The Tycoon Report

Is Blockbuster Dead?

Wednesday, January 31, 2007 | Wayne Mulligan

Is Blockbuster (NYSE: BBI) dead?  A very good question that has been posed in tech and media circles for quite some time – or as long as Netflix (Nasdaq: NFLX) has been around, at least.

When Netflix first hit the scene, Blockbuster was dismissive, like most sector leaders are when a new technology comes along.  Some might argue that companies have to be a bit skeptical.  I mean, if they took every competitive threat too seriously, they’d change business strategies like I change my clothes.

But in my opinion, Blockbuster should’ve seen the writing on the wall with Netflix.

- Online library of videos.
- No late fees.
- Delivered to your home, and you can return it whenever.

I don’t know about you, but when a service becomes more convenient and less costly, it’s enough to make a lot of folks jump ship.  And that’s precisely what happened to Blockbuster.

OK, so it took the company a little longer than it should’ve to catch on – but when it finally did, Blockbuster went ahead and started to make some serious changes.

First, the company eliminated late fees.

Then, it started to offer a service identical to Netflix.

And most recently, the company got really smart and began using its network of retail stores to make its service even more convenient.  Now we can rent a movie online and return it at any local retail location and rent another movie right on the spot.

Not bad, not bad at all.

It’s certainly made a dent in Netflix’s business, as the company noted a slight drop in business and an increase in customer churn.

Netflix responded by kicking off an online video initiative that allows customers to download videos online and watch them on their home computers.  Combine this with a device like the Apple (Nasdaq: AAPL) iTV, and it’s a pretty compelling service, assuming the picture quality is good enough.

Now, it wouldn’t be too difficult for Blockbuster to follow suit and do the same thing, but I don’t think it would help much.

In fact, unlike the other times throughout Blockbuster’s history, now is the point at which Blockbuster will either completely reinvent itself or go out of business within the next five years.

Want to know why?

Well, the answer is likely staring at you right in the face.

Since I live in New York, I’m a Time Warner Cable (NYSE: TWX) subscriber.  And just this last weekend, I was laying in bed, a little under the weather, and was sick and tired of watching the limited collection of DVD’s I own.

So I had the option of downloading a movie from Netflix, downloading a movie from Apple or hiking to the video store in 10 degree weather while I was already feeling sick…not appealing at all!

Then I tuned into Channel 1000 – those of us who live in New York know that Channel 1000 is Time Warner’s Video on Demand (VOD) service.

Instead of being forced to sit at my computer and watch a grainy and sometimes jumpy movie, I got to stay in my warm bed, press a few buttons on my remote control, and watch some of the most recent movies out there.

I didn’t have to drop my DVD in a mailbox when I was done.  I didn’t have to pay any late fees or walk over to the local Blockbuster to return my video.

I simply sat back, relaxed, and enjoyed my movie.

So here we are again:  a service has just been made cheaper and much more convenient than it was before – this is what’s known as a “disruptive technology” and usually causes an industry to get turned on its head.

The only weakness in the VOD market is the limited size of the video libraries, but this can and will be easily overcome in the future.

I’m just picturing the day when I can pull up Episode #53 of the Honeymooners without ever leaving my apartment or scouring the internet for a useable version – and believe me when I say we’re not too far off from realizing this vision, either!

So, if I were looking to make a play in this field, then set-top box providers like Scientific Atlanta (acquired by Cisco (Nasdaq: CSCO) last year) and the big cable operators like Time Warner might be the way to go.

In any case, my money certainly wouldn’t be on Blockbuster…and Netflix isn’t looking too appealing here, either.  These are companies that were innovative for their times, but it’s looking like their time is just about up!




Wayne Mulligan
Contributing Editor
The Tycoon Report