The Tycoon Report

Blockbuster meets night of the zombies…

As part of its strategic overhaul, Blockbuster Video (SYM: BBI) has finally decided to eliminate the late fees it's been charging it's customers.

Is it time yet for investors to make it a Blockbuster night?

 YOU'VE RENTED THAT MOVIE BEFORE.

The one where that possee of Zombies lumber across the football field, slowly swaying from left to right. Gargling, "Brains...brains...brains...", the zombies first suprise the innocent couple making out under the bleachers. Then they make their way to the shopping mall, where they're confronted by an astute security guard who manages to get most of the screaming customers into the mall before slamming the glass doors shut.

As the attractive blond woman tends to that weird "bite mark" on the security guards neck, the customers watch horifically as the zombies repeatedly and methodically ram their heads into the glass, trying to break it.

It must be hard to be among the Walking Dead - not quite dead, not quite alive...mumbling thorugh life trying to satisfy some undying thirst (No hidden meanings here you Freudians) But investors don't need to watch a movie to be scared away by the Walking Dead.

One must look no further than Blockbuster (NYSE: BBI) to find Wall Street's version of the same. Instead of "brains" though, Blockbuster wants "money" - your money. As a consumer you may or may not have a problem giving it to them. I know I won't. I could care less that they announced that they were dropping late fees this week. Way too little, way too late.

They lost me permanently two years ago after killing me on late fees for years that I know I didn't owe them. You know how their drop box "system" works. You drop a movie into the box Monday morning before you rush to work - well before the 12 o'clock deadline. Although the movie is in their system on-time, the pimply-faced manager doesn't scan it into the system until 2 p.m. (technically the "next-day").

Your loved one returns that Friday to rent another movie and is hit with late fees because it wasn't in the box in-time. She pays it withought thinking and just assumes I'm losing my marbles. (Believe me folks they've done research on this dynamic. At one point I got so paranoid that every time I dropped a movie into the box I could have sworn that I saw Sumner Redstones hand pushing it back). But that's a story for later.

Anyway, I moved to smaller and better things, such as Netflix (NNM: NFLX). 20,000 movies. No late fees. As easy to use as Amazon (SYM:AMZN). What do the paranoid rantings of an ex-Blockbuster junkie have to do with whether or not you should buy Blockbuster stock? Plenty.

After getting tossed to the curb by Viacom (SYM: VIA) earlier this year, Blockbuster began major strategic overhaul. While I wrote about this at length in our October issue of the Tycoon Report as a case study, here's a summation:

1. Instead of just renting videos theyir going to convert their stores into “stores-within-stores for video gamers and DVD buyers, traders and resellers.”

2. Expand by making a major purchase, such as the proposed (and likely) acquisition of Hollywood Video

3.And, as I mentioned before, they announced this week that they were cutting back their late fees (which accounted for $300 million of their $350 million in operating income this year - do you need more proof of a conspiracy?)

All of these clever moves, while admirable, hide one simple fact. That Blockbuster, no matter how hard it tries, still sells "Buggy Whips" (video rentals). And company's like Comcast (NNM: CMCSK), which was featured in the September issue of the Tycoon Report, sell "automobiles" (digital cable). And when the automobile was introduced Buggy Whip companies didn't last too long. Sure, many of them tried to compete. Some began to sell bicycles, others tried their hand at motorcycles.

In that context, it appears to me that what Blockbuster is trying to do strategically, is akin to a Buggy Whip company trying to create bicycles after Ford began selling cars. Sure, it might work for a little while. Heck, the stock may even "run" from single digits to low double digits occasionally. But, if you are like me, and you get the occasional call from that hard working stockbroker who wants to take Blockbuster for a spin with your money do what I do:

First - find an astute security guard and a gorgeous blond.

Second - begin to run as far and as fast as you can until you get to the next shopping mall.

Third - lock the doors, buy some popcorn from Blockbuster, and watch the Zombies pound their heads against the glass.

Remember, open minds mean larger wallets.