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What’s Next for Blockbuster (BBI)?


Blockbuster (BBI) is expected to announce that it lost $.11 a share last quarter on revenue of $1 billion on Thursday after that close. That is 16% below what it was a year ago. What was a $10 stock in 2005 now trades below $1 most days.

Blockbuster was king of the movie rental business when renting movies from stores was big business. Being first in a market normally gives a business a huge advantage, but in Blockbuster’s case, the company did not keep up with the times over the past few years, and that is now costing BBI big-time.

Netflix (NFLX) saw great success with the rent-by-mail business, but continued to innovate, and now plays in the digital delivery of premium content business, too. New to the movie rental industry is Redbox, owned by Coinstar (CSTR) which allows users to rent movies from 17,000 kiosks. It has the advantage of physical locations that Blockbuster has, but almost none of the cost.

Blockbuster can turn in one of two directions now. It probably does not have the capital or management resources to choose both.

Blockbuster is already closing hundreds of stores a year, and now has about 7,000 worldwide. It can continue to shutter its money-losing stores and try to live off the cash flow of the stores that do well. It is a strategy based entirely on retreat and it is not without cost. Blockbuster has to renegotiate leases on most of the locations it leaves. Downsizing by cutting locations is not without cost. Even in areas where landlords are reasonable, Blockbuster has to pay employee severance.

Blockbuster’s other path is to aggressively compete in the digital download businesses set up by Apple (AAPL), Amazon (AMZN) and Best Buy (BBY).  These companies simply deliver video for a fee from servers that send content from servers to the PCs and TVs of their customers. It is not a terribly expensive business to be in, but it is crowded with heavyweights like Apple, that are not going to give up market share easily.

Blockbuster has one advantage in the digital download and streaming business. It has a brand, and it is one that many Americans still relate to DVD sales and rentals. That’s what being first-to-market boils down to for Blockbuster now.

Still, buying market share, even with its brand, is costly. Blockbuster would have to convince consumers that it is a better alternative than Apple or the local cable companies, which deliver video on demand through set-top boxes.
Blockbuster could go in either of these directions, but neither holds much promise.

Article printed from InvestorPlace Media,

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