Don’t Touch Blockbuster
Early this month, in the space of a week, two things happened at Blockbuster (NYSE: BBI). First, on August 8 it announced acquiring Movielink for a price that later came to light to be a measly $6.6 million. 10 days later on August 17, COO Nicholas Shepherd and outgoing CFO Larry Zine both unloaded a little over 40% of their holdings in the company.
The stock rose 10% in the last week despite Nicholas’ and Larry’s selling, but that has more to do with JP Morgan increasing its rating on Blockbuster shares to “overweight” from “neutral.”
Movielink’s addition to Blockbuster’s arsenal is promising because its digital movie downloading service plugs a hole for sure. Significantly, the market hailed the move back in March this year scoring a 52-week high for BBI when speculations first emerged about the acquisition.
The advantage with Movielink is that it has license agreements with its five founding studios plus more than 30 other studios, distributors, foreign and independent content providers. The real value is perhaps that Movielink doesn’t introduce another set-top box in the already cluttered mix (although, it is not clear to me that the function of downloading moving can be achieved without adding new storage hardware), yet it provides Blockbuster access to one of the largest libraries of downloadable movies. Personally, I am not bullish about Blockbuster’s prospects in offering downloadable movies. The DNA mismatch is significant, and if they truly want to be in this business, they need a compelling partner who knows how to operate a new-age video-on-demand channel, even if that channel is branded Blockbuster. Movielink, clearly, has not been successful in becoming so. The absence of the set-top box, in my assessment, may be detrimental, rather than beneficial.
Blockbuster’s biggest competitor Netflix (NASDAQ: NFLX) has seen a decrease in new subscribers by as much as 55,000 in the last quarter (Q2-07) (as against an increase of 481,000 in the previous quarter, Q1-07) presumably due to Blockbuster’s Total Access program. Blockbuster, though, is handicapped by a smaller inventory of 40,000 titles as of this year compared to NFLX’s stock of 70,000 movies. There are reports that some of its customers are unhappy with limited movie selection most of which cater to new releases at the expense of more specialized genres such as classics and special interest.
Clearly, there is much catching up for BBI to come near NFLX. However in sharp contrast with NFLX, BBI’s financials do not inspire confidence. Q2-07 total revenue stands at a lackluster $1,263.2 million while total liabilities tower at $1,906.1 million. No wonder the net income is a negative $35.3 million translating to a disappointing –28.20% return on average equity.
BBI has 67,300 employees compared to NFLX’s just 1,300, which means its gross revenue per employee in Q2-07 is a dismal $0.02 million compared to NFLX’s $0.23 million, which is 13 times BBI’s. On the other hand, Blockbuster is a brick-and-mortar business, and a lot of mainstream customers still prefer to go to stores to fetch their movies.
This, however, will change as Generation Y becomes a bigger mix of the consumer base, giving Netflix its clear advantage.
I analyzed Netflix yesterday, and my conclusion is that whichever way you look at it, this video/DVD rental business is a bad business. Low margins, price cutting and consequent erosion makes it virtually a commodity. Against that backdrop, I suggested that Netflix ought to rethink its strategy.
It is evident that Blockbuster has a lot of debris to be cleared. However, I am not sure if the strategy I suggested for Netflix is necessarily the strategy for Blockbuster. For one thing, I have zero confidence in Blockbuster’s ability to execute on a compelling online Web 3.0 strategy. That requires a completely different DNA.
Unfortunately, my guess is that Blockbuster’s woes will continue since they are inherent in their business model, and I would not touch this stock with a ten-foot pole.
BBI has a lot of potential with the purchase of Movielink. I’ve been using the service for about a year now, and if BBI can incorporate their partners into the process, it will be a big win. Think, I order a movie online (25 minutes to download), and Movielink passes me off to Papa Johns pizza for a discount (takes 25 minutes to deliver the pizza). BAM! I’m a happy man. BBI has huge potential too, if they can revamp their stores to make them seem more inviting. This guy Keyes obviously knows how to revamp stores, i.e. 7-Eleven. But BBI’s future is Movielink. In 2 years when IP TVs come of age, the online movie market is going to explode…and those with 1) content, and 2) infrastructure will reap the profits.
I have one question for you Charlie: when you order your movie online, do you have any limitation concerning viewing or sharing this movie?
What happens with DRM on BBI?
I wonder if anybody ever thought of selling digital contents, and be able to resell them if I don’t want them anymore (all in the respect of copyrights of course!)
I have a question Charlie: do you own the movie when you buy it on BBI?
What about DRM?
I wonder if there is any technology that can allow to resell contents after you purchased them, without compromising the copyright?
“There are reports that some of its customers are unhappy with limited movie selection most of which cater to new releases at the expense of more specialized genres such as classics and special interest”
you sound as if you’ve never used either mail order service…next time you analyze a company, maybe you should try its product before writing in your pathetic blog.
the “DNA” metaphor is stupid.
Mars, I’m not really a DRM expert, but you are supposed to be able to copy your purchased movies to DVD. I assume that you will have to load the Movielink Manager application on any PC/device you wish to view the content on, so that the DRM software works. That’s not really my expertise though, so I leave that for others to answer. However, I’m addicted to downloading movies, rather than waiting for a package in the mail. I just attach a S2 video cable to my TV (they have S2-to-RCA ones), and emulate the display on the TV using the PC’s video settings. Plus, I never have to deal with dirty or scratched DVDs ever again. 30 minutes and I’m on. The kicker is CONTENT. BlockBuster needs to be the content king, and with the industry behind Movielink, I think they are off to a nice start. Plus, this Keyes guy doesn’t strike me as a dummy…he’s going to find a way to make BBI profitable again, in a big way. At least that’s my opinion.
By the way, no need for a “dedicated box” if Movielink is embedded into a media player, like Vista’s. When you start piping video content straight to an IP enabled TV in a year or two, there’s no need for another box. Any thoughts on that from anyone? Again, it will come down to having good partnerships in place, and content. Those are the two aces that win the pot.
Mike DeRemer -
On the contrary, I am an avid user of Netflix. Besides calling my blog pathetic and me stupid, do you have any logical response to the topic under discussion?
Perhaps some data that refutes my points?
I have a lot of readers, and they generally like differing points of views, but only those supported by logic and/or data.
Sramana
I’ve been a strict online business owner for 10 years and I say once BBI’s online and new rev model catches up a little with Netflix it can leverage it’s BAMs to better manage it’s customer base. It is lot cheaper to expand an inventory of old and off title movies online than to create a chain of BAM locations.
Netflix is going to continue to loose market share to BBI because the biggest complaint NetFlix users have is the wait for new or certain releases to be shipped from the ordering cue. With BBI, customers can get a movie in the mail, decide to get another flick and drive 2 miles and 10 minutes to do it.
There is still some blood letting left in this market and both will struggle, but I give growth potential to an aggressive BBI.
I will change to net flix. My credit card gets charged 17.99 plus tax on the 10th of every month for the all access online membership. blockbuster stopped sending me movies since august 30th 2007, because they raised their price to 24.99 for that same membership.I e-mailed them asking if there is a problem.The customer service response was that my account is “almost over” and I Have to renew for next month for 24.99 plus tax if I want the same plan.My response was “but I’m still a member until the 10th of september” so you should still send me the movies that you owe me till that time.I have not received a response since then. They are basically cheating me and probably alot of other people out of two weeks of rentals because they are not certain if people will renew. Well it’s not a good way of having people stay.
It is always amazing to me how companies abuse their customers.