Blockbuster Stinks Outside the Box

You don't need to rent a copy of Terminator at your local Blockbuster (NYSE: BBI  ) to know that the automatons are taking over.

In fact, you may not even have the luxury of a face-to-face rental if Blockbuster closes your neighborhood store, replacing it with one of thousands of new automated rental kiosks.

Blockbuster has seen the future, and it's all about fewer stores and more Redbox-esque machines.

In an SEC filing, Blockbuster concedes that it plans to close between 810 and 960 stores between now and the end of next year. There are another 275-300 locations in the process of lease mitigations or termination efforts, and they, too, may be shuttered.

A humbling retreat? Not so fast. Roughly 35% of Blockbuster's stores contribute 80% of the chain's EBITDA (approximately operating income plus depreciation), so those top-performing locations likely won't go the way of their slacker peers.

Blockbuster also has Coinstar's (Nasdaq: CSTR  ) Redbox in its crosshairs. The DVD rental giant may have fewer than 500 kiosks out in the wild right now, but it expects to have a fleet of roughly 10,000 machines by this time next year. Redbox, meet your blue box rival.

Blockbuster's move may seem like a no-brainer, but it's trickier than you think. Blockbuster can't compete with Redbox unless it matches the $1 nightly rentals. But doing so may disrupt the value proposition of conventional in-store rentals.

Kiosks will also generate a growing pool of tired titles to dump out of its machines, but Blockbuster may have a plan for that. Its blueprint for survival calls for converting as many as 300 other stores into outlet locations, just in case you have hankering for a used copy of the third installments in the Mummy or Matrix series.

Blockbuster also plans to grow its Total Access business, but Netflix (Nasdaq: NFLX  ) hardly needs to worry. Blockbuster claims to be profitable in this segment, with 1.6 million Total Access subscribers. However, it wants to be both "highly profitable" and have a "growing subscriber base." In the past, these goals have been mutually exclusive for Total Access. It grew only when it was slashing rates and liberally dispensing flicks and games. Unless "buy Netflix" is part of the strategy, expectations appear high here.

Blockbuster's final strategy involves broadening its digital distribution. This is a toughie. Selling flicks via cyberspace pits Blockbuster against the cooler Apple (Nasdaq: AAPL  ) and the more e-proficient Amazon.com (Nasdaq: AMZN  ) . It also has to compete with cable companies including Comcast (Nasdaq: CMCSA  ) and Time Warner Cable (NYSE: TWC  ) , which already have their pay-per-view boxes and customer billing information in place.

The future won't get any easier for Blockbuster. For creditors' sake, let's hope Blockbuster means it when it borrows a quote from Schwarzenegger, and promises it'll be back.

Can Blockbuster be saved? Share your thoughts and ideas in the comment box below.

Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz was an early Blockbuster subscriber, but hasn't been in a store in ages. He owns shares in Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2009, at 3:17 AM, GenChaos wrote:

    Blockbuster goes up against Netflix, they lose. Now they are going up against yet another iconic company flying red colors....somehow I think they are going to lose again. Every time I talk to a Redbox users they are in love with the company, much the same way as Netflix subscribers were/are. I have a gut feeling Blockbuster's gonna miss out again. They need to be the innovator for a change, not the follower.

  • Report this Comment On September 18, 2009, at 11:52 PM, eric0871 wrote:

    Blockbuster goes up against Netflix, they win. Blockbuster's revenue is over $5 billion, Netflix is just over $1 Billion. Blockbuster has superior kiosks to those used by Coinstar. Blockbuster will have stores that specialize in the selling of used DVD's. Netflix just started a fight with the movie studios that they will lose. Netflix couldn't get rights for the movies they wanted to stream over the internet so they found a loophole and made a deal with Starz. Now the studios are losing money because many more people will watch the same movies with no new revenue for them.

    You can go and buy stock in Netflix and Coinstar, all my money is on Blockbuster.

  • Report this Comment On September 21, 2009, at 2:02 PM, gregorypierce wrote:

    I'm actually surprised that anyone would be betting all their money on Blockbuster except for someone that actually works for the company.

    Lets look at some simple facts. Blockbuster recently came out and warned about its ability to continue as a going concern. It has been consistently trying to gain access to cash in order to fund operations. The company recently had to borrow $675 million dollars via notes to stay afloat all at 11.75% interest rate - worse than many consumers. Not only is the company's stock rated as junk, but the company also has $911.80 million dollars in debt on its balance sheet and only $99 million in cash. With a return on equity of -86.5% you're better off smoking your money than expecting any reasonable gain from the company since its profit margin is -8% and the operating margin is a paltry 3.24%.

    Meanwhile they are going up against Netflix with 38M in debt and 254.97 million in cash assets and 3 times the operating margin (10.73%) and 27.43% return on equity. Netflix is both a better run company and a better investment overall as evident in its 48.4% increase in its stock value over the past 52 weeks.

    The only thing Blockbuster seems capable of doing is making press releases that never actually turn into revenue generating items.

  • Report this Comment On November 17, 2009, at 12:28 PM, CaptainOzone wrote:

    The Blue Box, called Blockbuster Express, are now showing up in the local area in and around Lufkin, TX. A co-worker was regional manager for local stores and he said that the kiosks are a bold-face violation of the non-compete clause the franchisees have with Blockbuster. The machines are not affiliated with the local outlet.

    I wonder (and he does, too), what will happen when someone drops a machine-rented movie into the night slot at the store.

  • Report this Comment On July 13, 2011, at 10:38 AM, jscott0117 wrote:

    I love the new Blue Box!! It is a great alternative to the ever so popular Red Box where there is always a wait. I think they need to put a Blue Box beside every RedBox. !!

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