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Blockbuster Inc. (NYSE:BBI) is an American chain of rental stores headquartered in Dallas, Texas, that offers movies, video games, and other forms media entertainment on a subscription basis. Traditionally a brick-and-mortar business model, it has expanded into out-of-home DVD rental kiosks as well as an online rental and sale platform that delivers movies digitally and by mail^[1]. This expansion away from its core movie rental model has been an effort to compete with fierce online rental service rival Netflix and to capitalize on consumer trends. As of August 2009, brick-and-mortar video stores accounted for 45% of rental turns, with subscription-based mail-service and kiosks accounting for 36% and 19%, respectively^[2].

Blockbuster has also sought strategic partnerships in an attempt to fully take advantage of its changing business model. In January 2009, it struck a deal with CinemaNow to distribute its movie content through Cinema's Internet platform^[3]. Two months later, it partnered with TiVo and Samsung to offer Blockbuster On Demand's digital movie library directly to the TiVo digital video recorders of consumers' Samsung HDTVs, in return selling TiVos in many of its 4,000 retail stores^[4]. It also announced in August 2009 a deal with Motorola to integrate its library into mobile phones, potentially tapping into an entirely new revenue stream^[5].

As of late, the structural changes have been difficult for Blockbuster, with revenues in FY2008 roughly $700 million less than in FY2003^[6]. In the first nine months of FY2009, Blockbuster closed 635 company-run retail stores, now operating less than 7,000 sores worldwide^[7]. Its strategy to muscle its way into the kiosk rental space has been deterred by Coinstar's Redbox, which has already established 15,000 kiosks in retail outlets nationwide^[2].

Company Overview

In the last couple of years, Blockbuster has aggressively expanded geographically and into different product offerings. In August 2007, Blockbuster entered the market for online rental and purchase of digital video, acquiring Movielink.com, an online library of over 1,700 movies for online rental and 3,000 for online purchase and enabling consumers to download entertainment content via their PCs, portable devices, television-connected home networks and approved set-top boxes^[8]. It also partnered with NCR, a kiosk-based media distributor, who plans to invest over $60 million to launch over 2,500 kiosks by the end of 2009^[9].

International expansion has been fueled by franchisees, who operate 867 (31%) of its 2,773 stores abroad as of July 2009^[10]. Its International segment consists of all non-U.S. store operations in Europe, Latin America, Australia, Canada, Mexico and Asia, and makes up 30% of its revenue^[10].

Business and Financial Metrics

Total revenues for 3Q09 were $910.5 million as compared to total revenue of $1.16 billion for the same period in 3Q08. Management attributed the 21% decline to a 14% decline in same store sales, a reduction in company-operated stores, and the negative impact of foreign currency translation adjustments^[7]. It also witnessed a net loss of $116.8 million, driven primarily by write-offs from debt financing costs^[7].

Blockbuster's two main sources of revenue are rental services and merchandise sales. The majority of revenue can be attributed to its rental services, which accounted for 78% ($710 million) of total revenue in 3Q09. Blockbuster also generates most of its revenue domestically, including 68.2% in 3Q09^[7].

Business Segments

In Store

Blockbuster's stores offer new and traded movie and game rentals to their customers, including the addition of Blu-ray DVDs into their product mix in 2007. Additionally, over 400 of those locations include a game store-in-store concept operating under the GAME RUSH brand^[12].

By Mail

Blockbuster offers an Internet-based subscription service with a DVD library of over 90,000 movie titles and video games through [www.blockbuster.com Blockbuster.com] that can reach customers who are not within Blockbuster movie rental outlets^[13].

Vending

Blockbuster is a growing player in the nascent vending channel and looks to expand its physical distribution of media entertainment. It has signed a contract with NCR to establish machines in over 2,500 locations by the end of 2009^[9].

Download to PC

Blockbuster integrated its online rental services with Movielink, LLC, an online movie downloading business with one of the largest libraries of digital content for both rental and sale, which it purchased in 2007. This has allowed it to take advantage of the trend away from the brick-and-mortar industry business model and match the unique services of competitor Netflix.

Trends and Forces

Cyclicality of Retail Sector

The retail sector is highly volatile, with contraction and expansion closely pegged to the business cycle. When the economy is growing rapidly, demand for discretionary products like DVDs and video games increases, whereas in a downturn demand plummets. Because of structural weaknesses in the U.S. economy, Blockbuster suffered from lower store traffic and witnessed a 14% drop in same-store revenues in 3Q09^[7].

The Future of Media And BBI's Brick-and-Mortar Model

The technological developments in the in-home entertainment industry have increased the amount of competition for companies like Blockbuster. In recent years the rise of online rental services, online viewing, video on demand services and other such new-media fields have brought new competitors into their market. In order to remain a significant player in the in-home entertainment industry Blockbuster has to remain at the cutting edge by providing their products in the newest ways. Their Total Access program, the acquisition of Movielink, and the re-shelfing of their merchandise with HD and Blue-Ray discs are examples of attempts to take advantage of the growth in non-conventional rental services.

Saturation in Kiosk Distribution Market

Through a partnership with NCR to deploy over 2,500 kiosks by the end of 2009 and a total of 10,000 kiosks by mid-2010, Blockbuster is trying to expand into more consumer-convenient distribution channels^[14]. However, the current market leader and kiosk movie rental pioneer, Redbox, has established machines in over 15,000 locations across the United States^[2]. The fortune of pioneering kiosk rentals has allowed Redbox to select the most accessible locations possible, posing substantial barriers to entry for firms like Blockbuster, who must resort to relatively inaccessible locations for their kiosk business

Competition

Blockbuster distributes its product to customers in three ways: In-store rentals and sales, online rentals, and online viewing. As such there are three areas of competition for the company.

In-Store Rentals and Sales

Blockbuster competes directly with regional or small-scale movie rental chains, though none compare in size or market share to Blockbuster as well as with major retailers which provide stiff competition in the same products that Blockbuster rents and sells to its customers. These retailers include Best Buy, Wal-Mart Stores, and Amazon. Coinstar does not follow the brick-and-mortar model but competes through the Redbox DVD rental kiosks it operates in over 15,000 locations in the U.S^[2].

Online Rentals

• Netflix: Blockbuster's main competitor, Netflix, is an online rental service with over 7 million subscribers and 90,000 titles in its library.^[15] Netflix offers comparable plans to its subscribers, but also the capability to view movies directly on their PCs for no additional fee. Blockbuster has been gaining some market share from Netflix over the past few years, but rather slowly. Netflix has a very well-established subscriber-base and provides excellent customer service.

• Amazon & TiVo : Amazon launched its "Unbox" service in 2006, which provides customers the ability to rent movies through their PCs for download. Amazon teamed up with TiVo on this project so that TiVo owners can download movies directly to their DVRs for viewing at home.

Online Viewing

Blockbuster's acquisition of Movielink brought them into the online viewing market after a few established players already had a solid hold. Amazon is one such example with their Unbox service. Netflix already offers all of its subscribers a way to view videos on their PCs and at no additional charge. Blockbuster has not made any move to give away Movielink privileges to its Total Access subscribers. The entire online viewing market is also very susceptible to piracy and intellectual property violations. Websites providing pirated television shows and movies, while illegal, are widespread.

References

1. ↑ "Blockbuster Company Profile" Thomson Reuters
2. ↑ ^{2.0 2.1 2.2 2.3} "The NPD Group: Video Rental Kiosks Receiving Increasing Consumer Attention in the Video Rental Marketplace" NPD Group, 8/25/2009
3. ↑ "Blockbuster Links With CinemaNow for Video Delivery" The New York Times, 01/14/09
4. ↑ "Blockbuster and TiVo Join to Deliver Digital Movies" The New York Times, 3/25/2009
5. ↑ "Blockbuster to Offer Movies on Motorola Phones" 8/18/09
6. ↑ Seeking Alpha, "Blockbuster Could Collapse in 2010" 9/8/2009
7. ↑ ^{7.0 7.1 7.2 7.3 7.4} "Blockbuster Reports Third Quarter 2009 Financial Results" Blockbuster Investor Relations 11/12/09
8. ↑ "Blockbuster Inc. Acquires Movielink, LLC" PRNewswire, 8/8/2007
9. ↑ ^{9.0 9.1} "NCR Releases New Outdoor DVD-rental Kiosk" Kiosk Marketplace, 10/20/2009
10. ↑ ^{10.0 10.1} Blockbuster 2Q09 10-Q pg. 35
11. ↑ "Blockbuster," Morningstar Investment Research
12. ↑ Blockbuster FY2008 10-Q Item 1, pg. 2
13. ↑ Blockbuster, "How It Works"
14. ↑ Blockbuster 2Q09 10-Q pg. 32
15. ↑ Netflix Annual Report, 10-k