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Dish Closing All Its U.S. Blockbuster Stores

6 Nov, 2013 By: Erik Gruenwedel, Stephanie Prange

Iconic brand legitimized movie rentals and home entertainment, observers say

Dish Network has decided to close all remaining U.S. Blockbuster stores, including its by-mail DVD distribution operations, by early January 2014. That includes approximately 300 U.S.-based retail stores, as well as the company’s distribution centers.

Franchised and licensed stores in the United States and abroad will remain open.

“This is not an easy decision, yet consumer demand is clearly moving to digital distribution of video entertainment,” said Dish CEO Joseph Clayton. “Despite our closing of the physical distribution elements of the business, we continue to see value in the Blockbuster brand, and we expect to leverage that brand as we continue to expand our digital offerings.”

The Blockbuster By Mail service will end in mid-December and will serve existing customers until that time.

Wedbush Securities analyst Michael Pachter said Blockbuster over the years represented “a great way” for consumers to catch up on movies that came out over the past 18 months, they’d missed in the theater, or were unaware of.

Pachter said there really isn’t a similar way today to browse DVD inventories to see what you missed as you could at a Blockbuster store.

“My wife and I used to head in different directions when we entered, meet in the middle of the stacks (on the back wall) and compare our selections, then pick one or two and put the others back. There was really no shopping experience quite like it,” he said.

Russ Crupnick, SVP, industry analysis, with The NPD Group, said it's fair to ask that if there wasn't a Blockbuster, would the revolution in home entertainment have been as massive and rapid as it was?

“I remember the early days leaving my apartment at 11:50 pm, in my pajamas, to get that VHS tape in the return slot before midnight brought late fees,” Crupnick said. “Without Blockbuster, I wouldn't have owned a GE VCR with the wired remote that blinked [the number] 12 all day.”

Dish said it would continue to support Blockbuster’s domestic and international franchise operations, relationships and agreements.

The satellite operator will retain licensing rights to the Blockbuster brand and key assets, including the company’s significant video library. The company announced that it “will focus on delivering the Blockbuster @Home service to Dish customers, and on its transactional streaming service for the general market, Blockbuster On Demand.”

The Blockbuster @Home service offers more than 15 movie channels, including Starz Cinema, Epix, Sony Movie Channel and Hallmark Movie Channel, with more than 20,000 movies and TV shows streamed to TVs, computers and iPads. The service includes access to the Blockbuster @Home app currently available to the millions of TVs served by Dish’s Hopper Whole-Home HD DVR set-top box.

Blockbuster On Demand, which is available to anyone, not just Dish customers, is a transactional streaming video service offering thousands of movies viewable on connected devices including PCs, tablets, smartphones, Slingbox, Roku, and select Samsung TVs and Blu-ray players.

Legitimizing Home Entertainment

Before Blockbuster turned movie rentals into a billion dollar business with a store base that rivals Starbucks today, renting a movie meant a trip to a local mom & pop video store or questionable retail location marketing adult fare, said Tom Adams, research director, U.S. media, IHS Electronics and Media.

“Blockbuster brought credibility to the video store business, first with consumers and then with Wall Street,” Adams said.

The analyst remembers going to Houston in 1986 to visit Audio & Video Associates, one of the first video rental chains, as well Blockbuster store No. 14 in Dallas. Adams remembers AVA bursting with tapes stacked horizontally and vertically on shelves. Blockbuster, on the other hand, was 5,000 square feet of space featuring 12,000 neatly organized tapes.

“The contrast between those two stores just blew my mind,” he said.

Adams said Blockbuster’s evolution and IPO that year had been met with skepticism on Wall Street.

“What we don’t seem to need is another establishment renting videocassettes,” Barron’s columnist Alan Abelson sneered when Blockbuster went public. By the time Viacom bought the chain eight years later, the stock had outperformed Microsoft, a fellow member of the 1986 IPO class, according to Adams.

Adams said a key turning point (among many) in Blockbuster’s history, was when the cash cow was acquired by Viacom to help it finance the  purchase of Paramount Pictures. Thereafter, Blockbuster stopped its singular focus on home video, and became a corporate subsidiary.

“It did kind of cripple the ability to strategically move beyond their core business,” he said. Specifically, Adams said Blockbuster’s 50% market share in home video left it vulnerable to increasing its stock price without diversifying its business. A strategy that required access to significant capital, which Viacom wasn’t interested in providing.

That was a turning point for their fortunes,” Adams said. When Viacom spun Blockbuster off in 2004, taking a $1.3 billion dollar dividend in the process, Adams said the debt would be an ongoing impediment to Blockbuster, eventually forcing the chain into successive bankruptcies.

Missing the Netflix Bandwagon

In addition to lingering debt, Blockbuster failed to recognize the threat of upstart by-mail rental pioneer Netflix in 1999, which in 2007 began developing a streaming business model.

In the interim, Blockbuster CEO John Antioco failed to take advantage of the chain’s superior brand and footprint as Netflix struggled to make the by-mail disc rental business model work. It was during this time when Netflix CEO Reed Hastings infamously offered to sell the challenged business to Blockbuster for $50 million. Amazon earlier had offered Hastings $12 million for Netflix.

“Blockbuster wasn’t the only one to underestimate the subscription rental model,” Adams said.

When Blockbuster did respond and starting crushing Netflix with Total Access (which offered by-mail and in-store rentals and quickly reached 3 million subs), Adams said people “just loved” Total Access, but Blockbuster investors such as Carl Icahn refused to up the spending required to usurp Netflix.

“Either way, the mistake was made,” he said.

Blockbuster Demise, Redbox Advantage

The shutdown of Blockbuster leaves a dwindling but meaningful consumer base still looking to rent package media, said analyst Eric Wold with B. Riley & Co. in Los Angeles. Wold estimates Blockbuster leaves behind an annual revenue run rate from $400 million to $500 million, which he said Redbox could claim up to $300 million in incremental revenue.

“Even though Blockbuster’s disc rental operations have been struggling for years as consumers have gravitated towards both Redbox as well as various digital rental/subscription options, the company still generated meaningful revenues and serves a customer base that prefers the physical format,” Wold wrote in a Nov. 7 note.

The analyst said an “apples-to-apples” revenue add to Redbox could provide “a nice traffic tailwind” for the start of 2014 where B. Riley projects Redbox revenue to reach $2.1 billion.

“We would not be surprised to see both Redbox and Redbox Instant set out to target those customers and move them over to their platform,” Wold wrote.

A Redbox spokesperson said its customers rented a record 199.5 million physical discs in Q3, underscoring that consumers value “Redbox’s convenience, simplicity and ability to deliver content that matters.”

Meanwhile, Family Video, the Midwest-based largest remaining domestic movie rental chain, has no plans to downsize operations, with revenue reportedly up nearly 5% in October. Family Video, which owns much of its retail footprint, has also diversified, opening up pizza restaurants adjacent to select video outlets.

“The movie and game rental industries are alive and well,” president Keith Hoogland said in a statement. “We have never deviated from our model of high service and low cost entertainment while being an integral part of every community.”

Netflix spokesperson Joris Evers, in an email, said the streaming service would “welcome any of Blockbuster's customers to our by-mail DVD service.” Netflix ended its most recent fiscal period with more than 7 million disc subscribers — some of whom also stream.



About the Author: Erik Gruenwedel

About the Author: Stephanie Prange

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