Blockbuster CEO: Netflix, Redbox Taking Demand Out of the Market

5 Jan, 2010 By: Erik Gruenwedel

Faced with burgeoning competition from Netflix and Redbox, Blockbuster CEO Jim Keyes said the future of the Dallas-based DVD rental company hinges on its ability to position the brand across multiple distribution platforms.

Speaking Jan. 5 at an investor event in San Francisco, Keyes said the proliferation of “new kid on the block” Redbox’s kiosks and Netflix’s domination in the by-mail subscription business pose formidable challenges in 2010 as Blockbuster spent much of last year establishing new financing ($675 million credit facility) instead of growing its business.

“The next 12 to 18 months are going to be very challenging,” Keyes said. “We are building a multichannel platform approach ... [and] at the same time we have brand new competitors (Netflix streaming and Redbox) certainly taking some of the demand out of the market.”

That said, Keyes said he doubts kiosks would assume a sizable percentage of the rental market due to limited amount of product available in kiosks, in addition to the fractured support for kiosks among studios.

“The great opportunity for Blockbuster is to adapt to [all] the different use occasions, because that’s what these (streaming, kiosks, by-mail) represent,” he said.

The CEO said Blockbuster stores are pushing a Web-enabled Samsung Blu-ray Disc player with Blockbuster On Demand movie streaming software included.

Blockbuster this week at the Consumer Electronics Show in Las Vegas is showing its nascent Blockbuster Express kiosks with partner NCR Corp., in addition to mobile phone apps that allow users to locate titles at nearby stores and manage their online rental queues.

Keyes said physical distribution’s migration to electronic doesn’t meld with subscription-based business models. He said the likelihood of Blockbuster On Demand being able to offer new releases by subscription was slim due to the limited return to studios.

“I don’t think [studios] want to spend $400 million to make a movie like Avatar and then see it go in the all-you-can-eat buffet after 30 days,” Keyes said. “[They] are going to want to monetize it on an individual title-by-title basis as best [they] can.

The executive said Blockbuster On Demand would continue to offer new releases with a-la-carte pricing. Keyes said more practical electronic subscription models would revolve around children’s programming and Spanish-language content.

“Those are types of avenues you’ll see us pursue on the subscription side,” Keyes said, adding that he wouldn’t rule out in the future partnering with ad-supported platforms such as Hulu.

He reiterated that ongoing downsizing of Blockbuster’s physical stores domestically and abroad underscored a changing business portfolio that doesn’t preclude the company from someday offering digital distribution in foreign markets, in addition to kiosk vending.

“As that DVD presence over the next five-to-10 years begins to decline, then we shift into our video-on-demand products,” Keyes said. “Blockbuster is the Starbucks of movies when it comes to consumer perception of where to get movies. We are the only rental brand known worldwide.”

The CEO said Blockbuster has the option to close additional stores, a strategy he said the media blew out of perspective last year when it focused on the closure of 1,000 stores through this year while failing to mention the addition of 10,000 Blockbuster kiosks.

“The net increase for Blockbuster’s presence in 2010 was [actually] 9,000 additional points of presence [via kiosks],” Keyes said.

Blockbuster has also reportedly begun transitioning some underperforming stores into sellthrough-only locations as a way to cut overhead costs while utilizing lease spaces.

Finally, the CEO admitted that matching price points with Wal-Mart and Amazon was untenable, and that offering multiple distribution channels and convenience was Blockbuster’s only recourse.