I need your help with an investing decision. The issue involves Blockbuster and Netflix. There are two questions that have been puzzling me, and I could sure use some input. Here are the two questions:
1. Why do more people choose Netflix over Blockbuster even though Blockbuster offers physical store locations in addition to online DVD rentals?
2. Would you be more inclined to use Blockbuster if it offered newly released films 28 days before Netflix or Redbox?
Now some background.
Recently I opened a Scottrade brokerage account for my SEP IRA account. Although I’ve been investing in mutual funds for nearly 20 years, the Scottrade account was my first venture into buying and selling individual stocks. But since opening the account, I’ve run into a problem–figuring out exactly what to invest in.
Investing in mutual funds is easy. Simply build an asset allocation plan, and then find low cost mutual funds to implement the plan. But with individual stocks, you first have to find stocks to evaluate, and then go about the process of analyzing the company. And that brings me to Blockbuster (Ticker: BBI).
Blockbuster has been in trouble for some time now. Since Viacom spun off the movie rental retailer, it’s been in a heap of debt–about $1 billion of debt to be exact. And the company has been poorly managed. It let Netflix (Ticker: NFLX) beat it to the online market while it stood there and watched. And then it let Redbox (Ticker: CSTR) beat it to the vending machine rental market. While only a few years ago it was king of the hill, Blockbuster is now trying to play catch-up. And that brings me back to one of the questions I asked above:
Would you choose Blockbuster over Netflix or Redbox if Blockbuster got access to newly released movies four weeks before its competitors?
This question is not hypothetical. Recently Blockbuster announced a deal with Warner Bros. to offer new releases about one month before its competitors. And as the image that started this post reveals, Blockbuster wasted no time promoting this deal. The Blind Side, starring academy award winner Sandra Bullock, is a Warner Bros. picture that for the next several weeks you can rent at Blockbuster, but not Netflix or Redbox. Sherlock Holmes, also released by Warner Bros., will also be available at Blockbuster first.
While my first reaction to the Warner Bros. deal was less than enthusiastic, I’m starting to change my mind. According to Warner Bros. as reported in this Motley Fool article, 75% of DVD sales of new titles occur within the first four weeks after release. And just this week, Blockbuster announced similar deals with Twentieth Century Fox Home Entertainment LLC and Sony Pictures Home Entertainment Inc.
Looks like Blockbuster will get a head-start on Avatar.
Still, Blockbuster has some major challenges.
First, it’s way behind Netflix for online subscribers. If you dig into each company’s Form 10-K, you’ll learn that Netflix has over 12 million subscribers, and in 2009 grew at a 31% clip. Blockbuster, on the other hand, has only 1.4 million subscribers, down from 2.1 million a year ago. Can the deal with Warner Bros. stem the tide? Maybe, but it seems like an awfully tall order.
Second, Blockbuster is way behind Redbox in the kiosk market. While Redbox has more than 22,000 kiosk locations and has become a household name in its niche, Blockbuster is working with kiosk vendor NCR and has just 4,000 locations.
And all of that brings me to the other question I asked at the start of this post:
Why do more people choose Netflix over Blockbuster even though Blockbuster offers physical store locations in addition to online DVD rentals?
One possible answer may be that most folks don’t care about physical retail locations. If all things were equal, however, why wouldn’t you care? But maybe that answers the question–all things aren’t equal. In order to have in-store exchanges added to a Blockbuster Total Access subscription, you have to pay a few dollars more a month. Blockbuster’s Total Access without in-store exchanges costs the same as Netflix: $8.95 for 1 DVD at a time, $13.99 for 2 at a time, and $16.99 for 3 at a time. Add 5 monthly in-store exchanges to any of these plans and the cost goes up $3. Is it worth it? I guess most folks don’t believe it is, at least if subscription rates for Netflix and Blockbuster are any indication.
So what’s the likely outcome? Initially, I didn’t see Blockbuster as a viable company. It’s saddled with expensive stores and a lot of debt, both of which act has heavy anchors holding the company back. But the deals this week made me realize that the studios don’t want to see Blockbuster go away. Why? Because if Blockbuster goes away, Netflix will have far too much power in the industry. I would think that studios would much prefer to see healthy competition in the distribution of their pictures, and that means a competitive Blockbuster in some form.
All of that said, the question still remains whether to invest in Blockbuster. I love an underdog, so I may take the risk. But I’ll only invest money I’m willing to lose.
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