Coming Soon to Blockbuster (BBI): Chapter 11

by Paul Ausick | March 17, 2010 11:31 am

Just two weeks ago Blockbuster Inc. (BBI[1]) chairman and CEO Jim Keyes was talking up the company’s conservative (i.e., slow) move to digital delivery of movies as being what “these times demand.” Maybe that’s true if you’ve waited too long to get started and are now faced with nearly $1 billion in debt and limited prospects for paying the interest on that debt.

In its 10-K filed today with the SEC, Blockbuster said that if it can’t boost its operating income and if it is unable to restructure its debt, the company has “substantial doubt about our ability to continue as a going concern.” Next stop, Chapter 11.

Blockbuster has closed hundreds of retail stores and is adding kiosks as fast as it can, aiming to get 7,000 into the field this year. The company also has a video-on-demand service, but it has not caught on widely to this point.

Online video rental company Netflix (NFLX[2]) and kiosk renter Redbox have recently agreed to a deal with Warner Bros. (TWX[3]) to delay rentals of new titles for 28 days after the title is released on DVD. The delay is intended to boost DVD sales, from which Warner gets more revenue, but as time goes on revenue from rentals will converge with sales revenue and this restriction will disappear.

Streaming technology and video-on-demand from cable and satellite providers like DirecTV (DTV), Time Warner (TWX[3]) and Comcast (CMCSA[4]) mean that movie buffs no longer need to have the physical disc. In the same way that downloadable music has cannibalized CD sales, DVD sales will also begin to evaporate.

Movie watchers no longer will have to clutter up the living room with DVD players and discs because they will be able to watch a movie with just a few clicks of the remote or the mouse. Netflix currently allows subscribers to watch streaming video at no additional charge. Not all the Netflix catalog is available on-demand, but there are plenty of choices.

The 800-pound gorilla in the coming shift to streaming, on-demand video is Wal-Mart Stores, Inc. (WMT[5]), which recently purchased streaming video company Vudu. Wal-Mart made some serious moves to expand its offerings in home electronics just before the 2009 holiday season, and the company clearly sees electronics as a growth area.

If Wal-Mart can develop a market for streaming video from among its huge customer base, the company will have tremendous leverage over studios’ scheduling and pricing. From the consumer’s point of view that is a good thing. From the movie makers point of view, the jury is still out.

To reach a commanding share of the market for video, streaming technology needs to have more reliable and faster connections to the Internet. The FCC’s recent proposal to deliver 100 Mbps to every home in the US would certainly deliver the necessary speed. In fact, that might be overkill except for the few videophiles who once raved about the vast difference in quality between laser discs and VHS tapes.

The most important factor in determining the future of video rentals will almost certainly be cost. Kiosks are currently the winners there, with a price of $1/day. The downside to kiosks is that the selection is limited by the size of the machine to about 200 titles.

Services like Netflix and Blockbuster which use the mail to deliver DVDs own about a third of the DVD rental market, compared with about 40% going to kiosks. Streaming video providers, like Apple’s (AAPL[6]) iTunes store, Blockbuster, and most cable companies get the rest, and probably appeal most to movie fans who watch lots of movies and not much else.

With or without 100 Mbps broadband, streaming video will replace both in-store rentals and mail delivery services. It has to, because it promises cheaper, faster, better service to customers. Streaming may take a while to catch on, but if Wal-Mart can leverage its Vudu service quickly all bets are off.

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