Blockbuster (NYSE:BBI)
trading at $7.09 as of 10/26/04
Make it a Blockbuster fright? No, I'm not asking you to drive over to your nearest video store and rent some horror flicks to get in the mood for Halloween. Shivers will race down your spine just the same if you peek into a crystal ball and look into the future of Blockbuster.
With DVD rentals by mail getting cheaper and more convenient, how will Blockbuster survive? Earlier this month Netflix (NASDAQ:NFLX) shocked investors -- while pleasing elated consumers -- when it announced that it would be lowering its monthly rate from $21.99 to $17.99 for its basic plan, which allows for subscribers to have three DVDs out at a time.
Shares of Netflix fell sharply on the news because no company enjoys a price war, but Blockbuster's stock was relatively spared when it was left with little choice but to go from $19.99 to $17.49 for its similar mail order plan. The fact that this was all triggered by Netflix hearing that Amazon.com (NASDAQ:AMZN) was eyeing an entry into the home-delivered DVD rental market should be a zinger in Blockbuster's ears a la "I see dead people" or "The calls are coming from inside your house."
But Blockbuster's got all those stores, you say? Let's see. Same-store sales were off by 7.3% during the first half of the year. That's on top of comps dipping in 2003 as well. And it's not as though people stopped renting DVDs. Netflix has seen its subscriber base grow by 73% over the past year. It's just that they aren't doing it at your local Blockbuster anymore.
Blockbuster is so unloved that even its parent disowned it. Viacom (NYSE:VIA) had once bought into the company because Blockbuster was a cash cow. But now that the milk has gone stale -- Blockbuster posted negative free cash flow through the first six months of the year, and Viacom has moved on to greener pastures, forcing Blockbuster into issuing a $5 a share dividend before letting it go. So not only is Blockbuster facing an emptier fan base but also it is doing so infected with $950 million in new debt that it had to take on in order to finance Viacom's ransom.
So let's get back to that crystal ball. You don't need to fling tarot cards to know that the future doesn't look pretty for Blockbuster. It's not just the fact that now Blockbuster is down to pitching the all-you-can-eat plans made popular by Netflix. That will hurt -- the typical store was at one point generating nearly $10,000 a month in late fees. No, it's that it's not going to get away with $5 rentals anymore. And for those who opt for the in-store unlimited plans, they will soon tire of the round-trip strip-mall treks when the free overnight mail delivery is so much more convenient. Remember the old "Wow, what a difference" Blockbuster slogan? Like Freddy Krueger, Jason, Chuckie, and Michael Myers, that old pitch is coming back with a mutilating vengeance.
I've looked into the future. It may not be black and white with red all over, but it's certainly not blue and gold.
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Longtime Fool contributor Rick Munarriz did take Blockbuster's new online service for a test spin and canceled it after the second month. The interface wasn't as intuitive as Netflix, and he never got around to using the four free in-store rental coupons. He does own shares in Netflix.
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