Some dinosaurs never learn.
During Sunday's Super Bowl, Blockbuster (NYSE:BBI) began advertising a new wrinkle in its online DVD-rental service. Members who used to receive two free in-store rentals as part of their online subscription will now be able to get four weekly in-store rentals instead.
It probably won't work. In fact, it may do more harm than good.
It's easy to see, of course, why Blockbuster is crowing about this latest move. The movie-rental chain thinks the strategy will help increase foot traffic to its stores. Not only has Blockbuster doubled the amount of freebie vouchers, but it's also added a touch of urgency: Instead of lasting all month long, each of the four coupons can be redeemed only during an indicated week.
Rewinding the disconnect
Somewhere out there, in the Blockbuster dream lab of a boardroom, the prevailing notion may be that online subscribers will now be driving over weekly to turn in their e-coupons, load up on overpriced popcorn and candy, and do the chain a favor by cleaning out the bin of marked-down, previously viewed DVDs.
However, the plan fails on many different levels.
For starters, I know that when I was a Blockbuster online subscriber for a couple of months, I never used the free in-store coupons. I never even bothered to print them out. And I couldn't have been the only one. It's easy to get spoiled by the convenience of online disc delivery. I imagine that the carryout pizza business just hasn't been the same since the pizza joints started hiring delivery drivers.
More importantly, those who do take Blockbuster up on the coupons have had their perceived value whacked around a bit. If you pay Blockbuster as little as $9.99 a month for its rudimentary one-out plan, you get four weekly movie rental coupons. Walk into a store, and do the math. Even if you are allergic to your mailbox, the value of the coupons would be worth no more than $2.50. So it's doubtful whether you'd shell out more money (almost double the amount of your coupon) to rent a second DVD. And if you belong to an online disc-delivery service, you aren't likely to have much of an interest in owning old discs or shopping for snacks.
Then you have the traditional Blockbuster members sensing that they're getting ripped off when they walk into a store to see the online subscribers getting rewarded. They, too, work the math. In a logical world, they storm out, join the online service, and line up for the weekly freebie -- thus creating a chain of 9,000 worldwide stores doing nothing more than giving away corporate-subsidized rentals.
It won't work. It can't work.
Blockbuster has spent the past few months relaxing its debt covenants, posting horrendous quarters, and coping with a boardroom shakeup that has only further debilitated the share price. If there is a happy ending, I just don't see it.
Yes, I am a Netflix (NASDAQ:NFLX) shareholder with every reason to see my own investment thrive at Blockbuster's expense, but Blockbuster makes that just too easy. It has failed to master the delicate balance between online and offline renters. If anything, the upside-down value propositions that favor the online-rental offerings have simply educated the consumers about the convenience of renting from home.
Writing checks over the balances
Blockbuster has become the Messy Marvin who just can't seem to get anything right. Even when its heart is in the right place, its brain is somewhere else. From the poorly communicated "no late fees" discrepancies to upsetting franchisees with the online focus, Blockbuster hasn't hurt just its own offline business, it's also harmed the competition's. Movie Gallery (NASDAQ:MOVI) has joined Blockbuster as one of the two companies where a share of stock can be exchanged for a single movie rental.
Makeovers aren't easy. One can argue that Blockbuster and Movie Gallery may be better served by following Hastings (NASDAQ:HAST) into a model that puts more retail and entertainment into the rental mix, but Hastings has also suffered recent financial woes.
Online rentals are the way to go, for now. On-demand, digitally delivered rentals may be the way of the future. That leaves a company like Blockbuster -- or even Movie Gallery -- with little choice but to try to distinguish its stores as more than just a rental destination. But spending on costly Super Bowl advertising when the petty cash till is running dry -- to communicate a message that's self-annihilating -- is just wrong.
I thought last year's Blockbuster shakeup would be in the company's best interest, but the company continues to battle two wars that it can't win at the same time. Company executives should be high-tailing it to Seattle to do whatever it takes to allow Amazon.com (NASDAQ:AMZN) to take over its online business -- given that Amazon has already cut its teeth in the United Kingdom with DVD rentals -- and get cracking on remaking its stores as standalone attractions, not just rental depots.
Alternatively, Blockbuster can sell its franchise business and its company-owned stores and dedicate itself exclusively to taking on Netflix and its 4.2 million subscribers. It's an unlikely scenario, but the company can't keep sending mixed messages and expect to grow as a company when it's being pulled in two entirely different directions.
Netflix and Amazon have the right idea. It's no surprise that both of those companies have been big winners in the Motley Fool Stock Advisor portfolio of recommendations.
Blockbuster? I just don't see Tom and David Gardner adding the stock to their newsletter anytime soon. The only entities making money off dinosaurs these days are either ExxonMobil (NYSE:XOM) or Steven Spielberg.
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Longtime Fool contributor Rick Munarriz lives in south Florida, the original stomping grounds for Blockbuster. He also owns shares in Netflix and has been renting movies online since 2002. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
