Why I'm Still Not Sold on Blockbuster

As I've outlined before, due to a lack of innovation in the DVD rental market, Blockbuster is on the way down. The company's stock (BBI) had enjoyed a nice run of late before crashing down to reality after the release of the company's Q1 report.

Revenue and same-store sales continued to drop and CEO Jim Keyes attributed much of that drop to consumers choosing to watch movies in the theaters versus staying home and renting from Blockbuster. Probably more closer to the truth, the reason for the decline in revenue is because Blockbuster has been losing a competitive battle to Netflix (NFLX) and Redbox.

Blockbuster is years behind Netflix in the rent-by-mail DVD market, and Netflix's gain in subscribers has been Blockbuster's loss. Additionally, Redbox's $1 Kiosks are dipping into the market share of both companies.

Just as the General Motors (GM) philosophy of 'build it and they will come' has led that company to near bankruptcy, Blockbuster's mentality of 'offer it and they will rent it' left the company in the dark when Netflix stormed onto the scene.

To make matters even worse, Video-on-Demand and digital services such as iTunes (AAPL) could soon render all of these DVD rental companies irrelevant.

However, there may be some good news. Keys did mention that Blockbuster will roll out up to 3,000 kiosks by year end 2009. While the company has no chance at competing with Netflix in the mail-rental market, Blockbuster could easily steal market share from Redbox in the kiosk sector. The only benefit that Blockbuster has over Redbox is that they offer new releases first; it usually takes Redbox a bit longer to offer newer releases for $1. If Blockbuster offers new releases in their kiosks for much less than the $5 in-store price before those titles hit Redbox, then the company may be able to stave of collapse long enough to come up with an alternative plan to sustain revenue.

While the stock has been great for day traders, there are too many other stocks on sale right now to consider BBI a safe bet as a long term investment. That could change if Keyes can develop a plan for the future beyond same-store sales and kiosks.

Disclosure: VFC has no financial interest in any of the companies mentioned in this post.

Comments

[ECONOMICS 101:]

JV Johnathan Vrozos agrees with VFC Stochouse for another reason also. I was at a mall last week and saw a huge amount of people buying "illegal" DVD of the latest movies for $2/each. Nicely packaged and with a case. They even had a DVD player for people to test their purchase.
Why rent for $5 when you can own for $2?
By Johnathan Vrozos
johnathanvrozos.ca

May 17 08:33 AM

[ilstuGuy:]

redbox has the new releases tuesday morning right at midnight, how quicker can you get then that, the only ones that are delayed are the universal movies, and i can usually get those by the end of the day on tuesday.

May 18 11:45 AM