Studios Are the King Makers

Netflix executives, during the past month or so, may have been wishing all the attention were still focused on their old nemesis Blockbuster. As long as Blockbuster was around, Netflix looked like the new, younger kid; the cool kid; the entrepreneur; the next big thing. Netflix represented the future, Blockbuster the past.

Unfortunately, Netflix had to grow up sometime, and its growing pains are starting to show in the company’s stock price, which has dropped precipitously as it has raised subscription prices to offset greater costs and grow its streaming business internationally.

There are a lot of advantages in being the new phenomenon on Wall Street, which is looking for outsized growth, even if it does come by undercutting an older, established business weighed down by debt like Blockbuster. While Blockbuster struggled to move with an enormous debt shackled to it, Netflix could bob and weave and build a better rental mouse trap, one that didn’t involve cumbersome real estate or a debt load and that got great pricing on streaming licenses from content holders who had not yet realized what streamed content was worth.

Now the entertainment landscape has shifted, and Netflix is in the spotlight. The company can’t get the kind of pass offered to new ventures; it will have to grow and prosper under the weight of expectations — and new, higher licensing fees for streamed studio content.

Oh, for the good old days when Blockbuster took much of the heat, Netflix executives must be thinking. But those days may be past for Netflix, which may now find out that the studios can be king makers in the distribution pipeline. Content holders favor whichever distribution avenue will offer them the most profit, and will wring ever more money from distribution pipelines that use their content.

Content is king, and the studios that own it can make or break a distribution partner. In the case of Netflix, I think executives may be finding out they have more in common with Blockbuster and other past studio distribution partners than they thought. Just as Netflix overtook Blockbuster, there are competitors in the wings targeting Netflix.

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.

Blockbusted: The Fall of a Video Icon

I hate to be a downer here, but the writing’s clearly on the wall. Blockbuster, an icon of the home video industry since the early days of rental, is not going to survive much longer.

Dish Network, which bought the ailing rental chain out of bankruptcy in April 2011, announced it is closing an additional 300 U.S. stores, either ones with expiring leases or exceptionally poor performance. A year ago Dish announced the shuttering of 500 domestic Blockbuster stores. The latest closure leaves Blockbuster with maybe 500 locations throughout the country — a far cry even from 2009, when Blockbuster still had more than 3,600 U.S. stores.

Blockbuster has been earmarked for the grave for quite some time. Blockbuster made 24/7 Wall Street’s “Ten Brands That Will Disappear” list in both 2010 and 2011. Blockbuster defied the odds and managed to survive, but the latest round of closures suggests even Dish realizes now it made a bad investment. At the time buying the Blockbuster brand seemed like a good idea because everyone thought Blockbuster was associated with movies, but looking back, the Blockbuster brand merely reminded consumers of the hassles they had to go through back when renting a movie from a physical store was their only option — exorbitant late fees, return trips and not finding the movie they wanted.

Blockbuster made more than a few missteps throughout the years, but I think the biggest one was not jumping headfirst into sellthrough in the early days of DVD and thus allowing the mass merchants to take over that segment of the business. Another was taking a dismissive view of Netflix, and then belatedly trying to compete only after it became clear that the subscription model had caught on. Heck, back in 2000 Blockbuster even passed on several offers to buy Netflix for just $50 million, opting instead to sign a 20-year deal with a subsidiary of Enron (!) to deliver on-demand movies to consumer homes.

Blockbuster has managed to hang on for a lot longer than most observers thought, but its day of reckoning, I fear, is coming up. Even the proverbial cat with nine lives eventually runs out of time.

What Happens Without Blockbuster?

Last week a representative from the United States Trustee Program — a branch of the Justice Department — filed a motion saying Blockbuster doesn’t have the funds to bankroll its fiscal reorganization and should therefore liquidate under Chapter 7.

The industry already went through a liquidation with then-second-ranked rental chain Movie Gallery. Whether Blockbuster would survive in any form is in doubt.

That begs the question: What will the home entertainment business look like without a big, publicly traded video rental chain?

Perhaps independent video rental chains and stores — unburdened by the kind of debt that drew Blockbuster into financial trouble — might be able to stage a comeback, renting former Blockbuster locations on the cheap. Coming on the heels of Borders’ bankruptcy and store closings, a Blockbuster liquidation would lower rents.

Kiosk leader Redbox might be able to raise prices and get a better deal from studios that think their business model devalues content. Netflix, too, might be able to raise prices for physical rental to boost its streaming business.

As for the studios, they lose the biggest brick-and-mortar-store chain ally in keeping rental prices higher than Redbox and Netflix. Thus, the studios might opt to throw much more support behind the next-highest-priced rental product, cable and Internet transactional video-on-demand. The studios also might accelerate the high-priced rentals afforded by premium VOD shortly after a movie hits theaters.

Still, for consumers, it will mean less immediate access to a breadth of physical disc rentals that they have heretofore had. A Redbox kiosk can hold only so many titles.

My mother recently commented that she wanted to see The King’s Speech, but it is no longer playing theatrically in her area of Texas. Theatrically, the limiting of title selection to first-run movies has been long-standing. Unfortunately, that means consumers who want to see arthouse-type fare may lose their chance if they don’t act quickly after a film is released. They must wait for the home video release.

With Blockbuster’s exit from the store rental business, consumers may have to wait even longer to find the titles they want — unless they want to pay a premium to see the content on VOD in the home. Whether this is good or bad for the overall home entertainment business’ bottom line remains to be seen.
 

Blockbuster’s Debt Load and Marketing (Take 2)

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.

Blockbuster Blames the Red Menace

Blockbuster CEO Jim Keyes is seeing red — as in Redbox kiosks — in his explanation for the chain’s continuing woes.

Redbox, that wily competitor, has successfully been working around the windows imposed on it by Warner, Fox and Universal, he said in a conference call, and that’s why Blockbuster posted continued negative same-store rentals in the fourth quarter.

But now that Warner has struck a month-long window deal with the Red Menace, Keyes hopes Fox and Universal (both embroiled in lawsuits with the kiosk company) will do the same. That could give the chain an edge and prevent further store closures in the future, he said. Also, the closure of Movie Gallery and Hollwood Video stores could prove a boon for the company, he added.

“We remain cautiously optimistic ... with tailwinds becoming clear,” Keyes said.

Heck, Blockbuster couldn’t ask for a better hand of cards dealt it in recent months. The studios are forging later windows for competitors Netflix and Redbox. The only other big rental chain still kicking, Movie Gallery, has filed bankruptcy for the second time in three years. And yet nothing seems to move the needle much on Blockbuster’s fortunes.

There may come a time when blaming the Red Menace and other competition won’t hold water — when the real menace, Blockbuster’s crushing debt, mostly inherited when it spun off from Viacom years ago, will bite back with a crushing blow. Just before the chain’s financial results hit the wires, Blockbuster reportedly hired legal and financial experts to help it to restructure nearly $1 billion in debt. That debt has been the real villain in Blockbuster’s struggles. It prevented the chain from quickly modernizing, advertising and innovating in ways that could have held off the likes of Redbox, Netflix and others. The Red Menace may be the cause du jour of Blockbuster’s troubles, but it’s the debt that may eventually do it in.

Is Brick-and-Mortar Rental Dying?

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.
 

Blockbuster’s Debt Load Weighs Down Vital Marketing

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.

Blockbuster Seeks Upbeat Theme

Blockbuster Inc. April 1 said it would begin removing all "sad and depressing" titles from 5,000 corporate stores.

The Dallas-based No. 1 DVD rental company cited the ongoing recession and reduced consumer confidence for the move, which includes removing new releases such as Marley & Me and Seven Pounds, both of which are known for their depressing endings. Stores will be pulling catalog titles over the next week.

"People want to spend their money on something that will make them feel better, not something that will add to their misery," said CEO Jim Keyes in a conference call
 
The company would shift its marketing focus to upbeat comedies, family films and action titles depicting positive messages.

Keyes predicts the rosier outlook may draw in consumers disillusioned by the economic outlook and eager for escapist entertainment.

"Fun will be synonymous with Blockbuster," he said, "and you will know that when you walk into a Blockbuster, fun is all you will find."

April Fools!
 

I’m Seeing Red

In all the analyst hoopla over Blockbuster possibly filing Chapter 11 and the ensuing, wrong-headed declarations of the end of packaged media, I’m seeing red in more ways than one.

First of all Blockbuster will be around even if it files bankruptcy. Its problem isn’t cash flow but a mountain of debt that has plagued it since Viacom spun it off.

Second, disc rental is NOT DYING. While analysts have gone ga-ga over Netflix because of its streaming option, the company’s CFO a few weeks ago was careful to note that disc rentals are key to the company’s successful offering.

Third, I’m seeing another kind of red that analysts are conveniently forgetting: Redbox. It seems to be doing just fine. This past weekend I found myself selling Girl Scout cookies at the local Albertson’s supermarket (Please buy Girl Scout cookies by the way as the organization is feeling the recession and part of the proceeds go directly to the troop.). As the cookies went out, I saw a lot of little red-packaged discs coming back in.

So, while Maggie Overfelt at CNNMoney in a March 6 story called Blockbuster “doomed” and wrote that mail-order DVDs and streaming online video “may kill off the entire industry,” I beg to differ because I am seeing red.