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Can Blockbuster Be Saved?

26 Feb, 2010 By: Thomas K. Arnold

Analysts and observers have been predicting Blockbuster's demise for years, but the death watch has never been more focused than it is today. The chain's latest financials paint a grim picture: Blockbuster says it lost $435 million in the fourth quarter of 2009, with a revenue drop of nearly 18%, from $1.31 billion in the fourth quarter of 2008 to $1.08 billion in the quarter that ended Jan. 3. The news was spread by a widely circulated AP story that quoted BMO Capital Markets analyst Jeffrey Logsdon as saying the company had "a dismal holiday season performance." The AP further quoted Logsdon as saying "revenue erosion is now a defined trend" at Blockbuster, which if true is certainly a kiss of death. Blockbuster has already closed more than 1,300 stores and plans to close up to 545 additional stores this year.

On top of that comes news that for the first time ever, the No. 1 video rental chain isn't No. 1 anymore. Netflix in the fourth quarter of 2009 made more money renting DVDs and Blu-ray Discs than Blockbuster did (see story here).

Blockbuster also has about run out of options to remain solvent in this business. The chain has tried just about everything short of offering customers a fresh-baked pizza with each movie rental, from its own mail-order subscription service (a la Netflix) to its own movie rental kiosks (ala Redbox). But the market leaders in each category have swatted down those attempts like pesky flies, to the point where Blockbuster's only hope of salvation is essentially an unfair competitive advantage.

The chain can only survive — and even chief Jim Keyes intimated as much in a recent call with investors--if other studios follow Warner, 20th Century Fox and Universal Studios in imposing a window on new releases that are sold to Netflix and Redbox. Warner has actually negotiated deals with both Netflix and Redbox in which those two outlets get new DVD and Blu-ray Disc releases 28 days after they come out, and it is widely expected the two other two studios soon will have deals in place as well. (Sources say the prospect of getting new releases a month late isn't nearly as bad as the through-the-roof labor and logistical costs of sending out packs of staffers and temporary workers, armed with gift cards, to Wal-Mart and Costco to buy product sideways. Prior to settling, Warner, like Fox and Universal, simply refused to sell product to Redbox.)

The window — 28 days at Warner and as long as 44 days for the other studios' product — is a ploy by Hollywood to prop up the sagging sellthrough business by forcing consumers to either buy the newly released DVD/Blu-ray Disc or wait. But it's also expected to boost in-store rentals, not just at Blockbuster but also at the remaining independent rental stores, because brick-and-mortar retailers will continue to get new releases the same day as Wal-Mart, Best Buy, Costco and the other big retail sellers of DVD and Blu-ray Disc.

The big question: Will it be enough? Obviously the studios are hoping consumers who can no longer rent new releases the day they come out from Redbox or Netflix will start buying them again, as most of them did before the recession hit. But old Jim Keyes is looking to siphon off at least a fraction of those consumers to Blockbuster, which puts him in a rather delicate spot.

If he fails, Blockbuster may well be finished. But if he succeeds — particularly if he succeeds in a big way — the studios may take a second look at giving store rentals a pass.

My advice to Jim: Fire up Blockbuster's sellthrough presence and make a big splash of the fact that only at Blockbuster can consumers buy or rent new releases right out of the gate. Match the big-box prices on new releases for sale and make sure you have a steady supply of the hits on hand to satisfy both sellthrough and rental customers.

That way you'll be helping the studios achieve their goal of selling more discs to consumers while at the same time protecting your rental exclusive.


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