Blockbuster's real problem

Blockbuster appears to be pulling back (but likely not exiting) from its mail operation to concentrate on its brick and mortar stores.

Hacking Netflix ponders whether the "Death of Blockbuster" stories greatly exaggerate.

I hardly think we've seen the last of Blockbuster, but they do have a tough road ahead of them. Blockbuster Chairman Jim Keyes is just getting started, and he might have saved the company by pulling out of the expensive online war with Netflix. With Movie Gallery out of the way, refocusing on stores and getting more revenue (from) their 20 million monthly customers makes sense in the short term. Keep in mind that it's going to be a while before DVD goes away (and my Dad watches a movie online).

This latest round of the Blockbuster deathwatch was largely kicked off by Blockbuster's Q3 earning Webcast during which it was revealed that the company had lost about 500,000 Total Access (DVD by mail) subscribers. CEO James Keyes suggested that some were unprofitable subscribers, but then you'd probably expect him to say that. In any case, Blockbuster appears to be pulling back (but likely not exiting) from its mail operation to concentrate on its brick and mortar stores.

One often hears about B&M being dead or the DVD being replaced by online downloads. I don't buy either assertion, at least for any reasonable planning horizon. The reason is in the table below.

Latency Effort Consumer
Tech
Supplier
Cost
Store Low High Low High
Mail High Low Medium Medium
Download Low Low High Low

What the table shows is that the three styles of rental have distinct characteristics that inherently appeal to different groups of consumers or a given consumer in different circumstances.

If you just have to watch Spiderman 3 tonight, Netflix isn't going to cut it. On the other hand, downloading movies today requires a certain degree of tech savvy-ness and the appropriate hardware in your house--which may or may not be connected to your television set. So, there's something to be said for going down to the store for an impulse rental.

On the other hand, if you're mostly content to watch one of the movies that you happen to have on hand, as I am, disks by mail have a lot of otherwise nice characteristics--including, for now, probably the best selection for most purposes.

In the medium to longer term, however, I do believe that the relative cost to deliver movies in different ways is going to tend to drive home movie viewing more and more online. Although there are certainly (large) start-up costs to delivering movies over broadband, the infrastructure will get better and the costs will go lower over time.

This cost difference seems particularly relevant in something like movie rentals because all our experience to date suggests that, whatever the cost to deliver rentals, consumers are willing to pay about the same amount per movie. (Although there are certainly people who use the Netflix flat fee to rent large numbers of movies at a low per-movie fee, most people probably end up paying about the same $3 to $4 per film that they'd pay at their local rental store.)

Thus, the issue isn't so much whether a lot of folks would prefer to continue to have a B&M rental option (they would), but whether they're going to be willing to pay the costs. Especially as movie downloads start to chip away at the increasingly technically sophisticated user base that wants things right now.

That's Blockbuster's longer-term problem.

About the author

Gordon Haff is Red Hat's cloud evangelist although the opinions expressed here are strictly his own. He's focused on enterprise IT, especially cloud computing. However, Gordon writes about a wide range of topics whether they relate to the way too many hours he spends traveling or his longtime interest in photography.

 

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