Comments on: Blockbusted http://www.inelegantinvestor.com/2006/09/28/blockbusted/ Something of Value Fri, 21 Nov 2008 02:43:13 +0000 http://wordpress.org/?v=2.6 By: Phil http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-73 Phil Wed, 01 Nov 2006 11:09:59 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-73 A side by side comparison of Netflix's online service and Blockbuster's instore and online combination will show where the best value is for the consumer. A side by side comparison of Netflix’s online service and Blockbuster’s instore and online combination will show where the best value is for the consumer.

]]> By: cheapstochunter http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-49 cheapstochunter Thu, 12 Oct 2006 00:14:11 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-49 My aversion to Netflix lies in this one paragraph of their most recent 10-K. When you change your depreciation assumptions so that now you depreciate assets over 3 years, which you have historically depreciated over 1 year, is a MAJOR red flag. Lower depreciation expense = higher bogus margins = higher bogus EPS. The companies earnings are drastically overstated, the company does not have this level of earning power! This will come back to haunt investors, mark my words. From 10-K The Company amortizes its DVD library, less estimated salvage value, on a “sum-of-the-months” accelerated basis over its estimated useful life. The useful life of the new-release DVDs and back-catalogue DVDs is estimated to be 1 year and 3 years, respectively. In estimating the useful life of the DVD library, the Company takes into account library utilization as well as an estimate for lost or damaged DVDs. Volume purchase discounts received from studios on the purchase of titles are recorded as a reduction of DVD library inventory when earned. Prior to July 1, 2004, the Company amortized the cost of its entire DVD library, including the capitalized portion of the initial fixed license fee, on a “sum-of-the-months” accelerated basis over one year. However, based on a periodic evaluation of both new release and back-catalogue utilization for amortization purposes, the Company determined that back-catalogue titles have a significantly longer life than previously estimated. As a result, the Company revised the estimate of useful life for the back-catalogue DVD library from a “sum of the months” accelerated method using a one year life to the same accelerated method of amortization using a three-year life. The purpose of this change was to more accurately reflect the productive life of these assets. My aversion to Netflix lies in this one paragraph of their most recent 10-K. When you change your depreciation assumptions so that now you depreciate assets over 3 years, which you have historically depreciated over 1 year, is a MAJOR red flag. Lower depreciation expense = higher bogus margins = higher bogus EPS. The companies earnings are drastically overstated, the company does not have this level of earning power! This will come back to haunt investors, mark my words.

From 10-K

The Company amortizes its DVD library, less estimated salvage value, on a “sum-of-the-months” accelerated basis over its estimated useful life. The useful life of the new-release DVDs and back-catalogue DVDs is estimated to be 1 year and 3 years, respectively. In estimating the useful life of the DVD library, the Company takes into account library utilization as well as an estimate for lost or damaged DVDs. Volume purchase discounts received from studios on the purchase of titles are recorded as a reduction of DVD library inventory when earned.

Prior to July 1, 2004, the Company amortized the cost of its entire DVD library, including the capitalized portion of the initial fixed license fee, on a “sum-of-the-months” accelerated basis over one year. However, based on a periodic evaluation of both new release and back-catalogue utilization for amortization purposes, the Company determined that back-catalogue titles have a significantly longer life than previously estimated. As a result, the Company revised the estimate of useful life for the back-catalogue DVD library from a “sum of the months” accelerated method using a one year life to the same accelerated method of amortization using a three-year life. The purpose of this change was to more accurately reflect the productive life of these assets.

]]> By: ourneon http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-44 ourneon Tue, 10 Oct 2006 15:43:21 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-44 Read some of the articles about the new movie download services...they're slow, barely cheaper than buying, and years away from being a real threat. With the HDTV penetration rising at breakneck pace, I think that saying the number of "purists" is small (as Don says) is simply ignorant. Anyone with half a brain would know that 1080 lines of resolution always beats 480...even on my big screen the video-on-demand from Time Warner is a crappy imitation with blocky picture & 2 channel audio. I've worked for cable, telcom, and the movie biz...based on my fairly educated guess, DVDs are here to stay. True - many consumers are cheap & lazy, and will love the alternates to the video store. But those who enjoy the shopping & viewing experiences will continue to rent their movies. But, we've all got our opinions... Read some of the articles about the new movie download services…they’re slow, barely cheaper than buying, and years away from being a real threat. With the HDTV penetration rising at breakneck pace, I think that saying the number of “purists” is small (as Don says) is simply ignorant. Anyone with half a brain would know that 1080 lines of resolution always beats 480…even on my big screen the video-on-demand from Time Warner is a crappy imitation with blocky picture & 2 channel audio. I’ve worked for cable, telcom, and the movie biz…based on my fairly educated guess, DVDs are here to stay. True - many consumers are cheap & lazy, and will love the alternates to the video store. But those who enjoy the shopping & viewing experiences will continue to rent their movies. But, we’ve all got our opinions…

]]> By: TheValueBlogs » Blockbusted http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-24 TheValueBlogs » Blockbusted Thu, 05 Oct 2006 23:36:40 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-24 [...] To continue reading click here. [...] [...] To continue reading click here. [...]

]]> By: christo http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-20 christo Wed, 04 Oct 2006 05:35:23 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-20 Blockbuster and Netflix offer the exact same online service to customers. The difference between the two is that Netflix ads are all over the internet, and I can't remember the last time I saw an ad for Blockbuster. So, for now, Netflix is adding a lot more new customers than Blockbuster. I think that will all turn around when and if Blockbuster lets people know about their online rentals. Blockbuster and Netflix offer the exact same online service to customers. The difference between the two is that Netflix ads are all over the internet, and I can’t remember the last time I saw an ad for Blockbuster. So, for now, Netflix is adding a lot more new customers than Blockbuster. I think that will all turn around when and if Blockbuster lets people know about their online rentals.

]]> By: davis freeberg http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-19 davis freeberg Wed, 04 Oct 2006 02:11:03 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-19 This is a very good article that focuses on the real issues with Blockbuster's business plan. It's not that you can't make money running a retail business, but with the amount of alternative competition the company faces it will get increasingly difficult for Blockbuster to continue to make their debt and lease payments. I think that a lot of it is because Blockbuster has a fixed cost structure vs. Netflix's variable structure. If Blockbuster has consistently run on 10% gross margins and 15% of their customer base moves online, it's a big problem because their stores start running at losses. If Netflix were to see a reduction of 15% to their customer base, it would still hurt, but because the variable mailing costs would go down too, they wouldn't necessarily experiences losses over this sort of transition. This makes them nimble and it makes Blockbuster desperate. This also means though that Netflix's upside is capped because more subscribers doesn't necessarily translate into higher profit margins. In the heyday, Blockbuster benefited from having fixed costs, but now that they are facing DVD by mail as a threat and VOD as a threat, it's becoming increasingly difficult to continue paying those fixed costs. Thanks for the great article. This is a very good article that focuses on the real issues with Blockbuster’s business plan. It’s not that you can’t make money running a retail business, but with the amount of alternative competition the company faces it will get increasingly difficult for Blockbuster to continue to make their debt and lease payments. I think that a lot of it is because Blockbuster has a fixed cost structure vs. Netflix’s variable structure. If Blockbuster has consistently run on 10% gross margins and 15% of their customer base moves online, it’s a big problem because their stores start running at losses. If Netflix were to see a reduction of 15% to their customer base, it would still hurt, but because the variable mailing costs would go down too, they wouldn’t necessarily experiences losses over this sort of transition. This makes them nimble and it makes Blockbuster desperate. This also means though that Netflix’s upside is capped because more subscribers doesn’t necessarily translate into higher profit margins. In the heyday, Blockbuster benefited from having fixed costs, but now that they are facing DVD by mail as a threat and VOD as a threat, it’s becoming increasingly difficult to continue paying those fixed costs. Thanks for the great article.

]]> By: cubfitz http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-18 cubfitz Tue, 03 Oct 2006 17:50:20 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-18 I've tried video on demand from Time Warner and am not convinced that <i>it</i> is as big of a threat as everyone seems to think. First of all I had to wait two hours to have access to the movie I wanted and was told by customer service that "on Saturday nights a lot of people are requesting movies, so you'll have to wait an hour or so". That doesn't quite seem to be the next logical step in the industry to me. Not to mention that after I eventually did get the movie it skipped like a dvd that had been put through a blender. I’ve tried video on demand from Time Warner and am not convinced that it is as big of a threat as everyone seems to think. First of all I had to wait two hours to have access to the movie I wanted and was told by customer service that “on Saturday nights a lot of people are requesting movies, so you’ll have to wait an hour or so”. That doesn’t quite seem to be the next logical step in the industry to me. Not to mention that after I eventually did get the movie it skipped like a dvd that had been put through a blender.

]]> By: Don Bergenty http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-17 Don Bergenty Mon, 02 Oct 2006 23:56:12 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-17 I have been both a BBI and Netflix subscriber and I do not see much difference. I don’t see a service advantage from one to the other. I never used the free coupons because I never wanted to drive to the Blockbuster and find a movie. For families with kids the coupons make sense, but not all of us are in that category. Is Blockbuster dead – no. Are they dying - maybe. To assume that all consumers want to watch DVD extras as Ourneon says is a little rich. I can count on my one hand the number of times I watched the extras that come with a DVD and forget disc # 2; that never makes it into the player. The movie purist is a small percentage of the movie buying/watching audience. With services like Comcast and the speed which Verizon’s fiber optics will deliver movies it will be one more thing that takes revenue away from Blockbuster. The average price for new DVDs continues to drop which also hurts rental revenue. You cannot have a company has no top line growth for 2 – 3 years and expect them to be around forever. Retail is not dead, concepts and shopping habits change. Technology changes what people buy and at what prices. Who thought Tower Records might die 10 years ago? I have been both a BBI and Netflix subscriber and I do not see much difference. I don’t see a service advantage from one to the other. I never used the free coupons because I never wanted to drive to the Blockbuster and find a movie. For families with kids the coupons make sense, but not all of us are in that category.

Is Blockbuster dead – no. Are they dying - maybe. To assume that all consumers want to watch DVD extras as Ourneon says is a little rich. I can count on my one hand the number of times I watched the extras that come with a DVD and forget disc # 2; that never makes it into the player. The movie purist is a small percentage of the movie buying/watching audience.

With services like Comcast and the speed which Verizon’s fiber optics will deliver movies it will be one more thing that takes revenue away from Blockbuster. The average price for new DVDs continues to drop which also hurts rental revenue. You cannot have a company has no top line growth for 2 – 3 years and expect them to be around forever.

Retail is not dead, concepts and shopping habits change. Technology changes what people buy and at what prices. Who thought Tower Records might die 10 years ago?

]]> By: Win Mur http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-16 Win Mur Mon, 02 Oct 2006 17:59:22 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-16 The issues BB deals with are probably no diffrent than most retailers, no customer is 100% satisfied with the retail expereince. Having said that, whenever I go into my local BB store on a weekend night, it is always packed with people. I think it is to early to throw in the towel on BB yet, and as others have mentioned, the BB Online service does kick Netflix's backside. I prefer the retail store and online combo that only BB offers right now. Plus BB has a great in-store selection of games, a fast growing entertainment option that many people prefer to movies. I don't care who wins, but to say BB is dead is to day retail is dead and I just don't see it. The issues BB deals with are probably no diffrent than most retailers, no customer is 100% satisfied with the retail expereince. Having said that, whenever I go into my local BB store on a weekend night, it is always packed with people. I think it is to early to throw in the towel on BB yet, and as others have mentioned, the BB Online service does kick Netflix’s backside. I prefer the retail store and online combo that only BB offers right now. Plus BB has a great in-store selection of games, a fast growing entertainment option that many people prefer to movies. I don’t care who wins, but to say BB is dead is to day retail is dead and I just don’t see it.

]]> By: ourneon http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-15 ourneon Mon, 02 Oct 2006 15:07:32 +0000 http://www.inelegantinvestor.com/2006/09/28/blockbusted/#comment-15 While it is healthy to have these discussions, I'm sure you'll soon see that you are incorrect. While Netflix has gotten a massive headstart in the online business, Blockbuster offers a much better service and free in-store rentals. When you're sick of Netflix's "throttling" program delaying your picks, you can simply switch to Blockbuster, print a coupon, and pick up that new release in-store that Netflix has been holding hostage for weeks. Secondly, movies-on-demand and via internet will simply not do for any movie purist. If you don't mind poor quality, lack of bonus features, progressive scan playback, and all of the benefits inherent with the physical DVD then, sure, watch them on cable or your PC. But if you want widescreen format, 5.1 surround, and the plethora of extras that today's consumers demand then you'll steer clear of these inferior formats and drive to your local Blockbuster. Lastly, anyone who has actually tried Netflix & Blockbuster Online side by side know that theres is a far better product. So much so, that Netflix filed a frivalous suit to try to knock Blockbuster Online out of the picture. Heck, even the judge knew that they weren't going anywhere with this one when he refused to dismiss Blockbuster's suit. Consumers like to touch the physical movie and browse the store...the online experience just doesn't compare. So, pucker up...your trumpet won't be the only thing you're puckering for. While it is healthy to have these discussions, I’m sure you’ll soon see that you are incorrect. While Netflix has gotten a massive headstart in the online business, Blockbuster offers a much better service and free in-store rentals. When you’re sick of Netflix’s “throttling” program delaying your picks, you can simply switch to Blockbuster, print a coupon, and pick up that new release in-store that Netflix has been holding hostage for weeks. Secondly, movies-on-demand and via internet will simply not do for any movie purist. If you don’t mind poor quality, lack of bonus features, progressive scan playback, and all of the benefits inherent with the physical DVD then, sure, watch them on cable or your PC. But if you want widescreen format, 5.1 surround, and the plethora of extras that today’s consumers demand then you’ll steer clear of these inferior formats and drive to your local Blockbuster. Lastly, anyone who has actually tried Netflix & Blockbuster Online side by side know that theres is a far better product. So much so, that Netflix filed a frivalous suit to try to knock Blockbuster Online out of the picture. Heck, even the judge knew that they weren’t going anywhere with this one when he refused to dismiss Blockbuster’s suit. Consumers like to touch the physical movie and browse the store…the online experience just doesn’t compare.

So, pucker up…your trumpet won’t be the only thing you’re puckering for.

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