RSSBlu-ray could be Blockbuster's bailout
By Tim Conneally | Published March 9, 2009, 2:10 PM
It takes a lot of discs to stock the more than 7,800 Blockbuster Video stores in North America, and the company is a prolific purchaser of disc-based media, both movies and games. So when the company's substantive value derives directly from the discs it buys, any big changes to its structure could impact the disc production industry, and all the other businesses that rely upon it.
Blockbuster's future has been uncertain since well before it attempted to purchase the now-defunct Circuit City, a move which CEO Jim Keyes said at the time was not in the best interest of Blockbuster's shareholders.
While that potential crisis was avoided, shareholders last week faced an even bigger one: The news was made public that Blockbuster has hired Kirkland and Ellis LLP for "refinancing and capital-raising initiatives." One of the company's specialties is bankruptcy, and it has dealt with several high-profile airline industry bankruptcy cases in the past. Because of the looming potential of bankruptcy the legal firm represents, Blockbuster's stock plummeted 80% in value on Wednesday.
In response to the hysterics, Blockbuster released some of its fourth quarter figures, highlighting that same-store sales had increased by 4.4% and that its earnings had actually exceeded projections by around $15 million.
The mitigating effect of this statement was nominal.
CEO and Chairman Jim Keyes said, "With respect to our financing initiatives, we continue to work diligently to resolve the August 2009 debt maturities, aggressively reduce costs and maximize the company's strong cash flow generation. We look forward to sharing our progress."
The debt maturities Keyes mentioned will amount to more than $380 million in August, and the preliminary numbers Blockbuster released could look quite different by March 19, when the company hosts its quarterly earnings call. Stocks did regain some lost value, but only around 10%.
Blockbuster Case Study
In 2006, Blockbuster's inventory was worth an excess of $800 million. The company's combined physical assets (i.e., stores, offices, warehouses, and everything contained within them) only totaled $508 million in value. Over 60% of the company's value was its discs. This sort of larger-scale title acquisition began in the company's era of "guaranteed availability," which caused upset among the rental industry.
This is because that $800 million dollars worth of discs Blockbuster has is not just a stockpile of old films, it's a constantly refreshing and circulating inventory that's intentionally heavy on the new releases. Blockbuster buys so many movies, that in the late '90s, distributors had to come up with "depth-of-copy" schemes to give smaller retailers bonus copies of a film just to stay competitive with Blockbuster's massive inventories. Blockbuster could buy as many as 4 million copies of a single film at a time.
The original cost to purchase a movie for rent at Blockbuster is around $65, but through its 40% revenue-sharing deal with Hollywood studios, it ends up paying around $6 each. This revenue sharing deal affected 81.8% of inventory. [Source: Cambridge Business Review, 2008, 9(2) 68-75]
But Hollywood gets more money when discs are sold, and the strength of video rental stores has crumbled since the VHS era. At the turn of the millennium, rental revenue took a sharp drop. Adams Media Research predicted that until 2013, the sale of discs would increase while rentals level off. While the economy has taken a 23% bite out of DVD and Blu-ray sales in 2008's fourth quarter, rentals have actually remained quite true to analysts' predictions. Of the $8.16 billion in rental revenue across the category, about $1.93 billion went to Hollywood.
While the transition to discs took out many of Blockbuster's competitors, it also allowed for viable alternative methods of distribution where cassettes did not. Two renters capitalized on this, and severely damaged Blockbuster's preeminence in the process: Netflix and Redbox.
Netflix pioneered the no-late-fee, by-mail rental model, and made an early and highly successful move into the streaming model. The CoinStar-owned Redbox has installed over 10,000 of its $1 rental kiosks, including the pivotal Wal-Mart and McDonald's locations.
Blockbuster pledged increased support for all of those models. In addition to the company's pay-per-view set top box for digital delivery, its Total Access by-mail program has expanded to include 700 Blu-ray titles and video games. Likewise, the company has worked with NCR on creating branded rental kiosks for physical movie sales without the costly real estate. Unfortunately, the company has thus far failed to gain the dominance it has in physical video shops.
With all of these factors in line, Blockbuster looks poised to close corporate stores and use their valuable stock in the by-mail and automated rental trade, gradually falling back onto a business model similar to Netflix, while leaving the fate of Blockbuster franchises up to the franchisees (similar to when a franchisor files for Chapter 7 Bankruptcy.)
Next: The impact on Blu-ray...
Blu-ray.
PPppffffhhhh.
Who cares?
Outside of the PS3 gang & a minute number of a/v enthusiasts no-one cares.
BTW that Nielson number of Blu-ray taking 8% of the total sales market is a lie (based on their cherry-picked BS 'of the top 20 best selling movies').
In fact Blu-ray in the USA took a true 4.45% of the market in 2008
http://www.videobusiness...CA6627437.html?nid=3511
With HD TV taking off much later elsewhere it's likely that besides Japan everywhere else is seeing much lower Blu-ray sales.
Factor in the tanking global economy this year (and probably next and possibly beyond too) and it's pretty obvious Blu-ray is screwed.
Enjoy the new Laserdisc/Betamax whilst you can; already we can see flash drives will be offering the promise of much smaller size, 6 times the bandwidth and up to 2tb in capacity within the next 2 years.
They made a big mistake not reaching agreement with the DVD Forum & taking so long on their stupid and very short-sighted format war and now it's way too late.
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|My local library is now lending BR Discs! And with NetFlix and if I have to drive somewhere, I will go to the local $1 kiosk DVD Rental machine at Stop n Shop. Blockbuster isn't relevant anymore. If the economy wasn't so bad, they could linger probably a little longer, but now it's sink or swim.
http://afewtips.com
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|Hardly matters - the new era of trick-up poverty is going to kill Blu-ray anyway. Not going to convince enough people to spend thousands on a new player and another mountain of movies for better pixels.
The move from VHS to DVD was a 'no duh', but the BR bird just ain't gonna fly. BR buyers, enjoy the new betamax while it lasts. Streaming will be the next real revolution. Save your money the rest of you.
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|You go ahead and stream while comcast and other providers cap your bandwidth thus limiting the number of movies you can stream. Plus, streaming still has yet to reach 1080i at a decent rate. Full 1080P would take far more bandwidth than any of these services can stand to support for the forseeable future.
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|The answer to streaming caps?
Watch the cable and telco networks launch their OWN HD download sites exempt from the caps!
Duh!
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|I can't wait for Netflix to get a bigger catalog in their HD Instant Streaming catalog. I find it much more convenient to just browse Netflix and hitting play on my 360 controller. It's cheaper too at $8.99 for unlimited movies/shows and I don't have to drive to blockbuster to pay $5 to rent (I think, it's been years since I last went), or paying about $20 to $30 for new Blu-Rays. Yeah, I could rent them from Netflix, but they charge $1 more and I have to wait about 3 days to receive the disc.
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|(whats wrong with laserdiscs? ld players were better made anyway :)
Blockbuster killed Circuit City so not sure what side of the coin to look thru.
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|Nothing at all wrong with laserdiscs. They never gained significant market penetration beyond videophiles due to their cost.
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|Hmm....
http://en.wikipedia.org/...ile:LDDVDComparison.jpg
I wonder if that's the reason?
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|What is Blu-Ray? Reminds me of LaserDisc...
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|Unfortunately, until Blu Ray movies can be copied easily and duplicated like DVD's for 20 cents, it will never truly catch on.
People are so spoiled from being able to make copies of any movie or CD, they don't like being told a movie they bought can't be backed up or shared.
I only know one person besides myself who actually buys BD movies. I rent most of them from Netflix and only buy movies I really, really like.
p.s. I can't wait for Blockbuster to fold completely. The music stores tanked along time ago and the movie rental stores should only last another year or so. They sell obscenely overpriced candy and popcorn to help the bottom line. Screw these a******s.
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|which fanboys are you talking about? I know a ton of people who are buying Blu-ray.... Blu-ray is catching on if you like it or not. the only ones who don't like it are the ones who can't afford it. prices for both players and discs are coming down. Blu-ray is catching on everywhere in the world especially in Japan and Europe. Blockbuster pushing forward in Blu-ray is a smart move, every time I'm at my Blockbuster, new releases on Blu-ray are always checked out. I haven't bought the crappy DVDs for the longest time I can remember. Technology is always moving forward and I only see DVDs becoming like the VHS, digital d/ls catching on in 5 years or so which gives BD plenty of time to be mainstream...
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|Whatever you say, fanboy.
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|I'm speaking the truth. All you idiots out there can spread all the FUD you want about Blu-ray. If you can't tell much difference between DVD and Blu-ray, get your eyes check cause that's SIX times the resolution, a lot more then VHS to DVD. For those of you who think Blu-ray is still thousands of dollars and discs are at $40, you obviously have no clue about the technology. Go with your inferior version of the movies on Digital downloads or the crappy DVD quality. Blu-ray will only close the gap in sales with DVD. When The Dark Knight came out, 25% were Blu-ray sales, hmmmm so who was saying no one was buying Blu-ray???
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|lol no kidding he sounds more like a commercial than an opinionated person.
If Blorays going to save Blockbuster.. whos is going to save bloray.. let me guess Exon
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|Only thing your truely missing is music and perhaps some pictures and you'd be publically labled as either a Sony insider / sales person or an official Bloray commerical (only thing your missing is the blue box that says "because this is such a new technology [translated to] STUPID SUCKER go buy Laser disk not all features will work with all players]
Bloray's going to die all because of Sony's inability to provide a decent product at a affordable price.
Thanks anyways
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|You know "a ton of people who are buying BR"???
Gee, at 200lb each, that comes to 10 people.
You may indeed know ALL of the people buying BR!
After all, thats's about the number of Adam Sandler BR titles sold!
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|All Blockbuster needs now are hordes of folks who live and die to see the same 3 Adam Sandler movies over and over!
Like BR has a sufficient catalog of titles worth watching...
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|According to all the fanboys around here...no one is buying Blu-ray so I am suprised to see Blockbuster pushing them.
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|HD-DVD is on it's way back people. You wait. I still got my Xbox HD-DVD add-on plugged in.
All of you will tremble before the glory of HD-DVD!!!!! Muhahahahahaaaaa!!!!!!!!
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|lol
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|i think this is their only option it will cost them nothing to add (because Sony has already fronted the money for the in store displays and advertising)
They can see themselves that sales aren't even close to DvD (numbers support this) and being in a recession what other options do you think they could offer?
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|Read it and weep people. This is current news. HD-DVD may have changed slightly, but this new technology is based on the same initial format. CBHD. Warner is already onboard for now, and this is China only. But for how long?
http://arstechnica.com/m...ray-competitor-cbhd.ars
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