Was Netflix ‘Blindsided’ by Blockbuster?

homeHeroI 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.

If you’d like more information on their subscription services, check out our review of the various Netflix plans.

Topics: Investing

17 Responses to “Was Netflix ‘Blindsided’ by Blockbuster?”

  1. Suzanne

    Honestly, I feel Blockbuster is a dead company. Not only are their financials awful, but realistically… Blockbuster is an old brand. I think it will be gone within 2 years, tops.

  2. The #1 reason I’ve stuck with Netflix is because of loyalty. There are other several factors that made me never switch over to Blockbuster.

    Blockbuster never adds any real value even by allowing the in store exchange option for free. The whole point of rent by DVD was that I (and many other consumers I presume) would just drop off the DVDs in a mailbox on our way to work and get them in the mail at home.

    Another factor is Blockbuster isn’t a brand I love or ever identify with. It’s the brand I identify with all those damn rental late fees and whatnot in the 90s.

    Netflix also offered innovative streaming to your computer, xbox, etc. way before most other competitors were able to viably do it. This solves most of the impulsive need and allows NFLX subscribers to get through television shows very quickly.

    The DVD selection at Netflix was more extensive for the most part when I compared the selection at Blockbuster.

    In the end Blockbuster wasn’t trying to do anything innovative and was just trying to emulate or catch up to Netflix. They’re also doing this with Redbox. If you’re not the first to market, innovate or at least undercut your competition significantly then you’re not gonna win the movie renters over.

  3. The answer to your questions may lie in the simple fact that one company has a clear vision for the future, and is inherently adaptive to new technology. While the other got caught-up in the rubble of brick-and-mortar, and ignored the most important assets it had-the instore customers.
    A good customer service, would have made it easierfor them to online streaming subscibers.

  4. In spite of Blockbuster’s debt, I believe that Blockbuster has distinguished themselves from their competition as provider of newly released movies through both, their brick and mortar locations and their mail order services. I, personally, prefer to rent my movies when they are released as apposed to waiting a month for them to come to Netflix or Redbox and then another week or so it is available to me. As for the streaming movies, I see this as more a competitor for cable. I am a new release kind of guy. I generally pick up my new releases on Tuesday and return them on Sunday.

  5. Kristin

    I switched from a BlockBuster subscription to a Netflix subscription about a year ago because
    1) Netflix’s selection is better for the kind of films I like. I watch a lot of foreign and indie films (the kind that http://www.rottentomatoes.com tends to rave about), and BlockBuster often didn’t even have the films entered in their database until several months after the films had been reviewed. Netflix has always had the films I’ve looked up so that I can at least “save” the film to my list in anticipation of the eventual release on DVD.
    2) Streaming is great. Even with the cheapest Netflix subscription you can still get 2 hours of streaming video on your computer, and they have a lot of great TV series and exercise videos available in their streaming list.
    3) Netflix has a faster turn around time on DVDs. When I subscribed to BlockBuster, I had to wait 3-5 days to receive my new DVD from the time that I shipped back my old DVD. With Netflix, I get the new DVD two business days after I mail in the old one.

    I started out with BlockBuster because they used to have a great in-store exchange policy, but as they changed the subscription plans to make the in-store exchanges more expensive, my cost-benefit analysis shifted quickly toward Neflix.

    I expect that BlockBuster will dump brick-and-mortar franchise during bankruptcy reorganization in favor of the online and RedBox-type rental kiosks. Unless they can offer a cheaper product or better service than the other existing movie rental providers, however, I don’t see BlockBuster surviving in the long run.

  6. Ketan Thakkar

    Given the new release competition from Blockbuster and the kiosk competition from Redbox, I might say the best investment is shorting Netflix. I’m surprised to see it was up 10% in the past week alone and up 500% since March 09.

  7. I used to use blockbuster alllll the time. Now, I have no idea which stores are open or what it costs anymore. I don’t know what their late fees are. Netflix is almost a verb for dvds through the mail and redbox is almost a verb for kiosk DVDs. I know exactly where the 7 nearest redboxes are and I love the 1$ rental. I know exactly what it costs and exactly what late fees are. Blockbuster is to much of a hassle now. I have little kiddos so getting a movie earlier because of some fancy release, I don’t exactly care. I usually get to renting that special movie a month or two after its out if that.

  8. In these times where companies come up with new and better ideas to push their products to the market, Blockbuster simply is not dynamic enough. Physical stores are a thing of the past, especially for an industry like theirs. Anyone who refuses to accept that will go the way of the dinosaurs.

  9. dunno. Does BlockBuster offer online streaming?
    If they do that and rebrand themselves as “Eltria” or “Xa”, I’d probably forget all about my terrible past experiences with them.

  10. I wonder what effect this will have on the 3 companies over the next couple years.

    I potentially seeing this being somewhat of a big deal, although I guess it entirely depends on consumers and their preferences. To eliminate all new movies from an industry that thrives on new movies is an interesting situation for Blockbuster.

    As for why people choose Netflix. Most people that I’ve asked choose Netflix because Blockbuster has screwed them over. I don’t know how many stories I’ve heard of people being charged for never bringing back a movie when they actually had returned it, and the whole late-fee thing has also left a sour taste in peoples mouths.

    I barely use either. I use my roommates Netflix login to stream on my PC and PS3 and a few times a year, I’ll browse a Blockbuster store. I prefer Blockbuster though because I’m a “need it now” kinda guy with no planning/organizational skills. Blockbuster movies take 10 minutes to get, Netflix take about 48 hours. Also, Blockbuster does game too and doesn’t charge more for Blu-Ray like Netflix does. And now, if I want a new movie, Blockbuster is my only choice (Well, that’s not entirely true, I can rent through Comcast and the Playstation Store).

  11. Ugh, can’t edit =(

    Lastly, I was going to add that Netflix streaming is amazing and over time, I think it’ll be their greatest asset with the elimination of new releases.

  12. Allyson

    Sorry- I’m a Mom- I have to get out of my car with a stroller and stand in linefor 15 minutes – No Way.
    I can wait 28 days – I hate the new stuff its crap anyway.
    Netflix has things like the muppets and baby einstein – can I get that at blockbster – nope.
    Blockbuster is a starbucks fad – for people who want to wait in line and be seen

  13. missbliss87

    What I have always loved about Blockbuster is that when there is a movie I would like to check out, I have someone physically there with me to let me know if its even any good. If I went to redbox and wanted to know, I can knock on the box and ask ” Excuse me Mr. Redbox, is this movie decent?” But I will have no answer. At Blockbuster I can do that. And even if their shelf liners next to the movie “Greenberg” says “We love this movie and think you will too!” I can personally ask an employee and they will tell me not to waste my money on “Greenberg because Ben Stiller failed us there. Instead check out “Stolen” with Jon Hamm and Josh Lucas. I go home happy knowing I paid good money for a movie that will move me and not something that will make me want to hang myself.

    In the end, Redbox andNetflix have no customer service. And me being the movie buff I am, the 28 day movie availability has its hooks in me.

    I believe Blockbuster will be there to the very end!

  14. Netflix for me. Why?

    1. I am not that crazy about new releases, there are few movies that have come out recently that I care to see and I am very big on movies pre-2000s. So I am rarely in a hurry to see a new release, if I can wait 4-6 months for it to come out on dvd, I can wait one more month.
    2. Netflix streaming is awesome. Blockbuster can’t even compare. I like watching older tv shows. I use the $9.99 plan and 85-90% of my Netflix usage is in the form of online streaming.
    3. I can also use the Netflix app at work to watch whatever episode I want.
    4. The nearest blockbuster to me has just closed down. I use the bus to get around. I’d have to take 2 buses to get to the next closest blockbuster. So the one benefit BB had over Netflix is out the window.
    5. I am not a gamer other than playing games on my ipod touch.

    I have a feeling most Americans are like me which is why they go for Netflix over Blockbuster.

    • Lili, When it comes to new releases and games, most Americans are not like you. Gaming is an enormous industry with millions of users. And I don’t know how to evaluate the general public’s interest in new releases, other than to say that movies newly released to DVD (and theaters) always have their sales/rental numbers decrease after each week, implying that interest goes down the further it gets away from release.

      Other than that, I think your other points were great. Netflix streaming is (almost always) perfect. And all Blockbusters in my region (North Shore of Boston) have closed down. The only advantage BBV had over Netflix was it’s physical locations and 28-day window and now one is gone and that cripples the other.

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