Bringing down the Block

In the DVD rental industry, Blockbuster has been King-of-the-Hill for as long as I can remember, but today the company finds itself in the lowly position of copying its competitors and closing stores, just to survive for tomorrow. The situation has become so bad, they’ve turned to cute bunny videos. Could emerging competitor Redbox lead to the ultimate demise of the Block?

Hanging by a thread

With $1 billion in debt and downward trending sales, Blockbuster is teetering on the edge of bankruptcy. Below is the 10-yr stock history of Blockbuster (BBI), the stock price as it sits today is 0.33:

How did it come to this

Some blame poor management decisions, like eliminating the profitable ’late fee,’ some blame a slow reaction to competitors like Netflix, both were contributing factors, but my guess is that the emergence of Redbox has more to do with Blockbuster’s downfall than anything else.

According to flexplay.com, this is how the DVD rental industry works:

DVD rental stores make their money through a number of different methods including membership fees, rental fees, late fees, and DVD purchases. However, the major key to their success is that they operate under a pure supply and demand business plan. When a new DVD title is set to be released, demand for these titles skyrockets. To accommodate for such a high demand, DVD rental stores buy up the title in bulk to make sure their shelves are stocked with the hottest new release. As demand for the DVD title begins to wear off, the rental stores then sell the excess DVDs as “previously viewed” DVDs at a reduced price. This system has made DVD rental stores quite profitable over the years.

Redbox does all that, and it doesn’t need a store to do it. Blockbuster’s bread & butter has been its stores, where people can roam the aisles in search of the ultimate DVD choice. But running a store also means that you have to lease  commercial space, hire employees, pay the utility bills, hold extra inventory and deal with everything else than comes with running a store. Redbox isn’t burdened with a lot of the costs of a traditional brick & mortar store,  its essentially a vending machine.

Why rent from a vending machine?

Admittedly,  I was a bit afraid when I first tried using Redbox, and even more reluctant to give it my credit card.  But now that my fear of the unknown has passed, I am a regular Redbox customer; it’s quick, it’s convenient and it’s inexpensive,  creating a solid value proposition.

In just 5 years, Redbox, which is owned by Coinstar(CSTR), has grown to 22,000 locations, today, these refrigerator sized boxes can be found in fast food restaurants, pharmacies and even Walmarts. In a seemingly symbiotic relationship, Walgreens benefits from the additional foot traffic generated by the Redbox, and Redbox benefits with the convenient location & residence of a neighborhood Walgreens. Finally, customers benefit due to the ease of vending experience compared to checking out at a store, and the comparatively low price of $1 for a new release DVD. The only parties dissatisfied with Redbox (other than Blockbuster), are the movie studios, which make a killing off DVD sales and have traditionally prompted a premium ( up to $4)  for the rental of new releases. Movie studios hate that Redbox charges the same price ($1) for a new release DVD as it does for older DVDs, and there could be some retaliation coming that shakes-up the DVD rental industry. But my guess is that Reb Box is already too relevant for Hollywood to simply dictate terms. Here’s a breakdown of the DVD rental industry by sales according to research firm NPD Group inc. :

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 Redbox is up to 19% market share after representing only 2% in 2007. Redbox has grown by leaps and bounds, leading Blockbuster to start its own DVD vending service, but one has to wonder if its too little too late. There are three RedBoxes on a 2 mile stretch of the main road next to my house, the topmost picture in this blog post is one of them,  also, here’s a picture of the local Movie Gallery.

However, the problem I now have with Redbox… is the line of indecisive customers I have to wait behind.

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