Blockbuster Won't Survive: CEO Says "Conservative Approach" Required For Digital

Eight months ago I wrote a post entitled "Ten Years Later, Blockbuster Still Lacks A Digital Media Strategy" where I outlined some of the ways that Blockbuster has faltered with their strategy for the digital distribution of movies. After the post, I heard from some angry shareholders who wanted to argue with me about how the company would turn it around and I received a call from Blockbuster directly who wanted to brief me on their digital media strategy.

While it was great to hear directly from the company on what digital initiatives they were working on and their pitch to me on why things would get better for the company, I'm afraid that eight months later, things have only gotten worse. While I don't doubt that some of the folks working on the digital media strategy at Blockbuster get it, if you just look at some of the things Blockbuster's CEO said last week on their earnings call, you can clearly see that the company simply doesn't have the right culture to be successful with digital.

When asked different questions about Blockbuster's digital strategy, CEO Jim Keyes responded by saying things like, "these times demand a conservative approach," and that the company "will proceed cautiously as to how aggressive the company should be." For a company that has almost no digital offering today, those are some pretty scary statements. The last thing Blockbuster can afford to do is stay at the same slow pace for a digital offering roll-out that they are at now. For all the talk of what Blockbuster is actively working on, I still don't think they have a single successful deal involving digital they can talk about today. Of course, some will say that they have already signed deals to get their platform on to TVs and mobile phones, but so far, those deals are meaningless.

Six months after making a big PR splash that Blockbuster's platform was now available on TiVo, Blockbuster only has a total of 26 HD movies available and just under 1,000 movies all together. To put that in perspective, Apple has more than 2,500 HD only movies available via iTunes. How can Blockbuster think they are going to make any traction in the market with a catalog of 26 HD movies on a platform that has less than 1.5M stand-alone subscribers? YouTube and Netflix content on the TiVo platform has to date only streamed a few million videos in total, or as TiVo put it "millions and millions of streams" - and that's content that is free.

Of course one of the major arguments I heard from some shareholders the last time I wrote about Blockbuster was that Blockbuster's big advantage is that the vast majority of their customers rent new releases. Apparently they felt I didn't "get it" since they seem to think that gives Blockbuster a huge advantage in the market. While they are right in that about 80% of Blockbuster's rentals are from new releases, show me one instance how that has helped them on the digital front? If Blockbuster has all these new releases, why are only 26 movies available in HD on TiVo? And for all the shareholders who think Blockbuster is going to be on fifteen or twenty million devices by the end of this year, that's just not realistic.

Another deal I hear some shareholders talk about is the one with T-Mobile where Blockbuster will be the exclusive movie download experience embedded on the upcoming HTC HD2 smartphone in the U.S. While that sounds nice, there are a couple of major problems keeping this from being a big deal. For starters, consumers have already shown us that they don't want to download full-length movies to their phones, let alone pay for that content. Not to mention, the movies will only be available to download on the phones via WiFi and from folks at T-Mobile I have spoken to, they hope to sell a "few million" HTC HD2 phones over the next eighteen months. That's not enough of an install base to make any real impact on Blockbuster's business. Oh, and I should also mention that in Blockbuster's PR release with T-Mobile the company said that, "This will be the first download and multi-screen mobile movie application for Blockbuster and is part of the Blockbuster multichannel offering to connect customers with more than 100,000 movies, television shows and games." Well if 100,000 is the number they are aiming for, they are currently at 1% with their movie inventory on TiVo.

Listening to Blockbuster's earnings call last week, you really get a good feel on just how confused they, or at least their CEO is. Additional answers to questions included statements like, "As for the competition, we’re not worried. The Blockbuster brand is so well-known. Netflix is much more longtail. We’re known for hit movies. So this is all very good to us." Other statements included, "Netflix has said that it is not interested in going into mobile. So we think we’ve got a nice head start in mobile." Why do companies seem to think they can be successful in every market just because they have a "well-known brand"? Having a well known brand in retail does not automatically carry over to digital. Not to mention, the company has one announced deal in the mobile space, for a phone that has not yet even been released, but they think that gives them a "head start"? And would someone please tell Blockbuster's CEO that it does not matter if you have a "well-known brand", it only matters if that brand is connected to a service or product that consumers feel is valuable. One could very easily use the example of Toyota, which has a very well-known brand, but not for a good reason.

In an interview on CBNC last Thursday, Blockbuster's CEO said, "we don't think we're late on the digital side" and he also made the comment that when it comes to digital, "there is very little actual traffic today." Apparently he missed the press release from Netflix and Microsoft from last year that said in the first three months of Netflix being on the Xbox platform, Netflix streamed 1.5 billion minutes worth of videos. That's not a number you can argue with. You have to shake your head wondering how or why Blockbuster's board would want the CEO speaking on digital when clearly he's not aware of what's going on in the market. Just watch the CNBC interview, listen to the direct questions asked and then listen to all of the fluff and marketing provided for answers. If Blockbuster does in fact have a real digital strategy like the CEO says, where is it? Has anyone seen them present it in public? Is there a slide that showcases what they are working on? I got some details from Blockbuster eight months ago when they were nice enough to walk me through it, but most of it was from a high-level with no real details other than to reinforce they want to be on as many devices as possible. Well isn't that everyone's digital media strategy? While no company is under any obligation to share their game plan with the market, for a company that has no creditability on Wall Street or the industry when it comes to a digital strategy, you'd think they would go out of their way to prove otherwise.

I didn't see it get a lot of press but it was interesting to see that last week, Blockbuster quietly brought back late fees on video rentals in their stores. While that may help their core business, it's not going to do anything to help their digital offering. I have a Blockbuster store 6 blocks from my house, yet I use the Redbox machine that is right across the street from them in the grocery store. If I wanted to use a Blockbuster Express machine, I'd have to drive about 15 miles away since Blockbuster won't put machines in any locations close to where they have a store. As a result, they leave me no choice but to use Redbox.

While I am not a shareholder in Blockbuster or any other public company, some of their shareholders sure are adamant about the stock. One of the funniest comments I got was from a shareholder who wanted to convince me that the brick and mortar stores would always do better than digital due to the "experience" it provides. He wrote, "many consumers still find it fun to rent DVDs at a physical store instead of getting movies in the mail because of the experience of walking into a store where there are lights and other videos to look at and the whole experience". Maybe that's true if you're a five year old, but if that's the biggest thing Blockbuster has going for their brick and mortar business, then don't be surprised when their lights go out sometime soon.

Comments

[Brian Lehmbeck]

I personally can not remember the last time I went to a physical store to rent a movie.

It must be years.

I am a Netflix customer and have not looked back.

[Arul Sundaram]

In general, I agree with most of your comments, but Blockbuster is willing to put their Blockbuster Express kiosks fairly close to their stores - at least in NYC. I have a Blockbuster store 2.5 blocks from me, but Blockbuster has put their kiosks in supermarkets (Gristedes) and drugstores (Duane Reade). That means that there is a Blockbuster Express directly across the street from me, and there's another two doors down from the physical store (and another 2 blocks from there). Their rent online to pick up at the kiosk program seems like a step in the right direction to me. None of these are revolutionary steps, and it's hard to see how they'll make money renting movies at less than $1 / day (factoring in the free rental coupons), but it's gotten my family to rent from Blockbuster 3 or 4 times already this year - and we hadn't been into a Blockbuster store in years.

[Dan Rayburn]

Hi Arul, well that's good to hear, wish they would put some machines near me. But whenever I look at their map of where the machines are, there is always a big void of all machines for a few mile radius of wherever their store is, here in Westchester County.

[Rob]

You forgot about Coinstar. Coinstar is killing Blockbuster from the bottom up. They pioneered the $1 kiosk rental and Blockbuster is only now responding.

I think you are correct Dan,their CEO doesn't have a clue (and probably their board too) and they are just too tentative and late to the game.

[David H]

Have you ever been to a reatil Blockbuster with teenagers or children? Everytime I go, we spend $4 on the video and $12 on candy. The DVDs are just a loss leader to push candy, soda, and popcorn.

[Mike]

Judging by that CNBC interview, they are pretty much dead :/

I used to be a member myself but ever since I switched to Netflix I have never looked back.

"Little actual traffic" statement is laughable. Yesterday me and my significant other watched a movie on our PS3 using Netflix streaming. My little girl constantly uses it to stream her Dora the Explorer and other cartoons.

There is a Blockbuster across the street but there is just no reason to go there anymore. Between Netflix mail, streaming on Netflix/Hulu/etc., and a Redbox at the nearby grocery store there is just not much a Blockbuster store can provide.

[Kien]

I am a shareholder of BBI and agree that the CEO needs to get his act together. I am EXTREMELY disappointed with the current and future direction and vision the company is taking. At this point I'll be happy just breaking even and getting out. I have better places to invest my hard earned money.

[Sathya]

Your comment on "consumers have already shown us that they don't want to download full-length movies to their phones"

are u refering to some survey done? if YES can u please point me to this.

[Dan Rayburn]

Hi Sathya, no need to do any kind of survey on that, just talk to the content creators and carriers like Sprint who have been offering this kind of service for quite some time. Off the record they will tell you there is no real adoption and they won't even give out any numbers on how many movies have been consumed as the numbers are so low.

[Scott C]

They are a strong brand in need of minor changes to thier dirtribution model. They will not turn out the lights soon. They however may find better suited business partners that help them align with the market. They are clearly undervalued...but keep up the hype. Your advertisisers love bashing any possible compitetion.

[Dan Rayburn]

Scott, can you please tell me which of my "advertisers" is competitive to Blockbuster? Netflix is not a sponsor of my blog, neither is Apple, or Cinema Now. So do you actually want to debate the facts at hand, or simply use a baseless excuse to dismiss what this post is actually saying?

[Dirk]

@rob. Nobody forgot about Coinstar.. Coinstar is Redbox.

[Drew]

Good insights, especially the parts about having a brand and thinking digitally moving forward. Thanks for sharing.

[Scott C]

1) You are implying that relationships like Tivo and the early release rights(programming acquisitions) do not give BlockBuster a strong brand? Wow!

2) You are implying that they will go out of business, no mention that they will partner up. Already in play.

3) Information Today does have existing business relationship with common interest companies. It will only take a day of investigating to produce that list.

4) The big piece that your article lack is the value of distribution channels and the value of brands.

5) They will:
A) Sell off the DVD subs for a good price.
B) Pay down debt.
C) Drop the crappy model for fixed buildings.
D) Leverage partnerships for existing and new pipelines.

6) These guys will morph and not fade out. Wait 9 months and revisit this post. I only agree that fixed stores are on the out. The rest seems baseless.

[Eric L]

Good post Dan.

I'm actually surprised BlockBuster is still around, I've been expecting the lights out for a few years now.

FYI: I have no shares in Blockbuster, Netflix, or any video distribution company. Just find it interesting to watch how some brands adapt, while others stick their heads in the sand.

[Julian]

Almost all blockbuster retail stores near me (East San Francisco Bay Area) have recently liquidated within the last 6 months or so, and it's easy to see why. From their complete lack of a digital/social media presence to the fact that the "experience" of going to rent a DVD in the store is actually a major disadvantage, it is obvious that this company is dead on arrival. Netflix is an awesome service of convenience and variety - i love the "experience" of ripping open that little red envelope to see what movie has arrived; their site's UI makes queueing all the newest releases to being timed perfectly to arrive a day or two after they are released completely hassle-free; and streaming Netflix via PS3 and now Wii means if I'm waiting for a movie in the mail, I can stream something in the mean time. Redbox has a niche in the immediacy of a new release - I don't have to wait for the mail to arrive, I just look online for any Redbox near me that has the title I want in stock. I just don't see what niche or role Blockbuster can possibly work to fulfill?

[yaya]

I won't be using BlockBuster anymore. I've done away with renting all together. I just purchase what I want. The experience that I had which led me to stop renting was when I returned 3 dvds due that day to my local BB. I got home to realize that I had forgotten another DVD that was due that day. So the next day when I checked it in at the counter to go ahead and pay for the late fee, the CSR at the counter said that she showed two other dvds still checked out accrueing late fees. I responded by letting the CSR know that we turned the others in on time the day before. The CSR looked and indeed found them on the shelf. So basically, the day before I turned in 3. 1 was checked in correctly and the other 2 had just been put back on the shelf without being checked in. They said that the problem had been resolved, and not to worry because "this kind of thing happens a lot." It was easily resolved because I was at that store that day. What about those people who only rent every once in a while. I think BB has a policy that after so many days of not paying a late charge they take it out of the credit card you've used with them. No wonder business is going down. Needless to say, if not accurately checking in a dvd or game in before placing it back on the shelf is commonplace for them, people will tire of it. I don't want anyone to be without a job, I just think that they need to up their accountability to the customers. Then things will be better.

[William Malmborg]

I do enjoy Blockbusters DVD by mail rental better than Netflix for one reason, and that is because I can exchange the DVDs I get in the mail with ones they have in the store, which is good when you want another title right away. Without the DVD by mail in store return option, however, I would never have a reason to go into the brick and mortar stores.

[Dan Rayburn]

@Scott C: You said, "Information Today does have existing business relationship with common interest companies. It will only take a day of investigating to produce that list."

Ok, I'm waiting to see that list from you.

You say, "The big piece that your article lack is the value of distribution channels and the value of brands." Here we go again with the "brands" argument. If they have such a strong brand, why is that doing nothing to impact their bottom line? Why aren't they doing better financially due to their "strong brand"? Brands alone are not enough to keep a company in business.

You tell me to "Wait 9 months and revisit this post." I will. But this is the same argument many Blockbuster shareholders told me either months ago when I wrote the first post. Every time I hear from them, they say "just wait another year".

[Christopher Levy]

@Dan: I disagree about the download model. Actually PPV Downloads are the only area of growth in our business. Yes the CARRIERS offerings sucked and nobody was buying from them as a result. Verizon, Sprint etc all made weak offerings. Actual Download sites however are expanding.

[Miguel]

Like you said, it comes down to being late and poor execution.

Hope you don't mind me adding my thoughts:

They're getting KILLED in real life AND online.

Netflix OWNS mail-order. I think we can all agree that they're doing that so well that Blockbuster won't ever come close to a dent in their mail-order. Anything they can gain here is a bonus. Netflix streaming is a different story.

Redbox has KILLED them in real life. Every RedBox I've ever seen has a line of 3+ people waiting. They could stand to have TWO RedBoxes at most locations in my area. Really, the vending machine idea was brilliant. It also proves that people still like renting DVDs. BB has the machines but they now need locations.

It's a tough spot to be in but it doesn't put them at certain death.

So, how can Blockbuster come back?

The Blockbuster Movie Stream.
--
A REAL online movie catalog. Netflix's catalog is still a joke. Do you want to watch, "Helvetica", or "Dirty Jobs"? That's all you get on Netflix streaming. Come on...

Streaming is it. It's the only area where BB still has a chance to compete. Maybe pickup BB.com or rebuild Blockbuster.com into a streaming destination and market it as such.

They need a good and current movie catalog though. It's the only way they'll draw viewers.

They company is riding on this. I hope they realize how important it is.

Easy Real Life Rentals
--
Reduce real life distro network to something like 1-2 man shops & vending machines. They're going to have to do something about the location issue since RedBox has practically cornered them. RedBox has proven that people will still rent.

It just has to be easy and not a BS "experience".

A Blockbuster Torrent Network?
--
Use readily available technology to distribute movies. Legitimize it. Pull P2P movie distribution out of the shady corners of the internet and own it. Use Torrents to sell movies. People WILL let you use their broadband to distribute movies.

They need to do SOMETHING. It's just not going to happen with midnight openings and betting the company on a new release advantage.

Why aren't investors calling for management's head? Are the people investing in BB just as delusional?

Miguel

[Nomo Blockbuster]

BB shareholders have no argument when all is said and done. The executives of the company, the same executives that ran 7-Eleven at one point, are now running Blockbuster right into the ground. Sell, already!

[J]

Have any of you heard about Family Video? They are one of Blockbusters lesser known competitors that are opening more stores then ever while Blockbuster and Movie Gallerys are closing. Same type of business but they know how to do it right. Their moto is "Customer Service is the priority" They really believe the customer is always right. Amazing deals too. Free kids movies, 1/2 price rentals for first 30 days as new member and that 1/2 price can be renewed. New Releases are under $3.00 and all other movies are only $1!!! AMAZING!!!!

[J]

As a bb member, I can't for the life of me get the Netflix
Euphoria. I tried it out for 2 months, and its a dismal service, no new releases, the streaming barely acceptable and of old movies you can see on cable or other free web services, and more expensive. It offers nothing bb doesn't, and charges xtra for blu ray. Lets compare.

both $8.99 unlimited, 1@ time,+ $3 BR surharge on netflix.
Both, 13.99 same cost again, + $4 charge for netflIx BR wit two at a time

Both 16.99 for 3@time, Bray charge on Netflix.
Meanwhile on BB I get 5 free store xchanges/mth, which I use to pick up new releases on Tuesday's (or immediately xchange a mailed movie I do not want to see that night) , if they're not forthcoming in the mail already, walk to store 1/2 mile and get some exercise to boot.

With Netflix wait a month for new releases, and play around with all the other outlets, redbox,etc., to fill in the holes, PLEASE, when the simplest and most effective solution is BB. .could they improve, well duh, but it is absurd that Netflix is heralded as God's video solution, when the actual better outlet is failing because of lack of knoedge, information and media overexposure.

Suggestions for BB:

1. $3.99/2 days new releases. $1/day thereafter.
2. $2.99/5 days, other movies up to 2 yrs old
3. $0.99/5days all others.
4. Same on VOD capability. Charge $3.99 for new releases, $1.99 for those up to two yrs and those older free streaming. Your customers will flock back and new ones will come. As of now, can't help but abandon ship.

Simplify.

[Greg Millen]

I think that Blockbuster does have a chance to make a come back. Their service is actually better than Netflix but it is not well promoted and people don't know about it. If they can continue to open Kiosk in locations then I think they will be in good shape. I stay in East Lansing(I'm a Spartan) and we have no blockbuster kiosk in the area. Either way if they come back or not Blockbuster stocks are under a dollar a share any body with $50 to loose should just invest, it's a no brainer. If Blockbuster makes a decent comeback and there stock rises you can make some good money for a small investment. I'm definitely going to buy some shares why not