Digital Nerd

Tuesday, August 23, 2005

Extinction Long Seen, Video Stores Hang On

Via NYT:

Ever since Blockbuster and Movie Gallery opened their first video stores 20 years ago, predictions of their imminent demise have been as common as late fees.

Forum: Technology and the Internet
The Barron's columnist Alan Abelson deemed video stores a terrrible business opportunity back in 1986. Five years later, the chief executive of the Pilgrim Group referred to Blockbuster as a "casket case," adding that the video store would go the way of the dinosaur in three years.

The drumbeat of doom for the traditional video rental store intensified this month after Blockbuster and Movie Gallery, the country's two largest chains, with more than 50 percent of the market, announced their second-quarter results. Not only did they both post losses, they disappointed Wall Street with missed estimates, poor same-store sales and refusals to offer guidance for the coming months.

Yet that trip to the video store remains a stubborn fixture in the rapidly changing entertainment landscape. Complaints about the lack of selection, a paucity of hits and annoying late fees have not overcome the joys of browsing. Even the newer threats - the convenience of online subscription services like Netflix and the ability to order movies at the touch of a cable remote's button - are not expected by many analysts to crush the rental experience anytime soon.

Neither chain may ever become an investor's dream, but many analysts argue that with smarter management, judicious cost-cutting and further forays into sales of new and used DVD's and video games, and online subscription services, they can survive and perhaps even reward investors.

"The idea that video stores are magically going to go away for some reason is misguided," said Tom Adams, president of Adams Media Research, a research and consulting firm for the entertainment industry. "It is still the most popular way to watch movies."

The number of DVD's (and a dwindling number of VHS tapes) rented by the movie-loving public still dwarfs any other form of movie watching. According to Adams Media Research, there were nearly 3.2 billion rental transactions last year. By contrast, box-office admissions were less than half of that number, DVD sales totaled about 1.1 billion and there were fewer than 350,000 purchases of movies through video on demand or pay per view.

Nonetheless, the last few years have not been good to the video-rental market. As sales of DVD's exploded, thanks in large part to the aggressive pricing strategies of discount stores like Wal-Mart and Best Buy, fewer people felt the need to rent as much.

Depending on the company doing the tracking, the video rental business last year ranged from $8 billion to $8.9 billion. And according to the Video Software Dealers Association, that figure has been inching downward every year since its peak in 2001.

Now, in addition to the rise of DVD sales and Netflix, the traditional chains must cope with the video-on-demand option that cable operators, and soon the phone companies, are offering to their subscribers. The proposition does sound persuasive: no treks to the video store, no worries about not enough copies of the latest releases, even lower prices.

But one obstacle lies in the path of movies on demand, and that is the Hollywood studios. Unwilling to sacrifice the cash cow of home video sales, the studios have shown no desire to close the "window" - or the time lag of about 45 days - between releasing movies on DVD and making them available to the cable operators. Currently, the studios get about 60 percent of the list price of new DVD's, bringing in about $17 each. For each movie ordered by remote control, the studios get about $2.

And without the newest movies - the ones most popular with video renters - video on demand will be hard pressed to make a significant dent.

"Short term, I don't really see as much of a doomsday effect as other people do," said Ken Papagan, a vice president for Rentrak, an entertainment industry information service. "Because behaviors don't die easily."

Almost any product or service can be purchased online, by phone or through a click of the remote, said Mr. Papagan, who has spent about 25 years in the television and entertainment business. "But people still go to shopping malls in droves."

The two biggest chains are dealing with the changing and challenging business environment in different ways. Blockbuster, which reported a net loss of $57.2 million on revenue of $1.4 billion in the second quarter and also said it had to get a waiver on its debt covenants, is overhauling its traditional business model. Most of those losses stemmed from the costs of building up its year-old online subscription service to compete with Netflix and beginning its no-late-fee program, which gives customers a one-week grace period in addition to the usual rental period. Coming on the heels of its spinoff last fall from Viacom, the no-late-fee program alone meant a loss of $140 million in operating income during the second quarter, while the online project meant an investment of $30 million. For the year, the company is expecting to take a hit of $250 million to $300 million in lost income because of the no-late-fee program, and it will invest $120 million in Blockbuster Online.

By the end of the first quarter of 2006, it expects to have doubled the one million subscribers Blockbuster Online currently has. Netflix had 3.2 million subscribers at the end of June.

More here.


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