The video rental market isn't dead. It's not even sick.
Close-up hands to silhouette, crow!
Blockbuster (NYSE: BBI) just reported a fine quarter, returning to profitability and revenue growth after a mostly depressing 2007. Earnings per share came in at $0.18, much better than the 2006 holiday season's $0.04. Sales were up 3.6% year over year, adding more focus to in-store merchandise and the rapidly growing gaming market. Sounds healthy to me.
Blockbuster's turnaround efforts under new CEO Jim Keyes seem to be paying off. The company paid down 5% of its outstanding debt during the quarter (and 23% since last year) and generated positive free cash flow after posting negative cash flow last quarter. More importantly, there are customers in the stores these days, which wasn't always the case. So Blockbuster is doing all right, and it may not deserve its penny-stock status anymore.
The radio, the silver screen
Then there's the bigger picture of subscription-based movie rentals in general. Enter Netflix (Nasdaq: NFLX).
Blockbuster's attempt to throw its weight around with its aggressive Total Access program threw both services' subscriber growth trends out of whack last year. Blockbuster's own numbers were inflated for a while, then came back to earth; Netflix lost a few net customers while this was going on, but they came back; and the total market size became tough to predict. Some people, including fellow Fool Rick Munarriz, worried that the DVD-by-mail market had reached saturation, marking the end of growth as we know it.
So when Netflix raised its customer count outlook the other day, I posited that Blockbuster could lose nearly half a million subscribers before it shrank the market, in these decidedly less tumultuous rental-market times. Instead, Blockbuster held rock-steady at 3.1 million. The total market stands at 10.6 million film freaks like me, for 5% sequential growth.
What's the frequency, Kenneth?
That means that Wal-Mart (NYSE: WMT) can keep selling as many DVDs as it like -- people are still flocking to rental subscription services. Amazon's (Nasdaq: AMZN) Unbox and Apple's (Nasdaq: AAPL) revamped Apple TV gadget and iTunes movies aren't killing Netflix or Blockbuster. Video on demand may be the future, but Comcast (Nasdaq: CMCSA) just can't match the depth and breadth of the Blockbuster catalog, let alone Netflix.
Yes, consumers today have a plethora of entertainment choices, and all of these channels are competing for the same precious eyeballs and eardrums. (Did I mention YouTube? ABC, NBC, CBS, or Fox, anyone? How about satellite radio? Oh, and we still have movie theaters!) But they all have their own narrowly defined niches, and I think the American market is big enough to support this mangy melange of options. Success for Netflix doesn't necessarily mean the end of the road for Amazon Unbox, and so on.
And I feel fine!
In fact, I believe that Jim Keyes sees the market along those lines, too. That's why he's repositioning his company a bit, stepping away from the direct Netflix rivalry and creating a multi-channel convenience niche that is unique to Blockbuster. His 7-Eleven experience is starting to show, as the new Blockbuster is becoming more of a neighborhood retailer with a movie twist.
Keyes' goal is to make the company "a provider of convenient access to media entertainment across all platforms in store, by mail, and online," and drawing strength from the synergies among the three-part platform components. As a Netflix shareholder, I'm losing what used to be a direct threat; Blockbuster shareholders are gaining a unique market position with a target demographic that nobody else can claim. What Keyes is doing is good for the company and for the sector, and I'd buy both Netflix and Blockbuster these days.
Send the doctor home. Both of these patients are feeling great.
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