BB Liquidating Inc. (BLIAQ)

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Bankruptcy On-Demand
Blockbuster keeps reinventing itself, but it’s too late.

Blockbuster (BBI) is on its last legs. After moving billions upon billions of dollars through its registers, shepherding the transition from VHS to DVD and DVD to Blu-Ray and watching Netflix (NFLX) and Redbox invent new ways to rent movies, it stands on the brink. Last month, it warned the SEC that it could declare bankruptcy anytime (a threat that has since ebbed slightly), it plans to close more than 500 stores this year, and it’s in danger of getting delisted from the New York Stock Exchange. After 25 years, it appears people just don’t want to go see a Blockbuster anymore.

But when I told Kevin Lewis that I was worried about whether Blockbuster could survive, his face contorted. Lewis is Blockbuster’s senior vice-president of digital entertainment, and he is a man who believes in his employer. A few weeks ago, I met with him and two other guys in charge of Blockbuster’s digital strategy at the company’s loft office space in downtown Manhattan. It’s meant to be the headquarters for the digital team—the group of staffers who carry the weight of Blockbuster’s future. On the day I visited, none of the staffers were in the office. I suppressed the urge to see a metaphor where there wasn’t one. (They were all traveling.)

Blockbuster, I was told over and over again, is poised for a comeback. Its brand is more established than any other. It’s the only company that can offer movies in stores, in kiosks, online, and by mail. Most importantly, just because more and more Americans watch movies online—whether it be through Web-connected computers, Blu-Ray players, or DVRs—doesn’t mean they want to stop watching the newest movies. Netflix and Redbox can’t provide those when they first come out. Blockbuster is proud that it can—so proud that this is the first thing you see on its homepage:

The company’s final, last-gasp strategy to regain its swagger and prepare for the future is to harp on this fact over and over again. Lewis would not stop mentioning the “multichannel consumer”—the ideal people who “are in stores, they're renting digitally, they're going to kiosks, they're buying VOD, they're going to theaters. They’re entertainment omnivores…We’re the only company that spans all…of those (channels).” And these omnivores want their movies as soon as they can. According to Lewis, 70 percent of new rentals happen in their first 30 days of release.

When you combine all this, the motto is essentially that Blockbuster is the only place that can get you what you want, when you want it, how you want it. Taken as a whole, that’s true. But when you break down the motto to its three parts—what you want, when you want, how you want—things get far more muddled, and for Blockbuster, far more dire.

In Blockbuster’s view, it can survive because of the chart below. It shows last year’s top-10 grossing movies that are available digitally. Lewis bragged that all of them are on Blockbuster; none are on Netflix. It’s an especially important detail, as more than half of Netflix subscribers are now streaming movies. At my request, Blockbuster’s PR rep sent the chart over:

Netflix can’t stream those movies online because the studios won’t let them. Compared with Blockbuster’s well-stocked shelves, Netflix’s digital library is like a food pantry that contains only peanut butter and jelly. Netflix has made deals with several studios that give them a larger digital catalog, but it also forces them to wait 28 days to start sending them to customers the old-fashioned way: on disc. Similarly, Redbox, the king of kiosks, is being forced to delay the release of movies as a peace offering to the studios.

On this issue, Blockbuster is right; it’s far better digitally than Netflix. Blockbuster can offer digital downloads because it asks customers to pay for digital movies the same way they rent DVDs—a la carte. (The studios prefer this to Netflix’s come-one, come-all digital strategy.) Renting a movie on Blockbuster runs $4.

Of course, they’re not the only company that can do that. Steve Jobs long ago realized Blockbuster was on the ropes and decided to provide an alternative. So let’s amend that chart.

Nearly all are on iTunes. But that’s not the whole picture, either. If digital downloads are to be a success, they’re going to be watched on an actual TV, not on the computer screen. Netflix knows this, which is why it’s putting its Watch Instantly service on every Blu-Ray, TiVo, and game console known to man. Blockbuster is trying to do the same. By the end of the year it claims it’ll be on nearly every brand of Web-enabled TV and Blu-Ray device sold. Of course, once these services migrate off the computer and on to the TV, they’re contending with a new force: on-demand. Cable providers have steadily added to their pay-per-view offerings. I’m trotting the chart back out, this time with a new Comcast On-Demand column added.

So Blockbuster and Comcast On-Demand are identical for at least this small sample. Blockbuster’s strategy is to double-down on these new releases because Netflix and RedBox don’t have them. But if cable providers do, that invalidates Blockbuster’s claim on the space. It’s correct that Netflix and Redbox have been Blockbuster’s greatest enemies over the last few years. But moving forward, it’s a different kind of netbox that will eventually beat Blockbuster’s: the cable box.

The last piece of Blockbuster’s motto left standing is its assertion that it’s the premiere place you can get these films when you want them. On-Demand will soon make that moot, as well. The film industry has finally wised up and realized it doesn’t need middlemen like Blockbuster anymore. It can use the cable operators instead. Last month, the New York Times reported that studios were collectively marketing on-demand cable as the best way to get their content. They’re tossing $30 million at it, mainly because they get 65 cents from every dollar spent on on-demand, compared with roughly 25 cents at Blockbuster. As of now, not all movies get released via on-demand at the same time they’re released on Blockbuster. But Comcast told me it has more movies on-demand this year than ever before, and it’s getting them sooner than it had in the past. Several of the on-demand movies from the previous chart were on-demand the same day they were available for rental at Blockbuster. Given the 65-cents versus 25-cents economics, one would figure that trend will only hold.

To be fair, Blockbuster’s big strategy isn’t just that it offers the movies you want, where you want them, when you want them. It’s that they’re the only place that can deliver all three at the same time. True enough. Blockbuster is readying a massive database of where all of its movies are available. This way if you want to rent, say, GoodFellas, and it’s not available online, the database will tell you it’s down the street at a retail location or available through Blockbuster’s Netflix-like DVD-by-mail service. It’s the integrated service for the Blockbuster diehard.

But in an age of iPads, Boxees, and Netflixes, how many Blockbuster diehards can there be? This is the age of gadget diversity. We don’t need or want one megalith to handle all our video needs. (Only Apple [AAPL] has managed to create the kind of cultish walled-garden that Blockbuster daydreams about.) And even for the less tech-inclined—if a video is available on their cable box, why go outside and get it from a retail store? Or even from the Blu-Ray player that has Blockbuster DVDs. When I was at Blockbuster’s digital office, their crew told me how pleased they were to be the first thing people see when they boot up a Samsung Blu-Ray player. But compared with cable on-demand, that Blu-Ray player is still a secondary option. That means Blockbuster is, too.

That leaves Blockbuster’s brick-and-mortar retail business as its one unique characteristic. Of course, brick-and-mortar is what got Blockbuster into this mess in the first place. The same social trends that forced Blockbuster to shutter those stores don’t look like they’re ebbing any time soon. Back-catalog movies are still available through RedBox and Netflix for far less than Blockbuster sells them for in stores. Broadband is becoming more and more prevalent in the country every day, allowing more people to download videos and skip the drive to the strip mall. Blockbuster isn’t just running out of time and money. It’s running out of customers. Unfortunately, those aren’t available on demand.

Source: http://www.thebigmoney.com/blogs/hulucination/2010/04/28/bankruptcy-demand?page=full