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Tuesday, April 26, 2005

Blockbuster : Options Ahead

(Via CFO.com)Blockbuster took over several neighborhood stores to become the leader in the fast-growing video-store industry. Today, emerging technologies and delivery systems threaten the demise of video stores altogether. Video on demand and digital downloading threaten to make its business proposition obsolete. History shows, it is easy to get entrenched in existing technology— even when change is bearing down. The cost to move to an industry-changing technology can be prohibitive to the company—and to its shareholders. While chief competitor Netflix is investing aggressively in pay video-on-demand (VOD) delivery, Blockbuster is mostly focusing on extracting every cent from the home DVD-rental market—seeking acquisitions, boosting its online DVD-rental services, launching a subscription program similar to Netflix, and creating a DVD trade-in program.DVD rental instead of VHS tapes and the shopping experience is helping Blockbuster to stay aflot. What happened in the interim is something that gives Blockbuster a lot of comfort in the future.
In the DVD-rental market, this uncertainty is compounded by the fact that the two category leaders, Blockbuster and Netflix, are betting on what a feeder industry—in this case, the movie studios—will do. Studios make 50 percent of their gross profits on DVD sales and $2.5 billion annually from DVD rentals, a revenue stream guaranteed by well-guarded distribution channels. Blockbuster is staking its future on traditional DVD rentals in stores and online. Blockbuster receives new releases before VOD services, it has a bigger library of titles than VOD, and its DVD technology offers higher production values than VOD movies. Most important, movie studios don't think VOD is a big revenue generator. "The studios would have to hope for a fivefold increase in VOD rentals before VOD would really become a viable channel for them," says Zine, CFO.
The key to survival in a contracting industry, is "to become diversified and to evolve as your customers evolve. Define yourself broadly enough to develop other products, some of which may make your older products obsolete." This means CFOs must put aside some of the cost-cutting and EPS-boosting tools they use to pull companies through tough times in more-robust industries. They must make the argument to shareholders and to Wall Street that long-term investment in emerging opportunities is more important than short-term stock price. In the case of Blockbuster, advances in broadband, DRM, encryption & choose-to-devices like Tivo would gain prominence and make blockbuster lose ground – looking at the advances being made by Comcast in reaching more people – the days are not far off when there is a huge change in the home-DVD rental landscape. There’s no escape from that.

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