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Stock Market Hit a Short Term Reaction to Long Term Trend?

22 Dec, 2002 By: Kurt Indvik

Have we reached that moment of paradigm shift (a much abused term of the ‘90s) in the home video business from a rental model to a retail/sellthrough one?

You might think so when Blockbuster takes a 30 percent whack on its valuation in one day after reporting that its fourth quarter numbers won't be what it had hoped they would. This based largely on the fact that higher-margin rental revenues have taken a major hit due to the avalanche of top theatrical hits on DVD priced to own – due, that is, to the retail business that Blockbuster is fast trying to become a major player in, but too late for this season at least.

The market reaction extended to Hollywood and Movie Gallery, both of which lost 14 and 17 percent, respectively, in their stock value in one day, despite no change in their forecasts.

An overreaction on the part of Wall Street? Gee, we haven't seen that before, have we? There is so much tension in the market right now that any tilt in a company's forecasts can mean disaster. Blockbuster chief John Antioco said he believes this is a seasonal anomaly and that Big Blue's rental business will be back on track after the holidays…this even before two historically very busy rental weeks of the year over Christmas and New Year.

An unsteady economy and rumors of war shook retail confidence in consumer activity and in response, many retail sectors made early and fantastic price reductions at the outset of the holiday season, very notably in DVD software and hardware, that fueled a low-margin selloff attempt that hasn't matched expectations, but meanwhile took a bite out of rental as well.

Video Store Magazine market research has been tracking a downturn in rentals for 10 months now. The size of the discrepancy between last year's rental volume and this year's has been gaining steam on a monthly basis. November saw a dramatic 20 percent drop in rental dollars compared to November of 2001, again possibly an indication of the impact of the holiday sellthrough barrage. Overall rental spending year-to-date is down 11.6 percent, according to Video Store Magazine market research.

Blockbuster had largely been able to resist that trend, posting rental revenue gains of two and three percent throughout the year's quarterly reports. But at least for this holiday season, so far, the trend has caught up with the nation's biggest rentailer. Blockbuster's move to devote significant space to sellthrough will have to prove itself in the coming year.

My two cents is that as the holiday sellthrough phenomenon fades rentals will regain their footing. To what extent, however, remains to be seen.

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