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|Steph Sums it up|
I find it interesting that European disc sales (Blu-ray and DVD) are up 2.3% in the first quarter of the year, according to DEGE: The Digital Entertainment Group Europe, while in the United States sales were down 11% in Q1, according to DEG: The Digital Entertainment Group.
That can mean only one thing: Disc rentals are a drag on sellthrough in the United States. European’s aren’t subject to the same First Sale Doctrine that had allowed (up until 28-day window agreements with Redbox and Netflix) rental stores in the United States to rent titles at the same time they are available at sellthrough.
Obviously, consumers in the United States are turning to $1 Redbox rentals and cheap subscriptions at Netflix to fill their need for movie entertainment — otherwise, disc sales in the United States, as they were in Europe, would also be up.
The European numbers make the U.S. market more clear. Consumers are renting (at extremely low prices) instead of buying because they can. Without a robust rental market, Europeans turned to buying discs more often.
There’s a method to the rental window madness in the United States. Studios are merely asking consumers to pay more, as they do in Europe, to see high-quality releases. The evidence for the U.S. studio move is in the numbers.
By: Stephanie Prange
The news at the national retail chains is grim. Movie Gallery, after twice filing bankruptcy, is liquidating all stores. Blockbuster Inc just reported a $65.4 million first quarter loss, and analysts again are talking bankruptcy.
Meanwhile, Netflix’s stock has hovered around $100 and the online pioneer is surging past 14 million subscribers. Coinstar, parent of upstart kiosk company Redbox, has 25,000 kiosks and sees a potential market for up to 60,000 units in the United States.
Is the brick-and-mortar rental chain dying?
Certainly, the national rental chains have been buffeted, weighed down by paralyzing debt — Blockbuster from its spinoff from Viacom and Movie Gallery from its expensive acquisition of Hollywood Video. But, indications are, there are regional chains flying under the radar that are doing just fine. I recently got a call from a reporter doing a story on 40-store Movie Starz Video, which has locations in Virginia, Tennessee and West Virginia, and has been in business for 16 years. I’ve heard from a district manager at Video Warehouse with 60-plus stores throughout Georgia, Alabama, South Carolina, and Florida, who says his chain is doing just fine. Hastings reported a $1 million profit in the first quarter, a drop from last year, but still a profit. The chain has been able to compete with kiosks by matching the $1-a-night price on certain titles. It’s been a drag on the bottom line, but Hastings CEO John Marmaduke said more than 60 Movie Gallery (and Hollywood Video) locations nearby Hastings stores closed in the first quarter, which “over the long term … will have a positive impact on our rental revenue.”
Back in late March, we did a story on independent retailers who also are holding their own (“Indie Rentailers: Hanging in There,” March 22-28) by offering customer service and lowering rental prices a bit to compete.
The studios, too, have begun to boost rentail, with Warner, Fox and Universal offering new releases to stores before Netflix and Redbox. The stores have other advantages over the two new upstarts. Renting a title at a store offers more immediate gratification than turning to Netflix, and more customer service (and sometimes less time in line) than going to a kiosk.
Don’t count the rental store out just because the two national chains bit off more debt than they could chew. Readers, please send me more stories of regional chains tending to business.
By: Stephanie Prange
Buying your way into growth isn’t always the best plan, as evidenced by the cautionary tale of Movie Gallery, which bought Hollywood Entertainment Corp. after a fierce battle with rival Blockbuster Inc. in 2005. The $1.1 billion acquisition of Hollywood, which included assuming the chain’s $380 million in debt, proved disastrous. That deal was supposed to elevate Gallery from a successful southern rural operation to the national stage, but it ended up sinking the chain in a sea of red ink and ultimately placing it on the dust heap of failed retailers such as Circuit City and Tower Records and Video.
Blockbuster has its own problems with debt from it’s spinoff from Viacom, and no doubt executives now are delighted the chain dodged the bullet of buying Hollywood.
While both chains were duking it out to consolidate the existing brick-and-mortar rental business, Netflix was quietly growing the new subscription rental model and nuturing the idea of video streaming and Redbox was getting into $1 DVD rentals via kiosks at McDonald’s.
Preoccupied with the business of the past, Movie Gallery, in addition to biting off more than it could chew with the acquisition of Hollywood, clung to the old in-store rental model. The chain made tentative moves into video-on-demand with the MovieBeam acquisition and into kiosk rentals. But management seemed too preoccupied with whether or not the next quarter’s slate of titles would pull them out of a slump to look ahead. They were thinking short-term, under pressure from a giant debt load. Renting out store space was a good idea to boost the bottom line, but it wasn’t a long-term solution to a waning core in-store rental business.
Standing still while the competition innovates is not a winning strategy. Making small bets in a fast-changing business proved Gallery’s downfall. But it was ultimately the Hollywood acquisition that kept Gallery from innovating. The chain spent precious time shoring up an old business model, rather than nurturing a new one.
Blockbuster, which is sure to benefit from having fewer brick-and-mortar competition, turns out to have won a small victory by losing its bid to buy Hollywood. But is remains to be seen if that chain, which is also saddled with debt, can keep up with innovators such as Netflix and Redbox.
By: Stephanie Prange
I’ve gotten several responses to my last blog about Blockbuster’s debt strangling its essential marketing effort. One studio respondent noted, “The ‘open the door and here they come’ days have long been over.”
Yesterday, the chain made an attempt to tout its new-release advantage with a press release.
Here are some excerpts:
“Blockbuster Inc. today announced availability of the hit movie, It's Complicated, from Blockbuster in stores, by mail, or digitally, a full four weeks before it will be available through some competitors. Blockbuster's early advantage reflects its ongoing agreement with Universal Studios to provide customers with the opportunity to rent hit movies the day they are released. Blockbuster also has early availability of other box office hits like Sherlock Holmes and the highest grossing film of all-time, Avatar, as well as other upcoming new releases such as Tooth Fairy, Valentine's Day, and Invictus.
“Blockbuster is the only multichannel provider that has every hot new movie on the day of its release. For example, customers can rent a movie like Avatar through the Blockbuster By Mail service, return it to a Blockbuster store after watching, and exchange the movie for It's Complicated for more home entertainment. In addition, customers can access movies through Blockbuster Direct Access, a new service that gives customers in-store access to the more than 95,000 titles carried in Blockbuster's distribution centers. Customers can also access new releases from Blockbuster through any Blockbuster On Demand-enabled devices, including PCs, select Samsung products, most TiVos, and the new T-Mobile HTC HD2.”
Wow, that’s a mouthful. And certainly it’s appropriate for a press release, but depending on news outlets picking this up just isn’t going to cut it in my opinion. Blockbuster needs a massive advertising campaign, something catchy and memorable, like that Netflix campaign where all the movie characters are sitting in a room ready to be sent out. It needs to be a visual and succinct representation of what Blockbuster can offer. But, like I said, without some massive spending, that won’t happen.
By: Stephanie Prange
When was the last time you heard or saw an advertisement for any of Blockbuster’s rental services? How many times in the last week have you been bombarded by ads for Netflix?
My answer to No. 1: I can’t remember. My answer to No. 2: numerous times, on radio, on TV and on the Internet.
That, in a nutshell, is one big reason why Blockbuster’s by-mail service only has about 1 million subscribers while Netflix has nearly 14 million.
Sure, Netflix got a big headstart in online disc rental, but Blockbuster’s by-mail service is a good one that offers the most recent releases and in-store returns — something not available at Netflix. I recently met a family that subscribes to the Blockbuster service in part because of the in-store option. Also, I recently heard a colleague — a Netflix subscriber — say she entered a Blockbuster for the first time in a while because Netflix didn’t have The Blind Side yet.
These are advantages that Blockbuster should be crowing about every day, but with nearly $1 billion in debt it’s hard for the rental chain to scrape up the kind of money needed to blanket the market the way Netflix does.
That’s why Blockbuster’s lenders should be making every effort to relieve some of that debt load from the company. If they want to get anything out of this chain and not force it into bankruptcy, the lenders need to give it some breathing room to advertise its still-viable and in-demand services.
Indications are that this is happening. The company announced April 16 that it will delay the annual shareholder meeting for a month so management can “complete one or more” ongoing recapitalization initiatives, in addition to possibly resolving non-compliance issues with the New York Stock Exchange. The annual meeting was pushed from May 26 to June 24.
Blockbuster’s fortunes over the past few years might have quite different without a debt load that its competitors didn’t have. It’s time the lenders realize it will be a lose-lose situation if the chain isn’t allowed to market itself. Without the positive push of advertising, all consumers hear about Blockbuster is bad news. It’s not the kind of message that the chain needs to pay back investors, keep existing consumers or find new ones.
By: Stephanie Prange
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