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WIKI ANALYSIS
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 March 2009, 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[3]. 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[4].
As of late, the structural changes have been difficult for Blockbuster, with revenues in FY2008 roughly $700 million less than in FY2003[5]. 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]. In the first nine months of FY2009, Blockbuster has closed 635 company-run retail stores, now only operating 6,770 worldwide[6]. 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[6]. It also witnessed a net loss of $116.8 million, driven primarily by write-offs from debt financing costs<3Q09stores />.
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[7]. 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[8].
International expansion has been fueled by franchisees, who operate 867 (31%) of its 2,773 stores abroad as of July 2009[9]. 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[9].
Business and Financial Metrics
Blockbuster has two main sources of revenue: movie rentals and merchandise sales. The majority of revenue can be attributed to its rental services, which accounted for 78% ($789 million) of total revenue in 2Q09[10]). Rental revenues include both in-store rentals and rentals through Blockbuster's online rental service. Similarly, merchandise revenues come from sales both in stores and online at Blockbuster's online store. With a gross profit margin of 70%, the in-store portion of Blockbuster's business is more profitable than their mail-based service, which has a gross profit margin of 30%.
In 2Q09, Blockbuster suffered as a result of a necessary financial restructuring and poor market conditions. It lowered its General and Administrative (G & A) expenses $102 million (17%) over the prior year to focus on short-term cash conservation instead of long-term growth in order to meet upcoming debt maturities[9]. After a net income gain of $27.7 million in 1Q09, Blockbuster reported a dismal net income loss of 36.9 million in 2Q09. This could be attributed to same-store revenues, an important industry metric, decrease 14% sequentially as a result of weak demand in the retail sector [9].
With regards to its segments, rental services accounted for 78% ($789 million) of total revenue in 2Q09, and 70% of total revenues were from its domestic operations[9]. Despite comprising the bulk of its revenue, domestic rental revenues struggled in 2Q09 as a result of an average decline in mail-in subscribers (-34%), decreased active store members, lower copy depth, and reduced store traffic [9].
Business Segments
Blockbuster's segments are broken down by geographic markets in its financial statements, with the Domestic and International segments comprising 70% and 30% of total revenues in 2Q09, respectively[9]. However, Blockbuster's segments could also be broken down by rental service and merchandise sales (78% and 22% of revenue in 2Q09, respectively[11]), or by distribution channel (note:Blockbuster does not indicate in its financial statements how revenues are segmented by distribution channel):
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[8].
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 Makes Blockbuster Susceptible to Market Movements
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 in 1H09, Blockbuster witnessed a drop of 14% in 2Q09 same-store revenues[9].
The Future of Media is Incompatible with Blockbuster's Established Brick-and-Mortar Business 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 Could Negatively Impact Blockbuster's Room for Expansion
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 retail sellers such as:
- Best Buy
- Wal-Mart Stores
- Amazon.com: These companies sell the same product that Blockbuster rents to its customers and provide stiff competition in the movie and television show areas. They also compete with
- Coinstar: which operates DVD rental kiosks such as Redbox and DVDXpress, with former having kiosks at 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.com (AMZN) & Tivo: Amazon.com (AMZN) 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.
- Apple to Join: Rumors have been spreading that Apple (AAPL) has teamed up with Fox to begin providing rentals through its online iTunes store. Apple is expected to announce the new product at their annual MacWorld conference in January 2008, but nothing is certain yet.
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.com (AMZN) 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
- ↑ "Blockbuster Company Profile" Thomson Reuters
- ↑ 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
- ↑ "Blockbuster and TiVo Join to Deliver Digital Movies" The New York Times, 3/25/2009
- ↑ "Blockbuster to Offer Movies on Motorola Phones" 8/18/09
- ↑ Seeking Alpha, "Blockbuster Could Collapse in 2010" 9/8/2009
- ↑ 6.0 6.1 "Blockbuster Reports Third Quarter 2009 Financial Results" Blockbuster Investor Relations 11/12/09
- ↑ "Blockbuster Inc. Acquires Movielink, LLC" PRNewswire, 8/8/2007
- ↑ 8.0 8.1 "NCR Releases New Outdoor DVD-rental Kiosk" Kiosk Marketplace, 10/20/2009
- ↑ 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Blockbuster 2Q09 10-Q pg. 35
- ↑ Blockbuster 2Q09 10-Q pg. 3
- ↑ Blockbuster 2Q09 10-Q pg. 3
- ↑ Blockbuster FY2008 10-Q Item 1, pg. 2
- ↑ Blockbuster, "How It Works"
- ↑ Blockbuster 2Q09 10-Q pg. 32
- ↑ Netflix Annual Report, 10-k
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