Blockbuster Hemorrhaging DVD-by-Mail Subscribers

Just in case you think Blockbuster’s (BBI) problems are isolated to a declining video store industry, I’d encourage you to take a closer look at their latest 10-Q filing. Despite there being clear growth in the DVD-by-mail category, Blockbuster is hemorrhaging subscribers.

In fact, the percentage of people giving up on their by mail service is almost as high as the percentage of people giving up on their video stores. According to their 10-Q,

Rental revenues decreased mainly as a result of: a $76.3 million decrease in by-mail revenues driven by a 30% average decline in by-mail subscribers, which was more than offset by related cost reductions described below under “Domestic—Gross profit."

At one point in early 2007, Blockbuster had the pedal on the metal and was boasting of having close to 3 million subscribers. Since then, they’ve been understandably quiet, but I had no idea things were this bad until I read their most recent filing.

After piecing through other filings, I was able to come up with an estimate of 1 - 1.25 million current subs.

Here’s the math for those playing at home.

At the end of 2006, Blockbuster had 2.2 million subscribers and had brought in approximately $250 million in revenue. By the end of '07, they were flirting with 3 million subs and had $525 million in DVD-by-mail revenue.

From an historical standpoint, this tells us that Blockbuster’s subscribers tend to average between $9.49 - $14.60 per month, but these figures are a bit skewed by their total access efforts. Since most of their subscriber gains were added at the end of '06 and the beginning of '07, it pushes both numbers to an extreme. Their actual monthly average is probably closer to somewhere in the middle.

By comparison, Netflix (NFLX) subscribers were averaging $12.84 per month as of their most recent quarter.

The information that Blockbuster discloses doesn’t allow us to get at an exact figure, but if we also dig through past filings, there is more than enough info to extrapolate a reasonable estimate for their current number of subs.

In December of 2006, they had just passed 2.2 million subscribers. Two months later, they were predicting that they’d be at 3 million subscribers by March '07

A year later the first sign of trouble shows up when they disclosed that they saw “significant” subscriber losses after pulling total access in '07. If we assume that 20% of their subscribers left after they canceled the free in-store exchanges, it would bring you to an estimate of 2.4 million subscribers for midway through '07.

By Oct 08′, Blockbuster admits that their by mail revenues decreased another 21.5%, so if you subtract another 500,000 subs you get a total of 1.9 million from 9 months ago.

Since we know that they’ve lost 30% of their subscribers over the last 12 months, it gives us an estimate of 1.3 million subscribers today. With some of these number being moving targets, I wanted to check to my math to see how reasonable this guess was and I actually think it’s a tad high. If you take a look at their most recent by-mail revenue number, it suggests that the total is slightly lower.

Since Blockbuster has plans that range from $9 - $17 per month, it gives us a range to consider. If a decline of $76 million represents 30%, it would suggest that they are currently earning $14.8 million per month from by mail subscribers.

If we assume that 100% of them were $9 per months subs, it would mean that the maximum number of subscribers that they could have at this point would be 1.64 million and if 100% of the subscribers were paying $17 per month, it would peg the minimum size of their subscriber base at 870,000.

Since $12 - $14 is a more reasonable estimate for what the average Blockbuster by mail subscriber pays each month, it gives us a ball park range of 1 - 1.25 million current subscribers.

I wasn’t surprised to see a drop in subscribers right after Blockbuster abandoned their total access plans, but to see them drop below TA levels has to be concerning for Blockbuster Execs. This is the one part of the company that should be firing on all cylinders, but clearly Netflix’s Watch Now service has been poaching their members.

Blockbuster may have put up a good fight in the DVD wars, but with nearly 10 times the number subscribers, Netflix is now threatening to do to them, what they did to Wal-Mart’s (WMT) DVD-by-mail program.

The smaller membership gets, the harder and harder it will become for Blockbuster to run their by-mail program at a profit. They could always raise prices, but that would only lead to additional defections. With Blockbuster on the ropes, don’t be surprised to see Netflix maintain the price war for another 12 months while they wait for Blockbuster’s bond owners to take control of the company.

In the meantime, this data only highlights the fact that Blockbuster’s problems aren’t because of a lack of opportunities; it’s an issue with their execution.

Comments

[pocono:]

and the point is? thats why netflix and bbi are trading at the levels they are. actually i think bbi should be trading higher!

Aug 23 11:22 AM

[JODATI:]

why don't you compare the tota l"DVD by mail" universe...it really hasn't grown that much from 2007...Blockbuster stole from Netflix ...Netflix stole back from Blockbuster but the total pie didn't get much bigger....so Netflix will have trouble continuing the growth.....food for thought

Aug 24 10:34 AM

[rel:]

You can still exchange 5 movies for free a month which is more than you need...I find BBI offering a much better deal than NFLX

Aug 24 12:04 PM

[Davis Freeberg:]

@Jodati - I'm not worried about Netflix's future growth, they're continuing to add subscribers at a record pace. Once the video stores closes it will force a lot of people to online only, but to address your point . . . when Blockbuster was touting their 3 million mark, Netflix had 6 million subs. Now Blockbuster has 1 million and Netflix is pushing 11 million. From where I sit that's 35% growth for the industry over a pretty short amount of time. If Blockbuster can't execute in these types of conditions, how are they expected to succeed with 30% of the video store business leaving every year?

Aug 24 01:32 PM

[JHorton:]

BBI abandoned Total Access, and they are closing stores every month in search of cash. They are encouraging stores that are closing to direct the customers to BB online in an effort to not lose them completely. However, they are not encouraging them to go to the remaining stores. Why not??


On Aug 24 12:04 PM rel wrote:

> You can still exchange 5 movies for free a month which is more than
> you need...I find BBI offering a much better deal than NFLX

Aug 24 03:01 PM

[pocono:]

i wonder what prompted bbi`s 11 percent move today, surely not this article,

Aug 24 11:44 PM

[pocono:]

bbi up another 5 cents today

Aug 25 06:29 PM

[pocono:]

nflx opened mon following this article at 45.41, closed today tues at 44.46. for a loss of 95 cents a share. bbi opened at .74 and closed today at .87 for a gain of 13 cents per share. i made my comment on sunday. got 2 thumbs down, i currently own bbi at .67, i think i made a good move! and im not tying up alot of money per share and i have a HUGE gain.

Aug 25 06:44 PM

[Davis Freeberg:]

Good luck day trading your penny stock, but if you're reading my articles you should know that I don't concentrate on the short term and instead take a longer view on the companies that I write. You argue that there's no point to the fact that their by mail subscribers have gone into shock, but you're wrong because it is the only hope that Blockbuster has left for saving itself and if they don't have the resources to keep it competitive, then they have already lost. Over the next year, they need to come up with $500 million to pay off their debts. Where do you think that they will get that from? Their international operations certainly aren't worth that much, even stretching out payment terms and reducing spending will yield a little bit of operational cash flow, but no matter what they do, they're still going to have $300 million that they don't know how to pay back.

They can try to refinance, but with these bonds at 43% yields, how much luck will they have? I would argue that their only way to save themselves is by selling a core asset that's worth at least $500 million. The problem is that 2 - 3 million growing subs would be worth that much as a stand alone company, but 1 million subs and declining would not. So what's my point? It's that the "healthy" part of their business that could have given them an exit is now a closed off ramp. That should impact their long term ability to function and remain competitive in this space. So maybe it's not new news that Blockbuster is toast, but since you are the one whose long, why don't you tell me how you pay off $500 million in 12 months?

You'll note that in my article, I don't discuss valuations at all. You can go through life tracking every single tick of the tape or you can get way ahead and identify problems or opportunities that aren't clear to others. You can act like Blockbuster can be saved by a few cents added to their stock, but I don't see how that helps them grow, protect or save their business from impending disaster.

Aug 25 09:59 PM

[pocono:]

i really only live in the present for tomorrow may never come at my age. not a day trader either but an opportunist. will use my profits when i eventually sell to buy cstr which i consider to have more upside than netflix with all its redboxes and deal with paramount.

Aug 26 05:57 PM

[ohjohnnyboy:]

where blockbuster failed was that they assumed that the on-line subscribers who trade for in-store rentals would be spending at the register on used movies and confections. reality is that on-line subscribers make up less then 1/10 of 1 percent of a stores revenue. Also consider the cost of the store losing revenue on a free rental 5 times a month per person and the cost to pay an employee to checkout, check-in and replace the rental to the shelf. now multiply that by 1 million.

Aug 29 10:42 AM