Blockbuster: Get Rid of Your Stores to Stay in the Game

Includes: BBI, NFLX
by: Todd Sullivan

In early November, Blockbuster (BBI) CEO Jim Keyes said "Are we raising prices? No, as of today, what I don't want to do is raise them three or four times." Well guess what?

Blockbuster is boosting prices of its DVD-by-mail service for new customers and some existing ones by up to 40 percent. This mean hikes of $2 to $10 depending on "the profitability of the individual subscriber." Back in June when Blockbuster lowered the prices in a desperate attempt to steal business away from Netflix (NASDAQ:NFLX), I simply said they could not maintain the prices because their cost structure was so much higher than that of Netflix.

I said if they wanted to compete on price with their rival, they need to close more stores to lower the basis.

Of the new plan, Blockbuster spokeswoman Karen Raskopf said they are "a really good value for consumers" that are "providing a fair return to Blockbuster." She said the company hopes the increases won't cause existing subscribers to quit. "This is not a plan to drive people away," she said. "We want to keep them all."

Raising prices is not usually a recipe for keeping customers. Although, Blockbuster has been losing ground on Netflix for the past year, so I guess if they just tread water, they will be happy.

At the end of the day this all boils down to the stores. Until they get serious about doing something with them (either closing or selling), they are doomed to play second fiddle to Netflix. They just cannot compete with Netflix on cost and people do not want to have to get in a car in January to go get a video.

Since Blockbuster was last to the online download game and still has not established themselves there, one cannot even say that there is a light at the end of the tunnel... Blockbuster has gone from the leader in its business to a great business school case study about what happens when management does not see how its business is changing.

The sad thing for shareholders is I think Blockbuster still cannot see it.