Blockbuster Goes for Netflix's Jugular

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Bankruptcy reorganization or not, Blockbuster is still in it to win it.

If you've been watching commercial television lately, there's a better than fair chance that you've seen Blockbuster's "why wait" attack ad. In the spot, a family is told that their flight has been delayed by 28 days. A couple at a restaurant and a kid at the orthodontist's office are told of similar waits.

"You'd never wait that long, so why wait 28 days for new releases," the announcer says.

The ad is a shot at Netflix (Nasdaq: NFLX  ) and Coinstar (Nasdaq: CSTR  ) , who have struck deals with most of the major studios. In exchange for cheaper DVDs, Netflix and Coinstar's Redbox have agreed to hold back from offering new releases during their first four weeks on the DVD market.

This is a huge opportunity for Blockbuster -- and it's not going to let it go.

The reawakening of Blockbuster
The "why wait" spot has been out since this summer, but it seems as if Blockbuster has been ramping up its marketing budget to get the commercial noticed in recent days.

Is it a coincidence that I've been noticing the ads frequently since Netflix's announcement last week of its first rate hike since 2004? I don't think so. Blockbuster has done a lot of dumb things over the years, but dumb luck isn't its strong suit.

Netflix is vulnerable. Redbox is vulnerable. They just don't know it, because their shares recently hit all-time highs.

A year ago, Blockbuster didn't stand a chance. Its storefront could never match the low overhead of a Redbox kiosk, so it turned to NCR (NYSE: NCR  ) to roll out licensed Blockbuster Express machines to match Redbox's dollar rentals. It was once a serious threat to Netflix's mail-based disc deliveries, but its cash-strapped balance sheet failed to give it the pricing flexibility necessary to effectively compete.

General Motors (NYSE: GM  ) and Six Flags (NYSE: SIX  ) have emerged from bankruptcy this year, with strong enough balance sheets to finally dream out loud. Is Blockbuster the next broken company to get a redemptive shot?

The timing is perfect
If you want to see Knight and Day, Going the Distance, or Vampires Suck today, there's a good chance that a copy is available at a Blockbuster near you. If not, you stream all three of them on-demand through Blockbuster. You'll have to wait until after Christmas to squeeze a DVD out of Netflix -- and who knows how many years after that it will take for a couch potato to stream a digital copy through Netflix.

Netflix always proposed a value-priced smorgasbord, but its rates will be climbing by as much as 18% come January. I'm a longtime Netflix shareholder and subscriber, and I think investors are naive if they don't think this will have an impact on the company's churn early next year.

A third of its subscribers aren't streaming at all, so they may be the first to question the hike -- especially since Netflix caving to the studios was supposed to be about lowering costs.

11 months ago
Netflix struck its first studio deal with Time Warner (NYSE: TWX  ) back in January. It was supposed to be a win-win-win deal.

  • Time Warner would win because 75% of its DVD sales take place during a release's first four weeks on the market. Keeping titles out of dirt cheap Redbox and Netflix services would encourage purchases of full-priced on-demand rentals.
  • Netflix would benefit from reduced costs, and Time Warner would be providing a greater number of discs.
  • Subscribers would benefit from greater availability, despite having to wait four weeks when the flick had already slipped from the best-seller and most rented lists.

The deals are probably still working for Time Warner and Netflix, but what about the 16.9 million subscribers? I don't know if it's just me, but I'm still staring at long waits for newer releases in my queue -- and that's after the rest of the country has had four weeks to check them out. Instead of passing on the cost savings, Netflix is increasing its rates a year after the Time Warner deal was inked.

Sure, Netflix has invested some of those DVD cost savings into streaming content deals, but how does that help the nearly 6 million accounts that don't seem to care about streaming?

Blockbuster knows that there will be a lot of Netflix subscribers either canceling the service or trading down to cheaper plans with fewer discs -- and turning to other options to help satisfy the void of new releases.

Netflix and Coinstar are soaring right now, but Blockbuster is finally parking itself on the landing strip -- where it should have been all along.

Does Blockbuster stand a chance against Netflix and Redbox? Share your thoughts in the comment box below.

Netflix is a Motley Fool Stock Advisor choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. 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 (11) | Recommend This Article (7)

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 December 02, 2010, at 11:00 AM, eFlatfooted wrote:

    This is could possibly bring NFLX's share price down to a level I can get back in on, as the subscription price wars kick in again, churn increases, and the share price stumbles.

    Then, I buy in and watch as NFLX management again rights the ship and the share price turns northeast again.

  • Report this Comment On December 02, 2010, at 11:19 AM, BioBat wrote:

    If Blockbuster concedes that the brick and mortar business is all but dead, and starts closing up most stores, then they can be a real competitor to Netflix. Until then, the physical stores will be a drain on their mail order and VOD services, which are far more profitable and more direct competition.

  • Report this Comment On December 02, 2010, at 1:05 PM, TMFSymington wrote:

    The first thing I think when I'm asked by those commercials "Why wait 28 days?": Because I'm not that desperate to see newly-released movies immediately. Additionally, Netflix has more online content availble (and of interest) to me than I can watch in an entire year. In between my "shipped" Netflix movies, I have more than enough to keep me busy. Occasionally I'll fork out a buck to pick up a movie at my nearest Redbox, but Blockbuster NEVER pops into my head as an option anymore (and I'm sure I'm not alone).

    In short, I'm afraid Blockbuster will continue to go nowhere. Netflix and Redbox beat them to the punch, and their established paths are too strong for BBI to do anything about it at this point.

    RIP, BBI. Bankruptcy won't revive you.

  • Report this Comment On December 02, 2010, at 1:57 PM, MrArbitrage wrote:

    I agree. I have been watching The Waltons for the past 2 years and I must be cutting edge, ahead of the curve because suddenly it appears there has been a run on The Waltons because as of the past month - for the FIRST TIME ever - I'm continually seeing "WAIT" next to my que. A WAIT on The friggin Waltons!

  • Report this Comment On December 02, 2010, at 6:44 PM, Sorni wrote:

    I'm both a customer and former shareholder of Blockbuster, and even though the shares completely tanked I still am rooting for the company.

    The in-store exchanges work great for me, as a large store is literally blocks away from my home. For roughly 13 bucks a month I get a ton of movies, and when they screw up (glitches still in the shipping process) they've finally stopped being argumentative and offer to resolve it with an e-coupon without having to yell and/or beg.

    I for one hope the stores remain in existence and they find a way to turn a profit; it would be a shame to see 'em go...

  • Report this Comment On December 03, 2010, at 1:05 AM, tyranus wrote:

    Blockbuster cheated me on late fees for video rentals years ago and I will never forget it. I wouldn't use their service if it was free and the only one available.

  • Report this Comment On December 03, 2010, at 3:50 AM, Panurge wrote:

    Initially(spelled correctly), I was with the block. Then they raised the price, and I said NO. Netflix gave a better price, so I went with them. They have been beery, beery good to ME. Plus I don't have to walk 1.5 miles to return the DVD. I just hand it to my mailperson for return. This eases my wear and tear on the old BODY!!! Anyway I'm pleased with them. That can always change of course.Plus, If I so choose, I can watch many movies or etc. within moments. Hey I can live with that!!!!

  • Report this Comment On December 03, 2010, at 11:49 AM, grands138 wrote:

    In the world of video rentals, Redbox is God! There's just no comparison. You can check availability and reserve online, and you have until 9:00 p.m. the following night to pick up the movie. There are a dozen plus locations nearby where I can rent from, and I can return to any location. One dollar rentals for standard DVDs and a dollar-fifty for Blu-Ray. While you may have to wait up to four weeks for some new releases to be available, the fact is, you get used to the delayed schedule. If there's one thing this economy has taught all of us, it's patience. The biggest problem that the rental industry faces is the fact that the films themselves just aren't exactly what they used to be. The availability of good movies is limited. And when a good movie comes out, why spend the money renting it, when it makes more sense to buy it if I'm going to watch it repeatedly?

  • Report this Comment On December 03, 2010, at 3:09 PM, Skypoint wrote:

    It's about time Netflix has a little real competition. I just received an email stating that NF will be going up almost 17% on my 4 dvd plan. This in the middle of the worst recession since the depression, and especially after cutting a deal to pay less less for movies in exchange for a 28 day wait? The Netflix customer has lost all the way around.

  • Report this Comment On December 03, 2010, at 4:43 PM, gltya wrote:

    There are 2 type of people as far as the service industry cares for...there are the savers, like to save money.And the other is for convenience, they don't care how much they spend long as its convenient. You have Netflix, caters to savers, pay less and get more movies. Then there's Blockbuster, for the convenience people who will not wait for released later date movies and will pay more. Both companies must exist, unless a company out there can provide, cost savings to ( the saving customer) and recently released movies (the convenience customer). That will never happen because the bottom line, it just wouldn't be profitable. :p

  • Report this Comment On January 14, 2011, at 2:41 PM, tamas88 wrote:

    I have 25 movies in my queue at Blockbuster. None of them are available. All of them have either "short wait" or "long wait" or "very long wait." The ones with status of "short wait" have held at that status for two months now. Therefore, I'm not receiving any movies, though I'm paying for them. I've had netflix for several years. I joined blockbuster when they started to promise the DVDs 28 days before netflix. Well, Blockbuster may release them earlier than Netflix, but you'll never get them from Blockbuster. Even with Blockbuster SAYING they have the movies 28 days earlier, you're STILL likely to get the New Releases earlier from Netflix. At least, that's my experience.

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