Blockbuster's die-off is no tearjerker (Netflix, too?)

Denver Post ^ | January 02, 2005 | Al Lewis

[MississippiMasterpiece]

It's quite an epic, watching Blockbuster die.

The nation's No. 1 video chain hopes to prolong its life with a hostile bid for the No. 2 video-store chain, Hollywood Entertainment. But make no mistake - it's dying. The whole video- store industry is dying, too. Meanwhile some high-rolling financiers are picking over the corpses.

Renegade capitalist Carl Icahn has emerged as the largest investor in both Texas-based Blockbuster and Oregon- based Hollywood. Icahn is trying to put the chains together in a $1 billion deal. He'll most likely try to turn a fast buck with synergies, economies of scale, cost- cutting, restructurings, refinancings and perhaps a little bit of that old-time merger accounting.

Before Icahn's move, Leonard Green & Partners, a storied California-based investment group, bid for Hollywood. The firm, however, lowered its offer after having a close look at the books.

Alabama-based Movie Gallery, the No. 3 chain, also made an offer for Hollywood. So now, there's a testy little auction - replete with hostile takeover threats - making regular headlines.

The truth is that combining Hollywood with any other video-store chain is like handcuffing two drunks together. They could prop up each other for a while, but they are bound to stumble.

This is why entertainment giant Viacom divested itself of Blockbuster in October. Viacom's brass said they believed Blockbuster would be better off on its own. What they meant was that Viacom would be better off without Blockbuster.

Shortly after the spinoff, Blockbuster took a $1.5 billion charge against earnings to account for its declining value. As a result, Blockbuster posted a $1.26 billion loss on $4.33 billion in revenues for the first nine months of 2004.

To be sure, Blockbuster, Hollywood and other video stores still throw off plenty of cash and have seized video games as a new source of revenue. But their glory days are long behind them.

One reason they are still alive is because cable and satellite providers have failed to deliver a respectable array of competitively priced pay-per-view choices.

Another reason is that movie studios have propped up video stores as cash cows. Studios send their movies to theaters, then video retailers, and then to TV outlets. The window when new releases were only available in video stores gave Blockbuster its appeal.

But movie studios have learned they can make more money by flooding the market with inexpensive DVDs for sale at the same time they release them to video stores for rent.

That gives consumers an intriguing choice: Why pay $4 to rent when you can buy for $12 to $20 and not worry about pesky late charges while building up a personal video library?

Cheap, lightweight DVDs are easily mailed, too. This feature gave rise to Netflix, which pioneered the online, mail-order subscription model. Unfortunately, this idea is so widely copied - by Wal-Mart, Blockbuster and soon even Amazon.com - that Netflix's days are also numbered.

Meanwhile, McDonald's is experimenting in Denver with kiosks that dispense rental DVDs for $1 in a bid to drive traffic to their food counters. Supermarkets, pharmacies, convenience stores and bookstores also sell or rent DVDs for the same reason.

Then there's TiVo and other digital video recorders, including ones from Comcast and EchoStar. Why suffer long lines and slow-witted clerks at Blockbuster when you can record what you want from TV and fast-forward through commercials?

Just before Christmas, Blockbuster said it would lower its monthly fee from $17.49 to $14.99 for its Netflix-like service. That announcement came shortly after Blockbuster said it would cut late fees for in-store rentals. Blockbuster said it expects to lose income of between $250 million and $300 million for 2005 as a result of eliminating late fees.

Imagine that. Taking a quarter-billion dollars a year from customers who are too busy, too lazy or too forgetful to return their videos. This is a business model that deserves to die.

[Extremely Extreme Extremist]

Maybe it is just me but why would anyone want to own movies/dvd's (with the exception of kiddie movies for the kiddies who can watch tripe over and over?) If I have seen a movie I really don't need to see it 50 more times.

There are some true classics that you have to own. But mostly I agree with you.

[Diana in Wisconsin]

I hope we don't lose Netflix, too. I know I'll continue to use them over downloading movies off of the satellite.

I also use my library a lot for music CDs, movies and videos. Wisconsin has an awesome setup for inter-library loans all throughout our state. I can find just about anything that I want with ease, and I can order it from my computer, too for pick-up at my local library. :)

There are plenty of ways to NOT support the Hollywood pukes. ;)

[billbears]

Their support of the failed CC DIVX model which most DVD player owners were against

LOL, try convincing someone to buy one of those pieces of crap. The year before I left CC for good, they rolled those things out. Very, very high commissions for the sales person on the DIVX models with practically non-existant ones on the regular DVD players. Add to that a managerial 'request' to focus selling only DIVX models it was a recipe for disaster for customers as well as salespeople there.

[Bear_Slayer]

Why pay $4 to rent when you can buy for $12 to $20

I'm not a collector of movies. So I won't pay any price to own them. Maybe, if I really liked the movie and the price was real low.

I have the Blockbuster Movie Pass. For $25.99 a month, I can take home two movies at a time. I can watch them immeidately and return them for two more or hold them for a long time. All without paying an extra fee.

Because we only have 1 TV channel, we tend to watch alot of movies. My only complaint with BB is that the movie selection is thin and because of that I'm thinking of dropping the Movie Pass entirely.

[SwatTeam]

I love Netflix. Been with them for about a year now. I missed a lot of the tv shows I wanted to watch because of the commercials. So I ordered a whole season of CSI, The Sopranos, The Wire, plus the Apollo series that was on HBO and narrated by Tom Hanks. It is a great concept and I watch my DVDs on the computer with headphones while my husband watches tv. It's great.

[Knitting A Conundrum]

I went out to buy a video the other day. Couldn't find anything I really wanted to watch. There have been so few releases that I would waste time over, and I already have them. I find myself buying old films just to build up my library.

[savedbygrace]

A few months ago, we rented a movie at BB, watched it right away, then after telling a friend about the movie, we loaned it to them (probably a Terms of Use violation, but whatever) with the understanding that they'd return it to BB within the rental period.

The next time we rented from BB, the clerk told us aobut a late fee we owed. I asked her what movie it was. You guessed it. Our friend had gotten busy and forgot to return it in time. Last time we'll try that approach.

[Hardastarboard]

but most of what is out today is just inane and worthless.

Agreed

[Extremely Extreme Extremist]

I have the Blockbuster Movie Pass.

Why?

[don-o]

I use Netflix precisely because I can find thousands of old movies. I watched a Cagney flick I had never even heard of. He was a painter, not a gangster

[kingu]

I've always figured that the biggest mistake that Blockbuster ever made was not paying attention to Netflix. Oh, I'm not talking about the videos by mail aspect (though a good one), I'm talking about rental queues for wanted videos. Where you can go in and know that the video you want is waiting for you.

Unlimited rentals for a monthly fee was a good idea; stupendous even. It got me into their stores quite a bit for a time there. But the frustration of trying to find what videos I wanted drove me out of their stores. Why should I waste a half hour looking for something?

They had some great ideas, though, using that monthly unlimited feature - you kept the videos in your hand while you picked out the new ones, and then handed the ones you were turning in to get the ones you wanted to rent. No card, typically no standing in line. I wouldn't mind browsing when I want to, but honestly, I'd much rather have the videos I want waiting for me at the counter.

[Bear_Slayer]

Because.