Blockbuster's real problem

Hacking Netflix ponders whether the "Death of Blockbuster" stories greatly exaggerate.

I hardly think we've seen the last of Blockbuster, but they do have a tough road ahead of them. Blockbuster Chairman Jim Keyes is just getting started, and he might have saved the company by pulling out of the expensive online war with Netflix. With Movie Gallery out of the way, refocusing on stores and getting more revenue (from) their 20 million monthly customers makes sense in the short term. Keep in mind that it's going to be a while before DVD goes away (and my Dad watches a movie online).

This latest round of the Blockbuster deathwatch was largely kicked off by Blockbuster's Q3 earning Webcast during which it was revealed that the company had lost about 500,000 Total Access (DVD by mail) subscribers. CEO James Keyes suggested that some were unprofitable subscribers, but then you'd probably expect him to say that. In any case, Blockbuster appears to be pulling back (but likely not exiting) from its mail operation to concentrate on its brick and mortar stores.

One often hears about B&M being dead or the DVD being replaced by online downloads. I don't buy either assertion, at least for any reasonable planning horizon. The reason is in the table below.

	Latency	Effort	Consumer Tech	Supplier Cost
Store	Low	High	Low	High
Mail	High	Low	Medium	Medium
Download	Low	Low	High	Low

What the table shows is that the three styles of rental have distinct characteristics that inherently appeal to different groups of consumers or a given consumer in different circumstances.

If you just have to watch Spiderman 3 tonight, Netflix isn't going to cut it. On the other hand, downloading movies today requires a certain degree of tech savvy-ness and the appropriate hardware in your house--which may or may not be connected to your television set. So, there's something to be said for going down to the store for an impulse rental.

On the other hand, if you're mostly content to watch one of the movies that you happen to have on hand, as I am, disks by mail have a lot of otherwise nice characteristics--including, for now, probably the best selection for most purposes.

In the medium to longer term, however, I do believe that the relative cost to deliver movies in different ways is going to tend to drive home movie viewing more and more online. Although there are certainly (large) start-up costs to delivering movies over broadband, the infrastructure will get better and the costs will go lower over time.

This cost difference seems particularly relevant in something like movie rentals because all our experience to date suggests that, whatever the cost to deliver rentals, consumers are willing to pay about the same amount per movie. (Although there are certainly people who use the Netflix flat fee to rent large numbers of movies at a low per-movie fee, most people probably end up paying about the same $3 to $4 per film that they'd pay at their local rental store.)

Thus, the issue isn't so much whether a lot of folks would prefer to continue to have a B&M rental option (they would), but whether they're going to be willing to pay the costs. Especially as movie downloads start to chip away at the increasingly technically sophisticated user base that wants things right now.

That's Blockbuster's longer-term problem.

[johnnywey]

You're forgetting other "B&M" alternatives

While I agree with your assessment of the value of B&M stops, you're
forgetting the alternative stops that have, at least here in Denver, opened up
all over the place.

Redbox and other "vending" solutions have rapidly replaced our family's use
of Blockbuster because they are cheaper, easier, and faster. There are at least
three different locations within two miles of our house, and I can even check
stock before leaving. While they only carry new releases, the movies we want
to watch "now" (instead of waiting for Netflix) are the new releases.

I think Blockbuster's problems stem from the combination of these new
vending solutions (which, btw, are always packed when we drive up to them)
and Netflix together. In reality, with Blockbuster charging $4+ to rent a new
release on top of the hassle of dealing with their often clueless employees
and having to drive farther and wait longer overall, there really is no
competition. Blockbuster will be around for a while longer, sure, but they are
on their last legs.

[ghaff]

Good point

To the degree that B&M's characteristics can be replicated at lower cost/better experience, that's definitely an interesting option given that B&M does have some unique things going for it. And it makes a lot of sense that "want to watch now" movies are likely to be new releases. I haven't seen any of those options around the Boston area though I can't say that I've been looking for them.

[TheZenArcher]

Recent BB Total Access changes were a mistake

I was a Netflix subscriber for years until two problems made them unusable: one, a ridiculously high incidence of (clearly uninspected) unplayably damaged discs; second, their open-secret "throttling" policy which completely undermines the concept of "unlimited rentals." This offensive policy drove me to BB Total Access, which, since I (admittedly) live close to a BB store, was a welcome relief: immediate exchanges available for damaged discs and unlimited in-store exchanges (translation: no "throttling"). Happy happy joy joy. Then they changed things, and completely missed the point of their own strategy: driving users to the stores in person. That's the one thing they have over Netflix et al and they need to capitalize on it, taking advantage of impulse rentals and ancillary purchases, a/k/a cash income. But the changes to Total Access have been bungled: by limiting the number of in-store exchanges for some price plans they are limiting the number of times people will go to the stores. D'oh! Must... shoot... foot... again...! My suggestion to them is this: return the unlimited-exchange policy to all plan levels with a new proviso: lower plans may not get free exchanges of New Releases, only older ones. The New Releases have got to be where BB makes almost all of its in-store rental $, while older ones sit on shelves; my plan leaves New Releases to the cash-paying impulse purchasers and still affords lower-tier plan subscribers an unlimited, and attractive, rental plan. So if anybody from BB is reading this, just do it, and I'll tell you where to send the check.

[Allan Ziskey]

yet other alternatives

I saw no mention of Pay Per View. Why?
PPV is a better alternative for a number of reasons:
- Ubiquitously packaged into most entertainment/communication services (cable, satellite, DSL, now wireless)
- Faster, easier access (no more trips to the store or waiting on the mail)
- Very competitive prices (new releases are cheaper than at my local brick and mortar)
- GREAT ability to record to DVR, DVD, or VCR (depending on in-house equipment)
- New Broadband/IPTV PPV offers an astounding variety of titles

only downside is that generally, most PPV offerings are slim.

While there are niche markets that Blockbuster might tap into I wonder if they can move their mass quickly and deftly enough to stay afloat...given all the competition against their current model I'd wager a "no".

[ghaff]

Rental alternatives

For various reasons, PPV hasn't really taken off in a big way so I wasn't really thinking of it as an option. But, in any case, it's essentially a flavor of rental "download." (From a use case if not necessarily from a technical perspective.) Maybe "bits" would have been a better term. I think of PPV mostly as an interim step but it does get around some of the issues associated with true download technologies today although it potentially has some downsides of its own. (e.g. you can't watch on other devices.)