When was the last time you rented a DVD from a Blockbuster (s bbi) store? If it was recent enough for you to remember the exact date, you’re in a shrinking club.
The video retailer behemoth that stomped many a mom-and-pop store out of existence is now finding people are renting fewer of its DVDs. Rentals at its U.S. locations fell 2.6 percent in the last three months of 2008 (in a conference call, CEO Jim Keyes blamed Hollywood for producing crappy movies), while sales of video games, game consoles and used DVDs rose 37 percent.
In other words, the epic Blockbuster-Netflix (s nflx) battle that has waged for several years isn’t quite over, but Netflix is doing a great job of bloodying up its adversary. So Blockbuster is hoping to fare better against GameStop (s gme) and Amazon.com (s amzn).
Just how bad is it for Blockbuster? As was made clear when executives discussed the company’s latest quarterly results on Thursday, it’s definitely not going bankrupt. Well, at least not this year. Instead, lenders are giving it another year to repay a revolving credit facility that was coming due this October. (Bankruptcy wouldn’t necessarily mean closing all stores, as Circuit City did. It could just restructure debt and position it for a turnaround.)
Blockbuster’s aggressive attack on Netflix’s DVD-by-mail model hasn’t worked for a few reasons: Shifting prices of subscriptions confused, then alienated users. Blockbuster poured energy into copying a successful model, not innovating it. Above all, it was unwilling to scale back its costly store chains, instead creating an awkward store-mailbox hybrid that never quite worked.
“I can tell you I never want to see the movies that come by mail,” Keyes said in the earnings call, sounding a bit like someone trying hard to enjoy his sour grapes. Instead, Blockbuster is forging a digital strategy with its set-top boxes and kiosks selling DVDs and digital downloads. Keyes said 10,000 kiosks will by deployed over 18 months.
So it’s not over for Blockbuster, but it’s lagging behind Netflix – which, in the meanwhile, has focused on improving its own mail-centric model, while gradually rolling out a catalog of streaming videos that is now 12,000 large. Consumers are now flocking to Netflix as a low-cost source of movie entertainment in the recession. Netflix signed up its 10 millionth customer in February. Its stock is up 31 percent over the last six months. Blockbuster’s is down 73 percent.
So instead of having a recession-resistant business, Blockbuster has become yet another company struggling in the recession. It warned that investors will be hearing about “going concern” risks — that is, risks it can’t pay debts and avoid consequences like bankruptcy.
As Keyes said, “We think that frankly there will be a lot of companies in a similar situation receiving opinions of this sort, and given the tightness of the credit markets these days we are not going to be alone.”
Thoreau put it much better. “If misery loves company, misery has company enough.” Maybe they can all hang out together and watch a movie. I recommend Netflix.