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Once the leader in rentals and the place where practically everyone found time to stop after work and pick up a few movies, Blockbuster is now a shadow of its former self. Competitors, suspect management, and evolving industry dynamics have rocked the company, leaving it in a precarious position. And unless it moves quickly to improve its business model and shore up its position in the market, it may become an irrelevant company with little chance of survival.
What's going on at Blockbuster?
In the late 1990s, Blockbuster was at the top of its game. The company's stock price was soaring, along with its revenue, and its profits were setting records with each passing quarter. Netflix was still an inconsequential competitor in management's estimation and there was little concern over other forms of rental distribution.
But in less than a decade, Blockbuster's once-promising future turned into a nightmare of epic proportions. Since 2002, Blockbuster has seen its stock price plummet from $29 per share to its current level of just $2 per share and watch significant profits turn into billions in losses as more people decided the brick-and-mortar rental alternative wasn't for them.
Time and again, Blockbuster was faced with the opportunity to change its business model and start focusing on those areas where consumers were flocking, like rentals-by-mail and video on-demand, but it instead chose to make its brick-and-mortar business the centerpiece of its strategy.
Blockbuster now offers a rental-by-mail service called Total Access and is enticing customers by offering PayPal bonus payments, but the service is still inferior to Netflix's offering. Blockbuster is exploring the possibility of installing kiosks in its stores to make downloading entertainment on mobile products available for those on the go, but few believe that holds much real promise. Looking beyond movies-by-mail to downloadable Internet content, the company also acquired Movielink, but so far the unit has yet to yield significant revenue.
But Blockbuster's issues aren't just macro-level ones; the stores have their own problems. Most stores carry too few titles and finding anything in the store is more difficult than it should be. If you do find a film, it costs $4 or $5 to rent it, and you'll need to go back to the store to ensure you're not charged the full price of the film.
But these problems don't mean that Blockbuster can't turn things around and create a business model that appeals to more people. In fact, Blockbuster can downsize, better capitalize on buyer impulse, and start focusing on those areas where it offers the best experience.
The key to Blockbuster's short-term success isn't in trying to copy its competitors. Instead, Blockbuster needs to focus on its core competencies and expand its business through those.
When downsizing becomes necessary, it's best to wipe out every store that's losing money and even those that are turning a profit, but aren't growing. And although Blockbuster has closed hundreds of stores in the past few years, almost 4,000 stores are still standing all over the United States, which is too high for a money-losing organization.
Prior to its decision to close stores, Blockbuster incurred hefty losses. In 2004 alone, the company lost $1.2 billion, and in the subsequent period, it lost over $500 million. But after closing more than 500 stores, Blockbuster was able to realize a slim profit of $50 million in 2006 and lose just $74 million in 2007.
According to Blockbuster's annual filings, it's suffering losses because of the high cost of expenses it incurs by running each store. And as the decline of the brick-and-mortar rental business accelerates, the only way Blockbuster can stay competitive is to start closing stores even more rapidly.
With almost 4,000 stores in the US alone, Blockbuster stores can be found practically anywhere. Realizing that, Blockbuster can strategically close some stores without forcing customers to stray too far from home.
In its own "risk factors" filing in its Annual Report, Blockbuster admits that it failed to recognize the rapid downturn in brick-and-mortar rentals and will need to continually play catch-up if it wants to stay relevant in the industry.
"We have previously experienced challenges caused by the faster than anticipated decline in the worldwide in-store home video rental industry," Blockbuster wrote to investors. "We have historically closed underperforming video stores and will continue to consider the closure of underperforming stores. We are currently reviewing many of our store leases and selecting sites to close or downsize based on store profitability."
As it learned from Movie Gallery and Hollywood Video stores, Blockbuster cannot afford to keep unprofitable stores standing, especially with $840 million of debt in its financial structure. And although stores are the key to its short-term success, it simply can't afford to keep so many of them open.
Capitalize on impulse
Netflix and video on-demand services make renting movies for the weekend more convenient than store rentals. Where Blockbuster still reigns supreme is in the impulse buyer market, and it needs to make it easier for those people to find and rent movies.
"What we think the role is that impulse purchaser, the person who is less price sensitive, the person who sees that beautiful 42-inch display who says, 'You know, I'm a busy person. I'm just going to get it.' Thankfully, that's a huge portion of the customer base," Blockbuster CEO Jim Keyes told PaidContent.
Keyes makes an interesting point that shouldn't be overlooked: as market factors change, Blockbuster is the place for mothers to rent a few movies to keep the kids quiet in the afternoon or the place to get some films to bring along on a family trip. It's also the place where someone can go to look for a specific comedy they want to watch right that minute without waiting for a Netflix DVD to arrive in the mailbox.
Realizing that, Blockbuster needs to drastically change its store designs and make it easier for patrons to find the films they're looking for. It should remove the questionable arrangement of movies by genre and make them available in alphabetical order, regardless of genre. It should also use more than half the store—about what it uses now for rentals—to increase the number of movies on hand to ensure those impulse buyers don't leave empty-handed.
Changing the store layout and packing it with more movies may cost Blockbuster a bit more but should yield higher revenue. Countless times, I have gone to my local Blockbuster looking for a specific film to watch that night and have left without it because it wasn't in stock. For a rental chain that relies on impulse purchases, that's simply unacceptable.
Supplement rentals with electronics sales
Although most pundits called it a dumb move, Blockbuster's attempt at acquiring Circuit City wasn't such a bad idea. That said, trying to acquire Circuit City itself was a poor choice on Blockbuster's part because the former is rife with financial and strategic issues that make it practically irrelevant in the electronics retail space.
But just because it botched a deal with Circuit City, it doesn't mean that Blockbuster was out of line by trying to acquire an electronics retailer. In reality, becoming an electronics retailer or acquiring one with sound financial health would appeal to Blockbuster's impulse buyers and provide an end-to-end value proposition that its competition simply can't provide.
But that doesn't mean Blockbuster needs to sell printers and fax machines. Instead, Blockbuster should continue to make in-roads in video game sales (it already sells hardware and accessories, along with games), and sell HDTVs, Blu-ray and DVD players, and any other product that has some relevance to its core business of movie rentals.
Doing so may add more operating expenses to its income statement, but it helps Blockbuster capitalize on its retail channel, which has performed extremely well over the past year. In fact, according to its latest filing, merchandise sales are up 69.2 percent in the US and almost 21 percent worldwide.
Judging by the success of its merchandise sales, the company has no other option but to explore other retail avenues as soon as possible. And the best way to do so is through the sale of key electronics that are found in most rooms of the home.
Make video games more important
Netflix isn't Blockbuster's only competition. Instead, the company is faced with competition from cable companies and satellite providers that allow users to download movies on-demand, Netflix hardware that lets users download movies directly to the box and watch movies on their HDTV, and streaming movies from services like Amazon and Hulu.
And while Blockbuster is well on its way to developing a set-top box with LG that will let users stream movies to their HDTVs and will use Movielink to fend off any competitors in the movie downloading space, it has fewer competitors in the video game rental business. In that case, it needs only to compete with GameFly, a service that rents video games by mail.
The comparative lack of competition in the video game rental space is most simply attributed to the fact that video games can't be streamed and downloading them and making them work on a console isn't easy. Realizing that, Blockbuster needs to do more to push its video game rentals and make it an equally important aspect of its business model. (Although this too may be threatened in time as console makers offer an increasing number of games online; while this generation of consoles generally supports only "arcade" games and extra downloadable content, Microsoft is already showing what's possible by offering older Xbox games as full downloads.)
By pushing video games even harder, Blockbuster can significantly increase revenue on video game rentals and possibly even movie rentals; more traffic in-store means more opportunities for people to find movies worth watching. The company used to offer free video game rental with most of its movie-by-mail plans, though this program was scaled back dramatically a couple years back. While it might be expensive, that sort of combo can also be quite attractive.
Ironically, the business that's making Blockbuster irrelevant is also the business that's keeping it alive. And although it needs to ensure that it's a major player in the future by spending research and development funds on HD downloads and film streaming, it can become a more viable company by sticking to its core competencies and doing everything it can to exploit those and turn a profit. And by doing so, more investors will be willing to trust Blockbuster management and help increase the company's cash flow, which can then be utilized for its future development.
Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles, called the acquisition a defensive move by Blockbuster to keep up with Netflix. “In the long run, if they are successful in neutralizing Netflix, this will work out,” said Mr. Pachter, who does not own Blockbuster stock.
Shares of Blockbuster rose 37 cents, or 8.75 percent, to $4.60, in after-hours trading.
Movielink, based in Santa Monica, Calif., was started in 2001. The company’s other owners include General Electric’s movie unit Universal Studios and Sony Pictures Entertainment.
Blockbuster is an investor in a Movielink competitor, CinemaNow, which has 4,000 film, TV and concert titles, compared with Movielink’s 3,300. CinemaNow allows customers to stream videos; Movielink does not.
Blockbuster will retain a small stake in CinemaNow, a spokeswoman, Karen Raskopf, said.
Blockbuster said this year that it might seek a partner in 2007 to start a video downloading service. Last year, the company introduced an online movie subscription plan to lure customers away from Netflix, the largest Internet movie rental company.
The two companies offer similar plans and have repeatedly lowered prices or modified services in an effort to win customers.Continue reading the main story