Hollywood Buyout Killed Movie Gallery

Buying your way into growth isn’t always the best plan, as evidenced by the cautionary tale of Movie Gallery, which bought Hollywood Entertainment Corp. after a fierce battle with rival Blockbuster Inc. in 2005. The $1.1 billion acquisition of Hollywood, which included assuming the chain’s $380 million in debt, proved disastrous. That deal was supposed to elevate Gallery from a successful southern rural operation to the national stage, but it ended up sinking the chain in a sea of red ink and ultimately placing it on the dust heap of failed retailers such as Circuit City and Tower Records and Video.

Blockbuster has its own problems with debt from it’s spinoff from Viacom, and no doubt executives now are delighted the chain dodged the bullet of buying Hollywood.

While both chains were duking it out to consolidate the existing brick-and-mortar rental business, Netflix was quietly growing the new subscription rental model and nuturing the idea of video streaming and Redbox was getting into $1 DVD rentals via kiosks at McDonald’s.

Preoccupied with the business of the past, Movie Gallery, in addition to biting off more than it could chew with the acquisition of Hollywood, clung to the old in-store rental model. The chain made tentative moves into video-on-demand with the MovieBeam acquisition and into kiosk rentals. But management seemed too preoccupied with whether or not the next quarter’s slate of titles would pull them out of a slump to look ahead. They were thinking short-term, under pressure from a giant debt load. Renting out store space was a good idea to boost the bottom line, but it wasn’t a long-term solution to a waning core in-store rental business.

Standing still while the competition innovates is not a winning strategy. Making small bets in a fast-changing business proved Gallery’s downfall. But it was ultimately the Hollywood acquisition that kept Gallery from innovating. The chain spent precious time shoring up an old business model, rather than nurturing a new one.

Blockbuster, which is sure to benefit from having fewer brick-and-mortar competition, turns out to have won a small victory by losing its bid to buy Hollywood. But is remains to be seen if that chain, which is also saddled with debt, can keep up with innovators such as Netflix and Redbox.
 

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’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.

Why Netflix Is Winning

I recently had a conversation with a journalist about the changes in the business and an interesting anecdote came up.

He said a friend of his purchased a season set of “24” on disc and then returned it to get his $50 back.

Why?

He found that through his Netflix subscription he could see the entire season via streaming for no extra charge to his subscription fee. It also explains why Netflix uses the 15-minute streaming measure (rather than one hour or so to connote a movie) in describing its electronic delivery success. Many of Netflix’s streaming customers are watching TV shows online.

Price. That is why Netflix is soaring — and why the studios are trying to push back new release availability on the site. But Netflix may be hurting TV DVD sales as well. Unless a TV show is collectible, TV DVD sales may take a hit. With Netflix streaming entire seasons, the need to buy TV DVD sets may decline.

The real reason Netflix is a success isn’t necessarily its technology, but its value.

3D Could Add Dimension to Disc

The new 3D technology could add new life to disc, just as it has reinvigorated the cinema chains, which a few years ago were bemoaning competition from DVD and home theaters. Digital delivery backers are upping their attempts to take a bite out of packaged media, and 3D could offer Blu-ray Disc a killer app to hold off the onslaught. Consumers are hungry for the product, according to Best Buy CEO Brian Dunn, who noted shopper curiosity and enthusiasm for 3D TVs in the chain’s latest financial call.

But, as it did with high-definition disc, the industry must be very careful about how it approaches the new technology.

James Cameron, director of the 3D phenom of the year Avatar, noted that a 3D Blu-ray release would be premature. “There just aren’t enough people with those screens,” he said.

During the launch of HDTV (and indeed, DVD), this chicken-and-egg dilemma of hardware versus content made the introduction of Hollywood’s library to the new technology very tricky. Content owners seem to have gotten quicker to market with top titles in the high-definition battle than they did with DVD. It took much less time for such catalog gems as The Godfather to hit Blu-ray than it took for them to come out on DVD. Studios waited for the market to develop in each case.

Now, the studios are dipping a toe in the 3D market, bundling certain titles (by mail) with certain 3D-capable TVs. As Home Theater Forum’s Adam Gregorich pointed out, that may be like giving consumers only one bite of a treat when they would really like a healthy serving.

Unlike Gregorich, I see no immediate harm in these bundles. Early adopters are used to waiting for content to explode for their new gadgets. When my family bought our first VHS player, one of the only titles we owned was Alien, and we watched it over and over again (especially the exploding stomach part).

Where the roll out of 3D Blu-ray content will get tricky is when we near the end of the early adopter stage.  Will the studios choose to release some titles only on 3D Blu-ray because they also will play on 2D Blu-ray players? Will consumers balk at buying a 3D disc without owning the hardware? Will studios still include a DVD and a digital copy?

As if release windows aren’t enough, Hollywood has a 3D launch to navigate.

Fess Parker: A Class Act

Fess Parker

Over the years I’ve had the opportunity to interview many stars from the golden years of Hollywood, and they exhibit a class that you often don’t see in the Hollywood set anymore.

In June 2006, I had the pleasure of interviewing Fess Parker, star of the “Davy Crockett” and “Daniel Boone” series. Sadly, he passed away March 18.

Parker gleefully recalled the title tune from the “Daniel Boone” series, joining former co-star Ed Ames.

“Daniel Boone was a man. He was a BIG man,” they belted in announcing the video release of the series.

Parker had invited stars of the series, a cadre of press members and fans to his Doubletree Resort in Santa Barbara, Calif., to celebrate and kick off “Boone” on DVD. We visited with his family and took a tour of his vineyard.

Parker was delighted to help preserve the series for fans on disc, and like so many of the classic film and TV stars, relished promoting his work.

It was a pleasant experience, and one I will never forget — like the day in 1994 I interviewed Gene Kelly, since passed, and listened to him gleefully grouse about “the suits” at the studios who had given him such a hard time (meanwhile he was sharing more than half his day with a group of reporters just to push the release of That’s Entertainment III on home video). At the same event, I met Cyd Charisse, another legend since passed, who looked as glamorous that day as when she first graced the screen dancing with Kelly.

They will all be sorely missed.
 

Who Needs a Portable DVD Player?

I think the disc — especially Blu-ray — will be around for some time, but I think one place where digital delivery has taken root is in the portable market.

Back in 2006, we prepared to take a long road trip by buying two portable DVD players. We got two so each girl could watch whatever she wanted (no fights that way). We packed 20 or so discs in a CD case and were on our way. Other than the youngest one asking for help changing the DVD selection every so often, it was a peaceful trip. We also used them on one or two plane trips.

Four years later, those two players sit gathering dust. With her new Apple iPod Touch, my 11-year-old can watch digital copies. And the younger one uses her father’s iPod to do the same on long road trips. Before leaving, they peruse the digital copies available, load them on the iPods and we’re off.

The iPods are certainly lighter and easier to store than the portable players, and the girls don’t mind only having a few movies from which to choose; they just switch iPods when they want to swap movies. We don’t have to lug around a CD case of discs. On the next trip, they dump the movies they’ve already watched and put new digital copies on the iPods.

The only downside is selection. There’s often a groan when they learn a particular digital copy isn’t Apple compatible. Compatibility doesn’t seem to be studio specific. It’s random. Some, such as Sony Picutres’ Cloudy With a Chance of Meatballs, work only with Sony’s PSP and a PlayStation 3.

Just when we thought the format wars were over, we find a new one in the digital realm. Some things never change.

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.

Redbox Deal Points to Blu Skies Ahead

One of the reasons Redbox has waved the white flag in its fight with the studios is because it is turning Blu.

Redbox executives said one of the motivating factors in making this week’s deal with Warner to accept a 28-day window on new releases was access to the studio’s Blu-ray titles.

The kiosk company plans to roll out Blu-ray rentals, which it has been testing for some time, by the middle of the year, likely at a higher rental price, according to executives. Netflix already offers Blu-ray rentals at a premium, charging customers $1 to $3 more on their monthly subscription for renting titles in the high-def format.

Blu-ray’s detractors — often digital delivery backers and Wall Street analysts who invest in that new technology — have long called it a dud, but last time I checked, getting customers to pay more for a product meant it was doing pretty well. Redbox consumers commenting on various discussion boards have indicated that they’d pay $1 more a night for Blu-ray rentals. Netflix’s Reed Hastings recently commented that the premium on Blu-ray rentals has helped the by-mail rental company grow the average profit per customer.

Blu makes more green, and one of the fastest-growing companies in the rental business adopting the format is a sign that its is gaining traction in the mainstream market, and will likely see great growth in the years to come.

The signs of adoption are all around. Consumer spending on Blu-ray purchases topped $1 billion in 2009, according to DEG: The Digital Entertainment Group. Just about everyone on my block has a Blu-ray player following the recent holiday season. Most members of my family have gone Blu. And — perhaps the biggest indication of all — I no longer have to explain to aquaintances what Blu-ray is.

There are still a few hurdles. For instance, one of my neighbors didn’t realize until last October that her PlayStation 3 played the format. (I’m sure she’s not alone.) Hopefully, Sony’s ad blitz will right that perception. Also, my mom hasn’t adopted Blu-ray, but she still has a 15-year-old TV and didn’t get a DVD player until they were $29.

Blu-ray is finally stepping into the spotlight, and, thanks to Redbox’s new deal with Warner, will soon be available at a kiosk near you.

Netflix and Redbox: The New Low-Price Leaders

I recently heard a report that, while liquor sales are doing well during this recession (as they always do), consumers are increasingly opting for the lower-priced booze. Instead of Grey Goose vodka, they are buying Popov. Instead of Gentleman Jack, they are opting for Black Velvet whiskey.

The same thing seems to be happening in the video industry. Wal-Mart used to be the low-price leader on packaged home media, offering the best value with DVDs priced close to the $4 it would take to rent it at the local Blockbuster. But as the recession has cut into consumers’ budgets, increasingly kiosks such as Redbox, with its $1 rentals, and Netflix, with its unlimited streaming plus disc rentals for $9 a month, are looking good by comparison.

Cable VOD, with prices around $4, also is struggling. Both Time Warner Cable and Comcast, the top cable operators in the country, each reported quarterly declines of about 200,000 subscribers for premium channels, including VOD.

“I have to imagine that the continued proliferation of Redbox kiosks and Netflix offerings is drawing consumers looking for cheaper alternatives that are just about as convenient as VOD,” Eric Wold, director of equity research with Merriman Curhan Ford in New York, told Home Media Magazine. He commented on a survey from research firm Light Reading that said 30% of respondents had switched providers due to video service price issues.

While analysts may wax poetic about Netflix’s technological advantage, I contend one of the primary drivers behind its growth during this recession is price for the amount of service. I know people who have dropped cable altogether in favor of Netflix. Subscribers have access to a slew of TV shows and older movies, as well as the traditional by-mail rental of the latest hits for a price that is much less than the typical cable bill.

As for Redbox and other kiosks, no retailer I know of can beat a $1 rental. That’s likely one of the reasons Wal-Mart is refusing to sell a buyer more than five copies of new releases (a move obviously aimed at Redbox, which has kiosks in its store) and has kicked out rent-sell-buy kiosk company e-Play. The low-price leader doesn’t like the lower-priced competition. I wouldn’t be surprised if the retail goliath gets into the kiosk business itself. That would make them a low-priced leader in the rental business as well.

Redbox and Netflix may have innovative business models, but it’s really price that is growing their businesses. To quote a political maxim, it’s the economy, stupid.