Would You Like A DVD With That Mu Shu Pork?
November 22nd, 2006 Davis Posted in DVDs, Disclosure - I own stock in co. mentioned, Netflix |
This must be the year of the dog for Blockbuster because despite recent denials that they are not looking to sell off their international operations, it’s beginning to look like they are walking away from the international markets with their tail tucked in between their legs.
Less then a week after the company denied that they are trying to sell off their international properties, we’ve seen the company abandon their affiliate program in the UK and now Digitimes is reporting that they’ve sold off their Taiwanese Blockbuster locations to Taiwan based Webs-TV.
Webs-TV wouldn’t confirm or deny that a deal has taken place, but Digitimes has said that the acquisition will be for all of their stores in Taiwan, as well as the rights to use Blockbuster’s name and trademark in the future.
The good news for Blockbuster is that they’ll have one less division bleeding losses at an alarming rate for the company, but the bad news is that next year is the year of the Pig and Blockbuster may get slaughtered as the loss of revenue from their international operations continues to impact their flexibility in a rapidly changing industry.
While I’m sure that Blockbuster will likely point to issues with piracy as their motivation for leaving Taiwan, I see their struggles in Taiwan as an early indicator of some of the challenges that Blockbuster will face in the US markets as the digital revolution makes it way past the DVD and through the net.
While DVDs and the video stores still have some life left in them, there is little doubt that media is moving away from the stand alone video store business model and towards direct distribution over the internet. Will Blockbuster be able to innovate fast enough to stay in the game? Only time will tell, but thus far they’ve invested in Cinema Now and have spent a tremendous amount of energy in promoting their own online competition to Netflix, yet so far they’ve gained relatively little traction from these moves. The company has done a good job at cutting costs over the last year, but at some point it will become increasingly difficult for the company to cut costs fast enough to keep pace with the number of video stores going into the red. While an early exit out of Taiwan may help focus Blockbuster’s business on the US markets, I question what Blockbuster plans on doing once the same pressures that they face overseas begin to happen domestically.
December 7th, 2006 at 6:42 pm
Davis,
Blockbuster is indeed under pressure and facing many challenges. At the same time, in my view, a company that still commands such a size in the industry has enough options to be creative and explore possibilities.
(financial and international operations aside)
You are correct to mention that:
“While DVDs and the video stores still have some life left in them, there is little doubt that media is moving away from the stand alone video store business model and towards direct distribution over the internet.”
The first question here is: how long will be the end cycle of this model of physical distribution? And at what rate will it drop in the next X years?
While the bigger picture needing to be answered for Blockbuster would be how to be another “Blockbuster” in the new Internet world; they still have to address and optimize their physical world entity.
So in needing to “innovate fast enough to stay in the game”, the ideal situation would be for them to find ways in leveraging their current dimensions and combine it with news models to remain the (or a) main destination (portal) for customers to consume entertainment.
Of course, they have already entered the mail-order channel. Netflix is still the leader and BB will need to find ways to increase the critical mass of subscribers.
For this discussion, focusing only on new channels of distribution, (and not as much on the challenges required to be good at operating each model), they could perhaps think of entering the Kiosk market and extend their reach (and brand)! This would allow them to leverage their current relationships on the content & studio side; as well as partnering perhaps with other leading retailers who will be hosting the Blockbuster branded kiosks.
And with the coming wave of an evolution of the Kiosk model to accomodate the Download-to-Burn functionality, this is an attractive approach allowing to participate and transition in both the physical and digital channels.
Not to mention that they could be even more innovative and proceed to transform their stores to become (at least in some cases) a “hybrid” model mixed with kiosks. The saved real estate space could either be optimized for augmenting their own product offering or reduced through co-location or other real estate strategies to take them “off the books” and reduce costs.
Who knows, perhaps for customers to see the familiar Blockbuster branding extended to a “store-within-a-store” Kiosk operation (at a Supermarket for example) will have appeal and even drive adoption of the concept!
All in all, we are obviously going through a transformation of the industry and time will tell if Blockbuster is able to really innovate. Unfortunately, often larger established players are slow to change or have too much baggage already. And here lies the opportunity for the emerging “Blockbusters”…
Let’s stay tuned!
p.s. Speaking of the “store-within-a-store” model, Starbucks knows certainly a thing or two about this… but I am not sure if they should be a help to a Blockbuster or just… be a new one!
December 7th, 2006 at 6:58 pm
All very good points Soheil. I actually belive that if Blockbuster adopts download to burn kiosks (or even download to burn stores) that it has the potential to save the company from the competitive pressures that they face today. Even Movie Gallery will likely undergo a financial restructuring and could be a player in this industry with this technology. The problem is though is that Blockbuster only has so much time to downsize and the studios still aren’t playing ball. If they could combine the efficiencies of a download to burn model with their DVD by mail pricing structure, I believe that they could preserve their high fixed margins and still remain competitive on price.
Over the years, Blockbuster has been stuck in the 1980’s and while they’ve taken steps to try and innovate the business, I still question their growth potential and view the business from a cash flow perspective as things wind down, more then from a growth perspective like I do the kiosk industry and Netflix. At this point Blockbuster has market share, but it’s there’s to lose. To date I haven’t seen signs of innovation. They copied Netflix’s business model, but they haven’t led and they haven’t created anything revolutionary. With their debts, their leases and their high employee costs, it will make it more difficult for them to be nimble compared to their debt free variable cost rivals. I don’t think it’s curtains just yet, but rather then selling off assets to pay for their on going losses, I’d rather see the company cut salaries and remove their dependence on employees to sell their product. If Blockbuster innovates, I’m sure that my feelings will change, but for now, I certainly wouldn’t bet money that they’ll be the dominate force ten years from now.
December 18th, 2006 at 6:45 pm
[…] When speculation on the Taiwanese deal first broke, the market had a very robust response to the news. The timing of the rumor also happened to coincide with news of a $1 million stock purchase by Blockbuster CEO John Antioco. With Blockbuster’s stock price having taken an absolute beating over the last few years, I can understand why value investors might be willing to take a gamble on the company, but the excitement over Antioco’s purchase and the potential Taiwanese transaction seemed like a misplaced catalyst to me. […]