From Blockbuster to turkey

http://www.economist.com/blogs/newsbook/2010/09/blockbuster_files_bankruptcy

From Blockbuster to turkey
Sep 23rd 2010,
The Economist

IN THE early days of the commercial internet, it was often predicted that pure e-commerce sites would begin to struggle as bricks-and-mortar stores moved online. “Clicks-and-mortar” stores, which could reach consumers both on the internet and on the high street, were thought to be inherently superior. Surely Blockbuster would be able to crush Netflix, an online service that rents DVDs through the post? Surely Barnes & Noble, a bookseller, would easily see off Amazon?

As it turned out, they could not. Shares in Barnes & Noble have slumped over the past few years as those of Amazon have soared. The British arm of Borders, another media retailer, went into administration last year. And on September 23rd Blockbuster filed for Chapter 11 bankruptcy protection in New York. The firm, once owned by Viacom, a giant media conglomerate, aims to reduce its debts by about $900m. It is likely to close some of its 3,000 American stores. (The company’s non-American operations and franchised outlets are not affected by the bankruptcy filing.)

The growth of Netflix, a technologically savvy company with a vastly superior website and an attractive subscription model, was hard on Blockbuster. But the firm was caught in a pincer movement. On one side was Netflix. On the other was the decidedly low-tech Redbox, owned by Coinstar. Redbox rents films for one dollar a night through kiosks in drug and grocery stores—a 1950s technology applied successfully to a new medium.

Netflix is a long-tail company. Its vast selection of DVDs means consumers with rarefied tastes can indulge their taste for Satyajit Ray films and Italian comedies. The firm is promoting the online streaming of older films, which subscribers will increasingly be able to obtain through internet-connected television sets. Redbox, in contrast, focuses on big films and recently-released DVDs. Blockbuster thus faces a “clicks” competitor that offers an enormous selection of films and a “mortar” competitor that specialises in hits. Life in between is tough.

Tears in Tinseltown

There will be no gloating in Hollywood at Blockbuster’s struggles. Although the film studios greatly prefer to sell DVDs than rent them, they would rather rent through Blockbuster than through Netflix or Redbox. Warner Bros estimated in December that it makes $1.45 when a film is rented from a bricks-and-mortar store. It makes $1.25 from a subscription rental, and just one dollar when a film is rented from a kiosk (most people keep their dollar-a-night kiosk movies for two nights). And Blockbuster sells DVDs as well as renting them.

Hollywood wants to persuade consumers to rent films as videos-on-demand through their cable and satellite boxes. On each of these Warner Bros earns fully $3.50. To goose demand, studios now release some films as videos-on-demand before bringing them out on DVD. The worry is that the growth of two low-priced alternatives will persuade couch potatoes that films can be had cheaply. Netflix and Redbox have severely wounded Blockbuster. The next battle will pit them against the cable companies.