A Blockbuster Is Hard to Find

In this week’s magazine, our editors and reporters looked in their neighborhoods for rental options. Most found a Redbox location within easy driving or even walking distance.

Blockbuster outlets seemed an endangered species, only happened upon on accident or via a long freeway trip.
And when our editors were able to get to a Blockbuster, it was a quandary to figure out how much a given rental would cost — though the selection was more broad than the Redbox kiosk option.

It is hard to see a former rental Goliath wane, but time may have passed Blockbuster by, leaving only ghosts like those at the Blockbuster in last year’s “South Park” episode. In the Oct. 24, 2012, episode, one of the kids’ fathers, Randy Marsh, buys a Blockbuster Video outlet for “only $10,000,” expecting to make a killing, only to find his customers are literally ghosts from the 1980s, wearing leg warmers and asking for films such as Turner & Hooch.

Whether Blockbuster is an anachronism or not, Redbox has taken steps to make sure its shrinking store footprint is filled. Our editors found Redboxes where there were formerly video stores, such as Blockbuster. The kiosk giant has skillfully filled in, and taken over, the disc rental market as Blockbuster has pulled back.

While our selected visits to Redbox and Blockbuster outlets may not paint the entire picture for the physical rental market, I think the exercise certainly points the way to — and points out — the successes and failings of the current physical rental landscape.

I hope you learn something (and perhaps get a chuckle or two, as I have) from the staff accounts we have supplied. The home entertainment rental business has changed a lot in the years since its inception around 1980, but one thing remains the same. Consumers are always looking for something to entertain them, in a convenient, wallet-friendly package. Whether it be Blockbuster or Redbox or a digital offering such as Netflix, or a disc or digital copy they own, consumers are looking for their own version of a “Blockbuster Night” that doesn’t break the bank.

Entertaining Ownership Again

In recent years it has become more fashionable to rent rather than to own. The dream of an “ownership society” has turned into a nightmare, with consumers tied down to underwater homes or losing them to foreclosure.

At the same time, consumers have become less committed to owning entertainment. Rental services, such as Redbox kiosks and Netflix, grew as consumers became less interested in plunking down $10 to $25 to own a DVD or Blu-ray Disc. They instead looked at inexpensive $1 rentals at kiosks or (until recently) $10-a-month subscriptions to Netflix as the more economical and useful way to keep themselves entertained.

But there are disadvantages to the rental model. As with a rented house that you can’t paint bright orange, renting or streaming titles constricts consumer options. Redbox and Netflix don’t offer the perfect catalog for each individual. They are not customized collections. The offerings are limited by studio deals, windows and, indeed, whether or not someone else may be first in line to get a particular title. In the case of Netflix, consumers via their subscription are paying for a whole lot of streaming titles they never will want to see. Such as in the cable business, they don’t have an a la carte option.

Owners have the advantage of possessing just the content they want. They buy their favorite movies and can access them at any time, either via disc or — as is the hope with the studios’ newfangled digital locker UltraViolet — digitally via the cloud.

Ultimately, ownership is a very efficient way to get consumers the movies they want. Until now, the only way to have that custom collection was to buy discs. The studios are hoping to make that ownership option more palatable in the digital realm via the fully interoperable ecosystem of UltraViolet. No more wondering if your digital copy will play on a particular device. No more disappointment when Netflix or Redbox doesn’t offer your favorite comedy.

Consumers don’t really want to watch any movie any time; they want to watch the movies they want to watch any time. And ownership that extends to the cloud, if it lives up to its promise, may be the best solution for that

Death of Blockbuster Was Only a Matter of Time

So this is it.

Just like that, it's over.

With Dish finally making the announcement all of us knew was coming, even though we might not have wanted to believe it, the Blockbuster era is officially over.

Another pop cultural icon, dead and soon to be buried — another nail, critics will say, in the coffin of the packaged home entertainment industry.

Granted, the fewer than 300 Blockbuster stores that remained of the once-mighty video rental chain amounted to a mere skeleton of the Blockbuster of the pre-DVD, pre-sellthrough era. During those heady days for the company, Blockbuster’s clout was such that we in the home video trade appropriated the “Big Blue” nickname that for years had been proudly worn by IBM and applied it to the unstoppable video power chain from Dallas, which within a decade of its 1986 launch had become the dominant player in the video retail trade.

No sooner had the first Blockbuster store been opened — by a fellow named David Cook — than its feeding frenzy began. Blockbuster began gobbling up mom-and-pops, then regional chains, then national rivals such as Erol’s (in 1990, for $40 million). By then, Blockbuster had been sold to Wayne Huizenga, the celebrated waste-management king, who had an even bigger vision for, well, “Big Blue.”

In 1993, Blockbuster acquired a controlling interest in Spelling Entertainment Group; a year later, Viacom acquired the company for a breathtaking $8.4 billion. By the time Blockbuster’s 10-year marriage to Viacom ended, in 2004, the company had 60,000 employees and upwards of 9,000 stores.

The relatively swift decline and fall of the Blockbuster empire has been well chronicled, by this publication and others. The upshot is that the home video business changed, but Blockbuster refused to change with it, clinging to its physical video rental model even after DVD sent the business spiraling toward sellthrough, even after consumer discontent with late fees and return trips paved the way for Netflix and Redbox.

Blockbuster filed for bankruptcy in September 2010; seven months later, the chain and its tattered fleet of about 1,700 remaining stores was bought at auction by Dish Network, ostensibly for the value of the brand name, for $233 million and the assumption of $87 in debt.

I can only imagine what Dish executives were thinking in the days and weeks after their purchase. Talk about buyer’s remorse — things went from bad to ugly to “My God, what have we done?” Stores fell like dominos: 200 in July 2011, 500 more in 2012, and another 300 earlier this year.

Now, as noted previously, it’s all over. All remaining Blockbuster stores, as well as the company’s once-promising by-mail DVD distribution operations, will be closed by January 2014.

In a press release, Dish chief Joseph Clayton said, “This is not an easy decision.”

Come on, Joe. At this point, I’m afraid it was the only decision.

Physical Rental Hangs On

A few years ago — heck, even a year ago — not many people would tell you it was a good investment to buy a house. The market was broken. There were more shoes to drop. More foreclosures were around the corner. Likewise, the physical rental business was on the ropes. Who would want to rent a disc when digital delivery was the future?

Like the housing market, which is returning from the dead, physical rental is getting some votes of confidence and rising from the ashes — albeit in a different form. Analyst Eric Wold, of Los Angeles-based B. Riley & Co. sees a future in physical rentals at kiosks.

“We continue to believe there is a large group of consumers that prefer and will continue to prefer renting DVDs or Blu-ray Discs for a number of understandable reasons: the large cost differential between DVDs and VOD, a lack of appropriate broadband access, or a desire for the better quality and enhanced content of Blu-ray versus downloads (i.e., alternative endings, additional features, etc.),” Wold wrote in a March 25 note.

He sees kiosks, especially Redbox, as a beneficiary of consumers’ continued appetite for physical rental. As stores close and Netflix continues to de-emphasize its physical business, causing those subscribers to turn elsewhere, a Redbox kiosk, he believes, will be physical rental consumers’ destination of choice. (It also doesn’t hurt that the kiosk company has dipped its toe in the digital water with its Redbox Instant by Verizon service.)

Meanwhile, the Blockbuster U.K. chain   was saved from the dead by a British private equity firm, which Wold suspects may help revive the kiosk business there. Redbox has machines in storage with the Blockbuster name already emblazoned on them by their previous owner, NCR. And Redbox would like to expand internationally.

Redbox isn’t going away, and it has smoothed over much of the rancor with studios via windows and better (non-litigious) relationships. Just last week, Redbox announced the extension of its deal with Universal.

Yes, physical rental is hanging on, at kiosks and at the remaining stores that serve a clientele who prefer to watch content on disc.

Physical Rental’s Smaller Footprint

Years ago, my friends and I would go to the local video store without a particular title in mind that we wanted to rent. We would peruse the aisles of both new releases and catalog fare to settle on the entertainment for the evening. It was pretty much the best entertainment choice in town without traveling to the movie theater.

That practice is, for the most part, a thing of the past. Now, consumers go to the local Redbox kiosk after they pick up the groceries for dinner and quickly pick the most-recent release they can get from the limited selection — or scroll through the offerings available on such streaming services as Netflix and Amazon. What’s available determines how they will spend their evening, and — new releases aside — the widest catalog selection is online.

Recently, my family scrolled through the Amazon offerings, which seemed even more enticing, as most of the deep catalog titles were available at no cost. Obviously, because we pay the annual shipping fee from Amazon, the titles aren’t technically free, but among the no-additional-cost titles were several my family could spend an entertaining evening viewing.

Certainly, the most recent releases can be found at the local Walmart or other chain that sells discs or at a video store such as Blockbuster, which gets the recent releases ahead of services such as Netflix. But beyond the most recent releases, the physical rental store doesn’t have much of an advantage — and probably doesn’t need as big a footprint.

“[Blockbuster] stores are just too big for video-only product,” Dish chairman Charlie Ergen said during last week’s fiscal call, acknowledging that reality.

While it’s nice to have a knowledgeable clerk to guide you to an undiscovered classic, most video consumers these days will likely find something to watch via an impersonal scroll through a list. Progress? I don’t know. But it’s the reality.

The future video store may likely rent you the latest release as a side business to offering a Dish package or phone accessories — or physical rental customers will go to the video store with an even smaller footprint — a kiosk.

Redbox Getting Physical

Last week’s announcement that the United States Postal Service would cease Saturday mail delivery signaled yet another shift in the video rental business. Physical rental is going to kiosk leader Redbox.

The physical rental industry has undergone numerous such shifts in its more than three decades. There have been format and pricing shifts, from rental-priced VHS to sellthrough-priced discs. There have also been distribution shifts, from independent retailers dotted around the country served by distribution middle men to major chains such as Movie Gallery, Hollywood Video and Blockbuster Video that went direct with their studio partners. Then came Netflix with its by-mail physical rental service, which turned out to be a video rental chain killer. Movie Gallery and Hollywood Video went out of business after an ill-conceived merger, and Blockbuster — the last physical rental store chain standing — after bankruptcy, an acquisition by Dish and recent store closure announcements, will total about 500 stores.

With last week’s postal announcement, Netflix, too, is getting less physical. Disc renters who want a title on the weekend better have it delivered by Friday, as weekend physical disc rentals largely have been ceded to Redbox.

Netflix execs aren’t exactly unhappy about the new development, as they will likely be mailing fewer discs per month at a lower cost. Besides, Netflix execs aren’t interested in physical rentals much anymore, as they focus on digital distribution models, such as their new “House of Cards” original series and distribution of TV shows licensed from other content producers.

No, by default, Redbox is getting physical. I expect to see longer lines at the Redbox kiosks in my neighborhood on the weekends, as the last Blockbuster store closed years ago. Perhaps those same customers will notice that Redbox, too, via its joint venture with Verizon is getting more digital.

But the physical rental business is going to Rebox for the forseeable future. The video rental store is all but gone, and by-mail rental is hampered by a shrinking postal service. Yes, Redbox is getting physical.

Era of Rental Windows Has Arisen

A few years ago, a wise studio executive — the home entertainment unit president of one of the six majors — told me that the industry is heading “to the point where one day, it will be all about windows.”

I think we’ve arrived.

The announcement by Walt Disney Studios CEO Bob Iger plans to impose a 28-day rental delay on new-release disc titles means four out of the six majors are holding back new releases from Netflix and Redbox, the top two rental outlets, in a concerted move to prop up the sellthrough market.

Given past experience, I highly doubt the two holdouts, Sony Pictures and Paramount, will hold out much longer. Sony already delays certain releases.

The strategy underscores the importance of windows and lends credence to the old saying, “timing is everything.”

Formats don’t matter nearly as much as when a movie becomes available on that format. Blu-ray Disc, DVD, download, streaming, VOD, iTunes, UltraViolet — the competition is no longer among formats, but, rather, maximizing the potential of each format through staggered release dates and, when the dust settles, hopefully create a roadmap certain types of movies will follow when their theatrical runs are over.

Redbox and Netflix will likely always be at the proverbial bottom of the barrel when it comes to getting new releases. Vending machines and subscriptions may be a gold mine, but not for the studios.

For Hollywood, the real money lies in getting a share of the spoils from each sale — be it direct dollars, say from each Blu-ray Disc or DVD they sell to Walmart, Best Buy or Target, or lump-sum payments through licensing content for digital distribution.

First Sale is well and good, but the retailers get the prize — which is why studios have never cared for the rental model, not when it was brick-and-mortar nor now when it’s done over the mail or through kiosks. They’re not in control, and when you’re not in control. you’re not sitting in the locomotive of the money train.

Fortunately for the studios, there are all sorts of other distribution mechanisms either available now or in the pipeline, in addition to the good old packaged-media standbys of DVD and Blu-ray Disc.

And if it’s all about windows, there’s nothing Hollywood would like more than to shut the window for good on rental.

Finding the Right Value for Video

The only thing that’s constant in the video rental business is change, and in the past few weeks that change has accelerated again.

While low-price leaders Redbox, Blockbuster Express and Netflix have begun to raise prices, Blockbuster is taking a page from the Netflix playbook and offering an in-store subscription program.

Dubbed Blockbuster Movie Combo, the new sub program allows users to rent one movie (DVD or Blu-ray Disc) or video game at a time in store with the option to order one by-mail rental per month with no due dates for $7.49 for the first month and $14.99 a month thereafter.

Meanwhile, the much-publicized and much-maligned Netflix price jump (for those who want both to rent physical discs and stream) has given kiosk companies Redbox and Blockbuster Express cover to raise their prices as well.
Redbox is upping its DVD rental price to $1.20 a night, from $1 (Blu-rays rentals are still $1.50 a night, and games, $2). Blockbuster Express has taken a slightly different tack, making new releases, many of which are not available at Redbox, $3 for the first night, with the older titles costing less and Blu-ray titles rented at a $1 a night premium on the DVD price.

Finally, rental dealers have stopped devaluing content, which should please their studio suppliers. No longer, thanks to windows and increased pricing, will a customer see the same new release sold for $16 or more at Walmart available for rent for $1 at a Redbox kiosk. With the new pricing structure from Blockbuster Express, customers will again begin to associate new-release rentals with a higher value. Over at Netflix, streaming isn’t just a value-added freebie; it has a cost associated with it.

While the studios have not always embraced the rental business, recent pricing changes are certain to cheer executives who have tried to stave off the devaluation of their home entertainment product — and of content in general. That, along with the stabilization of the business as evidenced by the Q3 numbers from DEG: The Digital Entertainment Group, should make for a merrier holidays.

Rental Has Helped Drive Business

I know Redbox’s $1 rentals and Netflix’s all-you-can-see subscription services haven’t exactly endeared them to the content creators, which much prefer selling titles directly to consumers. But rentals have long served a need in the home entertainment industry, whether via Blockbuster, independent rental stores, Redbox, Netflix or video-on-demand. Not only does this offering satisfy a customer who wants to watch a title only once, it provides a forum for lesser-known and mid-level box office films to find an audience as well as generates buzz for cult hits out of the glare of the Darwinian weekend box office sweepstakes.

Rental titles also offer the try-before-you-buy experience. I can tell you I watched a rental of many of my favorite catalog titles before I decided to collect them. Rental provides a low-cost chance to discover a gem that you otherwise might not have bothered to collect.

Most people — having been inundated with ads and three other predecessors in the “Pirates” franchise — will be able to make the decision as to whether they want to purchase Pirates of the Caribbean: On Stranger Tides. But smaller films, the kind that grow via word of mouth, often find their audience as consumers rent and talk about them. Once they come to love them, they buy them for their collection.

As studios become more cautious, putting all their eggs in the sequel and superhero movie basket, a crucial part of the movie business may get lost.

A reader recently wrote me responding to my column “Is the Movie Slate Just … Well … Bad?” (HM, July 25-31, 2011). The reader noted that “the transactional consumer, the same consumer that the studios hope to reach with their new cash cow, VOD, is interested in more than all those mega-budgeted blockbusters with all those alien invasions (Transformers 3, Cowboys & Aliens). Come on, how many bad aliens can there be!”

Lots and lots of aliens, apparently, in action and animated films that are pushing out thrillers and romantic comedies and dramas.

I’m not saying I don’t enjoy the occasional alien/superhero actionfest. I like popcorn flicks as much as anyone, and they do sell well on video. But films from Gone With the Wind to Sixteen Candles have sold well on video, too. Variety has always driven the home entertainment business. Many renters’ second choice at the video store has become the treasured disc in their collection.

The Three Faces of Consumerism

As a lifelong student of human nature — I've always preferred authors like Faulkner and Hemingway, who wrote about the human experience — I've spent quite a bit of time analyzing consumers of home entertainment. My conclusion: We are looking at three, not two, classes of consumer, each a distinct group with its own characteristics and personality traits that transcend their consumption of entertainment.

The first group, and the one that means the most to our business, is the collector. These are people who enjoy owning, and they will likely continue to buy movies on disc as long as they are available on disc. These people enjoy filing away their new purchases — invariably, either alphabetically, by genre, or a combination of the two — and show them off with pride to visitors. Collectors are the ones most likely to replace their DVD movie libraries with Blu-ray Discs and can't for the life of them understand why someone would rather rent than own, if the price is right. These disc collectors typically have shelves of hardback books and CDs in their homes as well, and continue to maintain photo albums, not trusting their hard drives or the Internet with their precious memories.

The second group is one we shall call the minimalists — and I know plenty of them. They abhor clutter, and their homes are sparsely furnished. Rarely do you see a bookcase; their music is all on their computer; and they would never think of cluttering up their homes with DVDs or Blu-ray Discs — not when they can rent them. Minimalists also were the first to embrace Netflix and streaming, and even in the old days, before DVD and the Internet, they frequented video rental stores or turned to cable and satellite for their entertainment needs. I have a minimalist friend who back when I was getting gobs of VHS screeners looked at me with pity. "I'd never want all that stuff in my house," he said. "HBO's got everything I need."

The third and last group I'll call "quick and easy." These consumers prefer the path of least resistance. If they happen to be in Walmart, buying groceries and school supplies, they'll pick up a cheap movie or two, just because it's there. Their first stop is the $5 dump bin; if, after about 20 seconds of browsing, they see nothing they like, they'll check out the new releases. They'll spend $15 for a new release its first week in stores, but not $20 the next week, when it is no longer on sale. Instead, they'll stop by the Redbox or Blockbuster Express kiosk on the way out, and rent something, anything, that happens to catch their fancy. The quick-and-easy crowd also tends to channel surf more than others; if they find something interesting, they'll stick with it, and if it's a movie, they'll watch all or part of it, even the commercials. It takes too much effort to skip through them. The quick and easy crowd doesn't value its purchases the way collectors do; walk into their homes and you are apt to see discs scattered all over the place.

As our nation ages, the first group likely will get smaller. Young people are growing up in a transitory world; they visit websites and watch YouTube videos that exist only in cyberspace and may or may not be there tomorrow. Still, this is not to say they won't become collectors as they get older, although in this world of fast-changing technology, I rather doubt it. The minimalist group will likely stay the same; I think this group, of the three, is the most unique, a class all in itself.

The biggest growth, the way I see it, will come in the quick-and-easy crowd. They have big appetites for entertainment but really don't care how they consume it, as long as it's, well, quick and easy.

And that, my dear reader, is the challenge facing studios and retailers alike: how do you attract consumers who see entertainment as just another commodity, to be selected, purchased and brought into the home without much thought or effort?