Blockbuster Inc. (
NYSE:) is the largest movie rental store in North America, with over 7,800 stores in the United States and 21 other countries. The bricks and mortar movie rental business has struggled with competition both from mail-order movie subcription services like
Netflix (NFLX)[1] and (on the horizon) direct movie downloads. In October 2007, Blockbuster's primary competitor, Movie Gallery and its subsidiary Hollywood Video, filed for bankruptcy and announced plans to close all 4,700-plus stores. Blockbuster itself lost money in 2004 and 2005, and would have done so in 2006 were it not for restructuring which allowed to post a small profit.
[edit] Business Overview
Blockbuster has two main sources of revenue: movie rentals and merchandise sales. The majority of revenue comes from its rental services, which accounted for 73% of total revenues bringing in $40,301,000.0 in 2006. 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%. Blockbuster entered the market for online rental and purchase of digital video, acquiring Movielink.com in August 2007. Movielink has a library of over 1,700 movies for online rental and more than 3,000 movies available for purchase online. Customers can purchase or rent movies and television shows through the website and view the content directly on their personal computer.
[edit] Rental Services
- In-Store Operations: Blockbuster's large number of stores (over 7,800 as of September 2007) provide a truly nation-wide base of operations. Blockbuster has roughly 4,000 stores in the United States and 2,100 stores internationally, which are company owned and operated. The remaining stores are franchised and account for roughly 1,750 locations. The stores offer a large selection of products for rental including new and old movie titles, video games and television shows. The in-store rentals still account for the majority of Blockbuster's rental revenues and the majority of their total revenue.
- Online Rental Service: In 2004 Blockbuster introduced its online rental program in an effort to gain a share of that new and growing market. The service allows subscribers to rent DVDs through the mail using Blockbuster's website, blockbuster.com. The service has a number of different subscription options with varying features. In September 2006 Blockbuster introduced its online service "Blockbuster Total Access". With Total Access online subscribers have the option to return DVDs rented through the mail to any Blockbuster store location. Customers can also rent new movies in Blockbuster stores with Total Access. The online rental service provides subscribers with a much larger library of titles than any individual store with over 75,000 titles.[2] In the first half of 2007 Blockbuster spent $131.4 million on advertising, but cut back spending significantly in the second half in an attempt to provide a more profitable service.
The online movie rental market has only a few key players, but the field is growing. Blockbuster's main opponent in this market is Netflix, a purely online rental service that currently has a large advantage in market share over Blockbuster.
- Movielink: Blockbuster's acquisition of Movielink.com brought them into the online video market in August 2007. The website offers movies and television shows for rental and purchase. The videos, after being downloaded, can be viewed directly on customers' personal computers or on a television with the use of certain hardware that is compatible the XBOX 360. Movielink has not yet been incorporated into Blockbuster's Total Access program, though plans to fully integrate movielink.com and blockbuster.com are on the drawing board.[3] In its current form Movielink is an a la carte service. Each movie has a price and is purchased separately. While Blockbuster's effort to gain entry into the online video market indicates its desire to adapt to changing technology, some believe it has come in too late or that it is not well positioned to take advantage of this new medium as its core competency is in-store renting. The online market is currently dominated by companies like Amazon, Apple and Netflix whose online video services have been around longer.
- Extended Viewing Fees: In the first quarter of 2005 Blockbuster introduced its "No Late Fees" program, which effectively eliminated the extended viewing fee (EVF) that customers paid if they returned a rented product past its due date. The program has not yet reached all of the Blockbuster stores though. Some 40 branches that were acquired by Blockbuster in 2006 still had a late fee policy, which Blockbuster said would be eliminated in the future. Furthermore, all of Blockbuster's international stores excluding those in Canada have not adopted this program and the company still receives a small amount of revenue from EVFs each year.[1] While the revenue lost from eliminating late fees may be small, the new policy allows for customers to hold rentals indefinitely. As a result popular titles may be out of stock more often because customers have little incentive to return the product.
[edit] Merchandise
The merchandise Blockbuster sells includes previously rented and new movies and video games as well as CDs, books and video game consoles. Merchandise revenues accounted for 25.9% of total revenue in 2006, bringing in $14,322,000.0 for Blockbuster.[1]
[edit] Business Financials
Blockbuster has had a difficult few years in terms of generating profits. Net income was significantly negative in 2005 where Blockbuster lost $588.1 million. In 2006 net income was positive, largely due to some minor restructuring. Blockbuster closed a number of stores in this period and reduced the size of its corporate work force. In 2007 their earnings went negative again to a loss of $73.8 million. Advertising expenses were significantly lower in 2006 than in both 2005 and 2007
Blockbuster’s total revenues for 3Q 2008 decreased 2.7 percent to $1.2 billion as compared to $1.24 billion in 3Q 2007.[4] Decreasing revenues were followed by a net loss of $17.8 million, almost a fifty percent improvement from $34.4 million net loss in 3Q 2007.[4] This decline was due primarily to lower rental revenues.
[edit] Trends and Forces
- New technology threatens Blockbuster's business model and its ability to attract new customers: The way consumers get their in-home entertainment is constantly changing. With the development and increased adoption of cable and satellite television, digital video recorders (DVRs) and premium television programming consumers are constantly being offered new ways to get entertainment at home. Blockbuster's method for providing such entertainment comes in the form of rentals, be them from the stores or online. As technological developments make it easier for consumers to get media without leaving their homes, Blockbuster's business model may become outdated. Furthermore, their ability to provide the most up to date versions of DVDs such as Blu-ray and high definition (HD) discs is crucial to their success.
- Online video viewing has more long term potential than Blockbuster’s conventional rental service: The technological developments in the in-home entertainment industry have increased the amount of competition that Blockbuster must deal with. 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 Blockbuster's 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 and acquisition of Movielink are examples of attempts to take advantage of the growth in non-conventional rental services.
- The closing of Movie Gallery could provide additions to Blockbuster's customer base: In October of 2007 Movie Gallery, a purely in-store based media rental chain, closed. Movie Gallery was Blockbuster's main competitor in the retail movie rental business prior to closing. With their main competitor eliminated, Blockbuster could gain additions to its base of customers, particularly in areas that previously had branches from both chains.
[edit] 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.
[edit] In-Store Rentals and Sales
Blockbuster competes directly with other movie rental chains, though none compare in size or market share to Blockbuster as well as with major retail sellers such as Best Buy (BBY), Circuit City Stores (CC), Wal-Mart Stores (WMT) and Amazon.com (AMZN). 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 (CSTR), which operates DVD rental kiosks such as Redbox and DVDXpress.
[edit] 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.[5] 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.
[edit] 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.
[edit] References
- ↑ 1.0 1.1 1.2 Blockbuster Annual Report (10-k), filed for the SEC 03/01/07.
- ↑ www.blockbuster.com
- ↑ Blockbuster FAQ
- ↑ 4.0 4.1 Blockbuster Reports Third Quarter 2008 Results, November 6, 2008
- ↑ Netflix Annual Report, 10-k
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