Davis Freeberg

DivX Offers Low-Tech Help to Hollywood Partners to Expand Reach

My understanding of how the technology works is that consumers have a couple of different options when it comes to playing it back. Just about any laptop or computer should be able to play the file as long as they've got the DivX codec installed. If not, the codec is bundled on the stick itself and consumers can install if from there. If you happen to own a DivX DVD player (prbly 40 - 90% of all DVD players support DivX depending on where you go) then a consumer can transfer the film to their computer, burn it on their own DVD disc and then play it there. If you happen to have a USB supported DivX device like the PS3 or some of the television sets that let you plug a memory stick right in, then you should be able to play the movie right off the stick. Most of the more recent gadgets will support this implementation which will help it drive mainstream adoption. If consumers could only burn it DVD, it would limit the popularity to the early adopters.

As far as my comment on Blockbuster goes, they certainly could use DivX USB movies as a way to differentiate their kiosks from Redbox and/or to drive Blockbuster branded sales at other retailer's locations, but the way things are currently positioned, content is moving from packaged media to a direct download/streaming system and in that system companies like Blockbuster and Netflix may be positioned, but companies like Wal-mart stand to lose a bundle in media sales in the process. USB movies may not be the perfect solution but it could be an entirely new revenue stream for consumers who just aren't interested in DVDs anymore.


On Nov 20 09:36 AM Coney wrote:

> Does the DivX memory stick work with only computers and not television
> sets? We tech-trogs who buy DVD's, play them on our television sets
> not our computers. The bread-and-butter customers for retailers like
> Blockbuster will want playback on their television sets. Would TV
> widgets resolve the problem?
>
> In your last paragraph you write that the DivX would be a weapon
> "against Blockuster". Blockbuster makes its money on DVD rental and
> sales, and would appear to be the biggest beneficiary in shoring
> up their brick-and-mortar retailing by using the DivX memory stick
> while transitioning to mail and straight to TV sales channels.<br/>
>
> Excellent article.
>
> Robert

Blockbuster Streaming Comes To TiVo, But Service Won't Reach Many Consumers

That's just it, your hang up on the number of devices is preventing you from seeing the real trend that happening. Let forget a minute about when we get to the future and look at this news from the context of how we get there. On it's own, the announcement is nothing new, nothing revolutionary and as you point out only available to a small audience, but the ripple that these decisions make is very exciting. TiVo may only have a small stand alone base, but there are a lot of DVRs out there and they've clearly been in front of many trends. Online scheduling, TiVo to Go and support for online video are a few things that consumers can get, if they actively seek it out. This makes it harder for the other 25 million DVRs to continue to keep their systems closed. Maybe it means that they start experimenting with cable everywhere or approved video content like Epix, but sooner or later they will have to respond.

From the perspective of Blockbuster, the arrangement highlights their willingness to not be exclusive. Earlier their digital strategy was to build a Blockbuster only box, now they are competiting on the same platform as Netflix, Amazon and the whole internet. It may only be an early example of this, but other Blu-Ray manufactuerers and connected TV makers will look at it and say hmmm maybe we can offer multiple choices for consumers instead of just one. This is very different from the cable only model where they absolutely want to be the only provider.

What the agreement really means for consumers though, is that they can now get Blockbuster digitally without having to buy special equipment. If they own a TiVo, it's there whether they are a potential customer or not. It's like Blockbuster was able to open a new video store without the cost of rent, staffing and what not. Maybe it's only 50,000 buyers, but how much does that cost them to replicate in real life? As more and more HARDWARE devices start supporting digital video it will drive demand for streaming services. Right now, it's all experimental, but if you look at where we are in the microchip area, we'll see a handful of connected tvs come out this year, but a healthy percentage of them coming out in 2010. Eventually most TVs sold will include an internet connection and that is what's so exciting about all of this. Consumers will have these choices presented to them when they buy products that they are already consuming. It's not a revolution as much as an evolution. Blockbuster's ability to show that it's committed to competing on these platforms opens up new video stores among each partners. So what if Samsung only ends up selling a couple million Blockbuster enabled TVs, it will still be allow Blockbuster to offer content to a community that wouldn't otherwise seek them out. When does the future happen? I'd argue that this is just a glimpse but that in two years, the majority of electronic devices will be connected and those passive consumers who've been reluctant to try digital delivery will finally understand the potential.

Blockbuster Streaming Comes To TiVo, But Service Won't Reach Many Consumers

You are missing the forest for the trees. For someone who is so up to date on the future of video, you seem to misunderstand the potential for hardware. For so long a small handful of companies have controlled tv content. Now that linear television is being challenged, strategies must change to be successful. The broadcast networks of the future won't be restricted to certain areas like cable is or have to worry about time slots because it's all on demand. Ushering in this change is a mass proliferation of devices and solutions. It may only be 1 million subscribers that Blockbuster can reach, but those are subscribers who aren't as likely to go to a video store and who wouldn't shop with Blockbuster otherwise, if they didn't go to the customer. When Netflix launched support on Blu-Ray players how many people who bought the Blu-Ray were actually customers? I'd argue a very small percentage when you look at Netflix's overall penetration rates, but each device that they partner with introduces them to another series of micro audiences able to consumer their content. Whether we're talking about the Xbox, Roku or TiVo, these devices start to add up. You can be unimpressed by Blockbuster's entry into the consumer electronic world, but don't overlook the significance of this change in strategy. They may be a year or two behind, but this sort of partnership will be what end up defines digital video.

Blockbuster Could Collapse in 2010

These comments are just plain funny. Decline has stabilized, I'm still laughing about that one. Considering that last qtr showed a 30% decline, I'm not exactly sure that stable is the word that I'd used to describe it. As far as the 50 million goes, this was only reduced because they reduced their lease obligations by $50 million to, so it shouldn't help Blockbuster at all. Not sure what Jodati is talking about from a 10% growth rate, but his math is clearly suspect. In 2004, Netflix had 2.1 million subs and Blockbuster hadn't even launched their online program yet. By my math this means that we've seen 500% growth in the DVD by mail category, not the 10% that Jodati seems to calculate.

As far as it being "reckless" to insinuate that Blockbuster won't make it past 2010, I'd say it's reckless to insinuate that they will. Until someone can tell me how Blockbuster plans on raising $500 million between now and then, I don't see how bankruptcy is avoidable. It'd be one to refinance debt, but at 40+% interest rates how the heck are they going to do that? Not sure that Netflix shareholders have anything to do with Blockbuster's stock price, but I will point out that Mark Wattles started selling his stake 2 weeks ago, which would certainly depress prices. Wattles also got out of Movie Gallery right before they went bankrupt, so this may be something to consider. Since he has 9% of Blockbuster's debt outstanding, it might give you a clue at how the smart money is investing in the company.

Blockbuster Hemorrhaging DVD-by-Mail Subscribers

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.

Blockbuster Hemorrhaging DVD-by-Mail Subscribers

@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?

Blockbuster Should Jump on Positive Citi Call

In 2005, Blockbuster Video saved themselves from bankruptcy when their ill advised bid on Hollywood Video was blocked by the FTC. Ironically, by failing to approve Blockbuster's bid, the FTC managed to kill Movie Gallery in the process. Now BV wants to bite off more than they can chew again, this time to buy CC. Wattles has suggested that they lever the company up in order to pay for the transaction, but taking on additional debt will only create more problems for both struggling retailers. With the movie industry in such a great state of flux, I just don't see the logic of reducing your flexibility especially in the middle of a recession. If Blockbuster does manage to pull this rabbit out of their hat, I think that it will kill them just like the debt needed to finance Hollywood Video, ended up killing Movie Gallery. I can understand why Blockbuster would want access to CC's discounts on inventory, but I think that Jim Keyes must have been drinking straight out of the slurpee machine when he came up with this one because I can't figure out a better explanation for the brain freeze that's going at Blockbuster headquarters.

Blockbuster's New Paradigm and Its Impact On Competitors

I don't doubt that Blockbuster has a tough road ahead, but Keyes' message was right on track. It surprised me to see the market price so much downside, into what I felt were significant improvements. There are no guarantees that Keyes will execute on his vision, but given his track record and a more reasonable business plan, I could see why you would be willing to give it a shot.

As a Netflix shareholder, I'm happy to see the price wars easing and think that the market has misunderstood Netflix's digital ambitions. Whether Netflix raises prices or sees more growth, I see them also benefiting from Keyes new focus. It will take time before we'll know if Keyes has the right solution, but he seems to be addressing all of the right issues.

Blockbuster Poised for a Turnaround

Thanks for the link Asif - The argument makes a little more sense with the additional commentary and I would agree that Keyes has been important improvement over their current management, however, I would still question how much of an impact he will have on the company. It was one thing to turn 7-11 around, but their problems were very different than BBI. 7-11 got caught in a credit squeeze, BBI is seeing their core business die. How you react to both threats is very different. While it makes sense for BBI to hire a retail oriented CEO, given that the future appears to be digitization, I don't see Keyes being all that different than Antioco, in the skills that he brings.

As far as activist shareholders go, it's hard for me to understand why you think Icahn would be a catalyst. People talk a lot about Icahn's BBI holdings, but he's had his shares for two years already and still isn't profitable. While he was integral in getting rid of Antioco, I don't know that there is a lot more he can do, in order to turn Blockbuster around. While, I'm all for seeing investors come in and clean out bad management, Antioco was actually a pretty good retail CEO, he just didn't react to the changing video store environment fast enough. In the long run though, he's done more to help, than hurt BBI. His biggest downside was that he made too much money and while Icahn was able to put a stop to that, it wasn't without a pretty nice golden parachute that BBI has to pay. While the new management will bring in a breath of fresh air for investors, I still don't see what Keyes can do, in order to solve the problems that Antioco couldn't deal with.

As far as the online growth, I'm not sure that BBI investors should be getting excited about that. They've clearly priced the service aggressively and while it's been good for consumers, it's been terrible for BBI shareholders. As the service gets bigger, the losses will intensify. At some point something will have to give. It would be one thing, if the growth of TA was adding to the bottom line, when I see that BBI is asking for another break on the covenants, it makes me think that things get worse, before they improve.

A lot has been made about the success of the online program, but what has been the cost. Even at 3 million customers, it's chicken feed compared to the number of customers Blockbuster serves at their retail stores. While I don't have the numbers in front of me, I'm fairly certain that BBI has lost a lot more retail customers than they've gained online customers, since launching their own online program. BBI management has said that approximately 50% of their subscribers are coming from in-store channels. While seeing subscriber growth for their online program is important, if you are giving up higher profitable fixed margin customers to do it, than I'm not sure that I see the logic in the move. It's great to start to see some life out of them, but how many millions of retail customers did they lose, before they could get to the 3 million online subs?

Blockbuster has to do something to compete, but when I look at the future of the video store, I see it continuing to move online and towards digital. While BBI's fixed cost structure gives them great leverage when they are profitable, it also makes things hurt even more when they start to see lose money. Considering that online rentals and downloads are likely to be a variable cost business, I question what happens to that leverage, as they move away from their retail business.

It may be that BBI is a screaming buy and could even go high as one times sales, but until the company can figure out a solution to their struggles, that actually makes them money, I can't help, but be a little pessimistic about a turnaround happening.

Blockbuster Poised for a Turnaround

This is a very well written overview on some of the issues facing Blockbuster, but I'm not sure that I see the logic for a "turnaround" here. A lot of what you mentioned in the piece, has been out there for sometime and I wonder what is different about right now, than six months ago?

I also don't know that it's fair to compare the company to Wild Oats. Wild Oats was forced to close underperforming stores, but Wild Oat's didn't face the obsolence of their business model. Blockbuster on the other hand, faces an industry that will see even more competition over the next 5 years, than they've faced from Netflix for the last 5.

NetFlix's Double Dose of Good News Boosts Stock Twice

I've seen the analysts cite this "diminishing returns" argument several times and I've got to say that I don't fully understand their logic. The $5.99 plan is for 2 DVDs per month which means that Netflix is making about $3 per dvd rented. If you compare that to the 3 out at a time plan where usuage varies but where consumers can rent as many as 12 - 16 DVDs a month, you not only get lower profits, but also higher costs because of the increased mailing costs.

The reason why $5.99 doesn't work for Blockbuster is because they also give away free coupons. This means that consumers are averaging $1.50 per rental due if they fully utilize the plan. The analysts may not like $5.99 and it may contribute less to revenue, but it contributes directly to profits and boosts Netflix gross margins. It's also gives Netflix an important last weapon for customers who would rather quit then stay at the 3 at a time DVD plan.

While it's always possible that customer usuage on the 3 on the time plans can drop and produce higher average revenue per rental then $3.00, it's unlikely for the majority of consumers who clearly watch their DVDs on the weekends and ship them back on Mondays. If analysts better undersood Netflix pricing they might understand this, but I'd love to see them explain how exactly the $5.99 plan hurts profits.