Why Blockbuster brick-and-mortars will be gone in five years

Over the past few years, Blockbuster has been a victim to a changing environment in the movie rental industry that has seen a mass of people leave brick-and-mortars in favor of online services like Netflix.

No better evidence of this is shown than the comparison between the net income Netflix enjoyed in 2006 ($49 million) and the net loss Blockbuster incurred -- $588 million. Just one year later, Blockbuster was able to turn things around slightly and enjoyed a net income of $54 million, but in 2007, the company didn't have such great luck. According to its most recent filing (September 2007), Blockbuster incurred a loss of $35 million in just one quarter.

So what's really going on at this company? Unfortunately, it doesn't look like anything good. After examining Blockbuster's 10-Q filed in September and evaluating prior year annual reports to estimate the impact on its upcoming annual report sometime next month, it not only looks like this company is in dire straits, I would venture to say that all of its brick-and-mortars will soon be closed. In fact, I give it about five years.

Aside from being on pace to record about $1 billion less in revenue, Blockbuster could be poised to post one of the largest losses the company has ever incurred. To make matters worse, its stock price is hovering at about $2.84 and with very light trading, and the chances of that turning around are nil.

Perhaps most damning to Blockbuster is its inability to compete in the online space. Aside from getting hammered by Netflix, the company is trying desperately to make its mark in the movie download business. But after acquiring Movielink, it not only wasted approximately $7.0 million, adjusted to Movielink's cash on-hand, it looks like it was a poor move.

According to the company's latest 10-Q, if the acquisition occurred at the beginning of the quarter and not in August of 2007, Blockbuster would have lost about $37 million subsequent to the acquisition and $130 million if Movielink was acquired 39 weeks prior to September 2007. In other words, the company is basically throwing money at an operation that not only doesn't work, it's losing valuable capital it will need to keep it afloat.

Of course, the story of Blockbuster's woes doesn't quite end there. According to its filing, Blockbuster currently owns or franchises out about 7,800 stores all over the world. But what becomes most vexing to the reader of this document is what Blockbuster's strategy actually is.

Early on in the 10-Q, the company tries to tell the reader that it's committed to expanding its business outside of the costly brick-and-mortar section, but then later on, explains that it increased prices and decreased advertising expenses for its Total Access Program resulting in a mass exodus "subscribers to other services." In fact, in just two months, the company lost approximately 500,000 Total Access subscribers.

And aside from closing 526 stores in an attempt to jump start sales, the company has been relatively incapable of turning things around on the brick-and-mortar front, even though it's ostensibly focused on doing just that.

But luckily for all of you Blockbuster fans out there, the company thinks it knows why this is happening: "the decline in the worldwide in-store home video rental industry has been caused primarily by (i) increased competition from retail mass merchant sales of low-priced DVDs, by-mail rentals and other sources of in-home entertainment such as digital video recorders and other devices that are capable of downloading content for in-home viewing; (ii) competition from piracy in certain international markets; and (iii) competition from other forms of leisure entertainment."

Ah, the ol' piracy trick, eh? So will piracy be to blame when the US brick-and-mortars are shut down? Probably.

But what's most ironic is Blockbuster really has no idea how to turn things around. It has already failed at trying to take on Netflix and its Movielink acquisition has been an unadulterated flop. So where does it want to go next to try to jumpstart sales? "Complementary services."

"We believe that there is a significant opportunity to both increase revenue and improve profitability by offering complementary entertainment-related merchandise, products and services in our stores," the company claims.

Ironically, though, those complementary services that Blockbuster is so quick to cite have yet to prove their worth. Just one page down in the 10-Q, the company claims movie sales increased by $2.0 million, game sales decreased by $42 million and "other revenues" decreased by approximately $8 million, representing a 50 percent decline. Hm. Sounds good, doesn't it?

Lastly, Blockbuster believes it will be able to increase its revenue through better customer service. To that assumption, I choose to ask the company a simple question: why would any employee want to trust your company or work harder for your company if you just laid off thousands of their colleagues and will probably do it to them as sales continue to decline?

So why do I think Blockbuster will close all US brick-and-mortars within the year? Simple -- because the company has no idea what it's doing. First, it tried (and still does) charge too much for rentals and attempted to woo customers through a "no late fee" scheme that was an even bigger blunder than charging them. In fact, the company has been sued numerous times for that policy and most have yet to be settled.

Secondly, Blockbuster tried to take on the leader in the movie rental industry -- Netflix -- and in so doing, ruined its standing in the industry by providing an inferior service.

But alas, none of these are nearly as damning to this organization as its awful management and misguided beliefs on what customers actually want. Instead of offering more "complementary services" and better customer service, Blockbuster needs to find a way to cut costs drastically (also known as close stores) and decide which business it will be in -- the brick-and-mortar rental business or the online rental industry.

And once it does make that decision, look for the latter to become the new focus. After all, its stores are largely unprofitable, it can't sustain these kinds of losses going forward if it wants to compete in the future and I think it's slowly realizing that if it can gain a foothold in the next wave of video rentals it can possibly turn things around.

Blockbuster is officially old and decrepit. And if it continues down this path it will soon be a memory. Realizing this and understanding that no other company is willing to acquire it, Blockbuster will make the tough decision to close its brick-and-mortars and go elsewhere. And believe it or not, its shareholders will actually like it.

Now, let's just hope we do.

[cardfan1212]

Umm..duh. Lots have been saying that the past few years. Glad it hit you finally..lol

[joits]

i still can't believe people continue to go to blockbuster when there are better options in terms of brick and mortar video stores. understandable if you live in a town or city that doesn't have anything else but blockbuster or hollywood video but if you have local mom and pop stores, i don't understand why you wouldn't go there. first of all they are a lot cheaper, charging only for one day rental (why do i need to keep a new movie for five days at $5 plus tax?) and secondly for some of us, our mom and pop video stores have a much larger selection of movies, tv shows, special interest, foreign imports, video games, etc than blockbuster.

[SheriffBooth]

Nice report. Not earth-shattering news, but a thorough and informative post. Blockbuster's a dinosaur waiting for the meteor. If they'd been smart they would've skipped the mail order rental game altogether and jumped straight into digital downloads and maybe taken an early lead in that realm. But obviously that's the point of the article - no foresight from Blockbuster means no more Blockbuster.

[aztec92154]

I completely agree with your comment.

I think its sad that the brick-and-mortars will be gone soon. I actually liked going up and down the isles with my friends to go pick out a movie or a game. Its sad that Amazon might kill bookstores and that Netflix and iTunes might kill video rental shops.

[22mojom22]

I can certainly understand why Blockbuster is failing. I can't remember the last time I went to a brick and mortor store and actually paid for a rental. I am a little suprised that people claim that Blockbuster's mail rental business is so inadequate compared to Netflix. (Granted I have never been a Netflix customer so I have no personal point of comparison.) I have been a Blockbuster On-line customer since they started the service, and have always been satisfied with the service. Have I had issues with the service? Certainly, on occasion disks have arrived damaged (even broken in one instance) but Blockbuster customer service has always been quick to respond with replacements with no hassle on my part what so ever. I actually have never understood why more people do not take advantage of the service with the added bonus of being able to exchange mail delivered rentals at the store for a new movie. (Although this certainly explains why the stores are all losing money.)

[techterry]

Netflix, or any mail-order DVD service has never really appealed to me. It's very rare that I know, in advance, what I want to watch. Now that we are starting to see services that offer movie downloads, we are finally moving into the movie service of the future. Mail-order DVDs were just a placeholder in the grand scheme of things.

Once every TV has an interface to the Internet, to accept movie downloads, and once you can download full High-Definition movies to your home, you will see a clear winner in the movie rental business.

My cable company offers movies on demand but the selection is always weeks or months behind video stores and the service does not always work.

For now, Blockbuster, or other stores get my vote, because I just want to be able to go to a video store and rent a movie I feel like watching on any particular day.

[jak324]

Red Box always seems to have huge lines. That still my choice. Easy and convenient with a MUCH better price than Blockbuster.

[rkminc]

At best, you're outdated in your analysis, at worst you're using old data to extrapolate the new management team's strategy. Keyes took control in mid-2007. Citing September 2007 data to suggest the new team has failed is a bit absurd. For example, are you really suggesting that Movielink's historical losses prior to the acquisition would continue, with no synergies or cost cutting restoring the business unit's profitability? And again, you're also stating Keyes' strategy to turn around the brick and mortar operations is failed because you don't see evidence of its success in September 2007 financials? It's amusing how much people use widely available historical information to suggest the sky will be falling, when all of that information is already reflected in the current stock price. Newsflash: the sky fell. Any improvements in the business at this stage is upside. Most of the downside is already being expected.

[bnessa55]

right on!

[CloudYenda]

^^^^
100% Logical

We call wild claims of a deeply entrenched player in the movie relm randomly dissappearing in a year's time news these days?
The above poster stabbed all sorts of holes in this article so I won't restate them. I will however point out how senseless it is to go off rambling like that.
Millions of loyal customers, and plenty of fresh new changes of policy company wide, may or may not do the trick, there is no way to tell yet, the market hasn't responded.

Let's see what blockbuster is up against in the HD download world...

1. Over compressed cable and satalite channels

2. Overly complex, overly compressed, and obscure download services. Xbox live, vudu, ECT...

OR

Run to the store and grab a great movie, while you're there the blockbuster guy recomends another few movies, you grab them too, knowing he always has sizzling recommends. (ok, he did like cloverfield...)

Its all about experience baby, if blockbuster plays their cards right, (and that's a big if) they will transition to digital when the time is right.

[bnessa55]

I am currently a blockbuster employee and have been for many years. Yes, I see internally that there are many flaws, but they can be fixed. I don't like the fact that there are so many stores closing ...maybe even mine, but I do see how they can make improvments with closing dead stores with no profits. For the people who left nasty comments you know nothing about blockbuster. We have been here for decades and will continue to do so, If we have people in the company who can come to realize that to make a profit we need to listen to what the people want. Even Netflix has it's problems, but at least you can just go into a store to solve it not talk to a computer or a person it Afganistan! Keep in mind for all you who read this you have a week grace period on each movie and that does help, there are many great programs offered with this company. I will continue to pray and have faith it will succeed!!!

[pepperpup]

We've had a BB store within 5 mins walk of our home since we moved here in '99. Because it's convenient, I could simply walk over on a Sat morning around 10:00 (best time to go: a full overnight return bin almost always guaranteed a "New Release" you wanted was in there waiting for you) and grab a couple for Saturday and Sunday night. Like many who have subscription TV (me: FiOS) today, the convenience of simply shopping from the comfort of your couch and watching a trailer before agreeing as a family to order it is simply better than gambling on walking down to BB to discover the movie you thought you wanted was either gone or, worse, awful. Indeed, we rent far fewer movies than we used to largely because most of what's out there is either (a) garbage, or (b) an action flick we already saw at a "modern" theater (we have a new Rave cineplex nearby. Phenomenal, all HD picture, THX sound, great stadium seating, etc.)

The SD versions of FiOS' VOD movies are the same price as those from BB; the "HD" versions (slow down, FiOS: they're really only DVD quality @ 480p) are $1 more. Still, we always opt for the HD version ($6), which today seem to be always available with their $5 SD counterpart. But, the former always looks far better on our 60". Sadly, we're contributing to the downfall of a 1980's/1990's nostalgia: going to the movie store. We still live in the same neighborhood and routinely walk by this same BB store. What we don't see any longer, even on a Friday or Saturday night? A line of renters waiting to check out. We're realized only recently that we're more than willing to wait a month or so after the DVD is first released to VOD it to see the trailer first before decided to fork over $6. Second, as a FiOS "HD Extreme" all-in customer, we have hundreds of channels, including all the premium movie channels, which are all simulcasting in HD, to pick something to watch.

Still...there's a downside to (potentially) losing our neighborhood BB. I have a PS3 (fat) I use for BD movies. I have a small library of "eye-candy" (e.g. Batman Returns, Ironman) titles, but still liked the convenience of being able to take advantage of BB's albeit smallish library of BD titles. If BB shutters, will the BD format itself be far behind except as a boutique technology? (Slow down, everybody: very, very few people have OC3-level service needed to stream even compressed BD grade feeds into their home today or anytime soon.)

If not already done so, BB should restructure their business model to sub-TV providers like DTV, E*, VZ, Comcast, AT&T, etc. to become their VOD host and manager, thereby bypassing the intermediate model from Netflix. (I was a Netflix when they launched, but quickly tired of constantly waiting for new release-movies while getting the older titles I placed in my queue. I'm sure thing have improved. However, I'm a GameFly subscriber today and still get the occasional "gold" (read: old) PS3 title in my queue over a release that's been out for a month or so.) Maybe if GameFly started doing BD movies, too?....hmmmm....interesting concept.

Anyhow, if you're a BB retail employee, you're probably in the buggy-whip business at this point: still suitable for rural communities, but a dead business model in urban/suburban areas.