to be where the consumer goes every day."

Until Redbox took off, Coinstar was known for its namesake coin-counting kiosks, more than 20,000 of which are inside grocery and other retail chains.

The company was founded just over two decades ago by Jens Molbak, who, as a Stanford University graduate student, realized there wasn't an easy way to spend the spare change piled up in a jar on his dresser. Coinstar converts change into cash or store vouchers, earning a transaction fee in the process.

The coffee kiosks are the first of what Coinstar expects to be a wave of new vending machines from the company. It is testing them around the country and expects to have about 500 installed by the end of the year.

Davis envisions the 3-foot-by-3-foot kiosks going into supermarkets, gas stations and office buildings, though he does not see a need for them in retail locations that already have a small Starbucks or some other coffee chain.

Coinstar joined with Starbucks on the kiosks, which are labeled with Starbucks' Seattle's Best Coffee brand.

Michael Pachter, an analyst at Wedbush Securities, said the coffee kiosks are a meaningful growth market for Coinstar. "The retailer relationship is their biggest competitive advantage," Pachter said. "If every place has a coin box, they know how to get another 12 square feet."

A kiosk concept Coinstar is experimenting with in about eight retail locations in Texas and California is called Gizmo, through which it sells used video-game consoles, iPads and other electronics. Many of the items are refurbished by a manufacturer or another party, with prices that are up to half off retail, Davis said.

Other concepts it is testing include ecoATM, a kiosk created by a startup Coinstar invested in that allows consumers to trade in old cellphones and other electronics for cash. The machine uses a camera to evaluate the condition of the devices.

Coinstar says the traded-in phones often end up being sold in developing countries, a more environmentally friendly outcome than going to landfills.

Davis said Coinstar had about eight or nine kiosk ideas in various stages of development, part of an effort it established about 18 months ago. It tests concepts in public locations, often in primitive form and with employees nearby to observe how customers interact with them. The early prototypes of Gizmo, for example, were made out of cardboard.

"What we try to do is plant a lot of seeds," Davis said. "We know the math says only about half are going to work."

The company will need new kiosk successes as physical movie rentals, its biggest business, face an uncertain future. About 85 percent of Coinstar's $1.85 billion in revenue last year was from Redbox.

The number of movies rented in DVD and Blu-ray formats last year in the United States fell by 11 percent from the year before, as chains like Blockbuster closed more stores and viewers switched to online movie watching, according to NPD Group, a research firm in Port Washington, N.Y.

Analysts say the long-term trend is irreversible: Consumers will increasingly favor the convenience of online movie watching. Davis said that the decline in physical rentals would take longer than most expected. He does, however, concede the decline will come. That is one reason Coinstar worked with Verizon to create a service combining physical and online movie rentals.

Details about the service, which will begin during the second half of the year, are sparse, but it is expected to be a subscription service with a monthly fee, like Netflix.

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