Did Redbox Kill the Video Store?

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Includes: BBI, GME, NFLX, OUTR
by: Brian A. Davis

For those of you who remember the days of the VCR, a Beta or VHS tape and a date, this walk down Memory Lane will also take you into the local video store. You remember, the old brick and mortar stores that sprung up everywhere for about a 30-year period in the United States?

Those who got in early... and got out within the first 20 years of the video rental business were the smart ones. (Does anyone remember paying $100.00 or more to belong to a video club?) Movie Gallery (formerly known as Video Update) was the last of these stores that died a slow and painful death in our town. Sure, expenses like rent at the shopping plaza, and employees took their toll, but the real culprit in the death of this local store was one little Redbox (operated by Coinstar (NASDAQ:CSTR)) located 150 feet away. The brick and mortar store just couldn't compete with a machine. Of course, in the world of business, natural selection takes over unless you are part of a government subsidized business lobby.

In terms of movie rentals, Redbox has a simple model. Place machines in high traffic areas and let the machine do the work of the video store. Let's face it, for those who remember the video store experience, this is not much different. For only $1.00 you can stay home and enjoy a video.

Netflix (NASDAQ:NFLX), however, has stormed onto the scene. Its first business approach was simple: Utilize monthly membership fees and mail service to deliver DVDs right to customers. Netflix even offered free trials. The more recent move into streaming video and the recession that has people looking for cheaper entertainment options, has positioned Netflix to become the Amazon.com of e-business. Investors have been handsomely rewarded.

The question is whether Blockbuster (BBI) can change fast enough to challenge Netflix. Blockbuster has abandoned many of its video stores and has even attempted to rival Netflix with its own online video experience. The question is only if it is too little, too late.

Growth areas? The current market suggests that games are another place to attract consumers. Gamestop (NYSE:GME) appears to have successfully transformed itself from a shopping plaza storefront to a viable online business model. Gamefly's (GFLY) IPO could, however, pose a problem for Gamestop. Could it be a case of Movie Gallery all over again? With free trial members and an endless mass of gamers, we can only see new opportunities.

Implications

The meteroic rise of Netflix and the potential of GFLY should not be under-estimated. Let us remember that it is not always the company that has the best name that succeeds, but the company that builds a name with a new and more savvy consumer.

Disclosure: Author holds position in C