A friend of mine, having heard me rant several times about the impending doom of Blockbuster(BBI), sent me an article from everyone’s favorite source of fake news, The Onion. The article, entitled “Struggling Blockbuster Eliminates Rental Fees,” contemplates a desperate attempt by Blockbuster to retain customers by eliminating all charges and even paying customers for renting videos. It concludes:
Miami resident Scott Patterson, however, was only one of many consumers who said they were unimpressed with Blockbusterâ€™s new offers, including “Two-Dollar Tuesdays,” in which customers are handed $2 cash for every new release they rent. “I donâ€™t know,” Patterson said. “Something about that place just rubs me the wrong way.”
The problem in a nutshell. The service Blockbuster offers is quickly becoming so unattractive that customers might not come even if they were paid to do so.
The video rental market has faced steep declines in the face of mail-based subscriptions and pay-per-view. The emergence of internet-based delivery will accelerate this trend. Netflix(NFLX) already has over 5 million subscribers who pay a monthly fee to rent DVDs by mail. Netflix’ turnaround is quick and its selection dwarfs that of your local Blockbuster store. The only disadvantages: you won’t always get your top choice of movie and some amount of planning ahead is required. That’s okay though, because your local cable company has vastly expanded the number of movies available for you to watch immediately without leaving your couch.
Blockbuster’s only advantage here is the exclusive window studios continue to give to DVD sales and rentals before they make their films available on Pay-Per-View. However there have been signs that this is eroding and it is inevitable that Pay-Per-View and Internet will soon have movies available as soon as they are released to DVD.
Making matters worse for Blockbuster is that those consumers who have opted to sign up for a subscription service tend to be high-volume movie watchers. Casual renters have no need for such a subscription service.
Blockbuster has responded with its own subscription service which has garnered 1.4 million customers, but will have difficulty competing given the twin albatrosses of $1 billion of debt and a $2 billion liability for store leases. Besides that, the mail-based subscription business will come under pressure from the “instant gratification” formats of cable and internet delivery.
Blockbuster has attempted placing more emphasis on DVD sales, but has difficulty competing with behemoths such as WalMart(WMT), Best Buy(BBY), Amazon(AMZN) and Costco(COST).
As valiantly as it may try, Blockbuster cannot cut costs fast enough to regain sustained profitability. There is no new product or service they can leverage their retail footprint to sell. A failed 2002 experiment with another doomed retailer, Radio Shack(RSH), is instructive in this regard.
Carl Icahn has taken a stake in the company and agitated for change, but I’m unclear as to what value he hopes to unlock. One need only look at Movie Gallery(MOVI) to see where Blockbuster will end up. It is the rare company that can successfully transition when its core business becomes obsolete. Blockbuster looks to be of the more common variety of company that can’t make the transition.
Disclosure: I own none of the companies mentioned in this article